It wasn’t long ago, people lined up overnight for a chance to put a deposit down on some yet-to-be-built condo, in some yet-to-be-built condo tower. They’d crawl out of their tents at dawn to chat with sidewalk neighbours also hoping to land what was often their very first home.
We now remember them as the good old days.
You rarely hear about those types of buying frenzies anymore and there’s a reason: Today, the most sought-after presale units are being offered exclusively to speculators, industry insiders and friends of developers who are profiting handsomely from this privileged access. In the process, this form of insider trading is driving up prices and wreaking havoc on the housing market.
That this has been going on for some time now has been an open secret in the industry. However, thanks to the investigative efforts of The Globe and Mail’s Kathy Tomlinson, we now have intimate knowledge of how it works and the incendiary impact it is having on the hopes and dreams of first-time home buyers in major centres like Toronto and Vancouver.
The scheme is pretty simple. A developer gets approval for a project and then has to go out and raise money to satisfy the banks. He does this through presales of his project. Most of the units are being offered to select realtors, who have investor clients, many from China, who are willing to put down whatever it takes to get a piece of the action. And they are getting this access ahead of young people desperate to get into the market.
Often what many of these realtors and others are then doing is selling their contract to buy a unit to someone else – known as assigning or shadow flipping. And they often hawk it for more than what they originally paid in the form of a deposit. A contract can sometimes be flipped multiple times at an ever-escalating price before the condo is ever occupied by a living soul. Of course, this fuels the kind of debilitating price escalation we’ve witnessed in the last few years.
The insiders who are flipping their properties are often not paying tax on their financial gains and not paying fees and levies (like property transfer tax and foreign buyers’ tax) that others do. And they are often making hundreds of thousands of dollars through these transactions. The developers are happy because they get a cut of every deal that takes place. They want to see price escalation take place because it means more profit for them. There are whole towers being built and designed with the speculator and investor first and foremost in mind.
The practice is unconscionable and the fact that it’s been done with the real estate industry’s knowledge makes it even more egregious. Now that it’s been exposed, many in the field are ducking for cover.
Get ready for all the excuses, and the condescending talk about how we don’t understand how the business really works and how developers need to be able to sell to speculators. Don’t buy it – any of it. It will be self-interested nonsense from people who once filled the financial coffers of the political party previously in power in B.C., likely banking on that government to not change the rules of the game.
With single-detached homes out of reach for many, condos have become the housing option of choice. Developers need to make their units available to all buyers, at the same time. There can’t be a lower price for insiders and another for the general public, as there often is now. There can’t be any secret deals. There can’t be flipping. Yes, people sometimes need to get out of their presale contracts because their personal circumstances have changed. Fine. But they should only be able to resell those contracts at the same price they originally paid for them, which would help prevent the crazy inflationary price spiral we see being created today.
There needs to be far, far more transparency in the condo market, as much as there is for single-detached homes.
The fact the NDP government in B.C. is indicating it is prepared to halt the deceptive practices Ms. Tomlinson revealed is encouraging. But it should be prepared for a major pushback from an industry that understands the house of cards it has built around the current system. It likely wouldn’t take much for it all to come crashing down, either.