When Do Condo Fees Start Affecting Condo Values?
At some point, high condo fees have to start impacting prices, right?
January is almost over. Finally. Every year around this time I see memes on Instagram about how January feels like the longest month ever and comments like "how is it STILL January??" For me, it's not so much about the cold as it is about the lack of sunlight. It's crazy how sunlight can affect your mood. But at least the sun isn't going down at 4:30pm anymore, am I right? Last week I turned to wifey at 5pm and was like "hey, it's not completely dark outside!" It's the little things that make me happy :)
Back in 2019 I wrote a blog post about what condo fees actually pay for and what are considered "reasonable" condo fees in Toronto (if you haven't read it yet, check it out here. I still get people reaching out to me about it to this day). But after the inflation uptick we've all experienced over the past couple of years, I felt the need to refresh that post in mid-2023 with more current figures given that the cost of everything has increased (check out that more recent updated post from mid-2023 here). Which got me thinking - if the carrying costs of a condo keep increasing, at some point it would have to affect the actual value of the condo, right? All the talk over the past three years has been about interest rates and how the cost of home/condo ownership keeps increasing because of higher interest rates. But I feel like nobody is talking about the elephant in the room. Condo fees. Condo fees have jumped pretty dramatically across the board over the past 2-3 years. Back in 2019, I would scoff at a condo building that had $0.90/sq ft condo fees when that was way above average. Now? That's nothing out of the ordinary. Which means the cost of ownership for condos has increased for just about everyone, interest rates and financing aside.
To put things into perspective, back in 2019, $0.70/sq ft for a building's condo fees would be considered average. Not high, not low, but reasonable. That means a typical 600 sq ft 1-bedroom condo would have condo fees of around $430/mo. Nothing a first-time buyer or investor would think too much about.
Today, that same building might have condo fees closer to $0.85/sq ft or even $0.90/sq ft; Or a 21%-28% increase over the past 5-ish years. Still reasonable relatively speaking in today's market when compared to all other buildings, but that means the condo fees for that same 600 sq ft condo would anywhere from $510/mo-$540/mo, or an $80-$110/mo increase over 2019's numbers. $110/mo would translate into borrowing power of around $25,000 on a mortgage at today's rates. So all things being equal, if a first-time buyer was stretched to their absolute maximum qualification in 2019, they technically would have been able to spend $25,000 more for that same condo in 2019 versus buying today, all things being equal. Maybe I'm being too analytical. But math doesn't lie.
A big difference between condos and freehold houses is that the monthly maintenance costs and upkeep of a house is unknown. You see the price of a house, the property taxes, and most buyers say "I can afford that". But with condos, that monthly condo fee is right in your face. A lot of house buyers will say "I want a house because I don't want to pay condo fees" but man, if you own a house, you will pay monthly fees. Trust me. You just don't know when and how much. And those expenses are always a surprise, and the cost of those same maintenance and upkeep costs have gone up, just like condo fees. The big difference is that with a condo, that cost is right there in black and white for everyone to see. "It will cost you $834.50/mo to live in this 2-bedroom condo. No matter what". With a house, nobody knows what that "upkeep and maintenance" amount really is so when most folks go to compare a house with a condo, all they see is a $0/mo monthly fee vs $834.50/mo fee and the house starts looking pretty appealing, even if it costs more to buy. I have this conversation all the time with my first-time buyers. My advice - pretend you have condo fees even if you buy a house, put that money aside every month, and you'll thank me later.
Which brings me to what this post is all about. At some point, buyers will balk when the condo fees hit a certain number. I've had first-time buyer clients say "I don't want to spend more than $600/mo in condo fees" because that's what their budget will allow for, while others take a more analytical approach and say "I just don't want to pay $1/sq ft in condo fees". For buyers it always comes down to the monthly carrying costs and future potential value of the property. If you're paying $1/sq ft now, what will it be in five years when it's time to sell and upgrade? How will that affect the value? All these things play out in a buyer's mind, even if they're not immediately aware of it. But I always am.
Personally I've found that when a downtown Toronto condo hits that $1/sq ft mark, it starts becoming a challenge to sell (excluding parking and/or locker - more on that below). The fees becomes a talking point, buyers start to hesitate, and if a buyer loves the unit and building, it starts to come up in the negotiations on price. But remember, not all buildings are created equal - is there a concierge, full-time on-site management, crazy amenities, are utilities included in the monthly fees, etc? These should all factor into whether you feel a building has "high" condo fees, and whether that $1/sq ft mark is really that relevant. Plus, if the unit comes with parking and/or locker, that will absolutely factor into the monthly fee. I think a lot of buyers don't realize that when you own a unit with a parking spot, you are paying not only condo fees for the unit itself, but also for the parking. Typically around $60-$80/mo extra, and it all gets rolled into the number you see on MLS. For a locker, that's usually around $20-$25/mo. So when looking at a unit and thinking "man, this 600 sq ft condo has $600/mo in condo fees", take it all into account - does the unit have a parking spot? A locker? Is hydro included? Make the necessary deductions for those and you'll see that in a lot of cases, the condos fees for the unit itself are much lower than that psychological $1/sq ft mark. But when those fees start crossing that $1/sq ft mark without parking, hydro, etc, that seems to be the tipping point where I'm seeing prices start getting impacted negatively. At least for now.
I currently sit on the board of two condo buildings in downtown Toronto and I can tell you that managing costs is a daily battle. Nobody wants to pay more in condo fees. But there are certain costs that are non-negotiable and when those costs go up, boards are in a tough spot. And as a Realtor, anytime we go through our annual budgeting process, the first thing that crosses my mind is "how will this new budget affect the value of the building, without affecting the quality of life and the services for everyone who lives here?" If you live in a condo, thank your board the next time you see them. It ain't easy.
Let's see how $1/sq ft looks in a few years time as the landscape of Toronto condos and the economy evolves. One things for sure though - I'll be sticking to condo living for the foreseeable future. I'm just not handy enough to own a house ;)
Have you checked out my previous blog posts?
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Your Toronto condo lover,
Adil Dharssi
Sales Representative
iPro Realty Ltd, Brokerage
Direct: 647-223-1679 (call/text)
Email: Adil@AdilKnowsCondos.com
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