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We believe that buyers in the current condo market exude hope over experience

Enter Ohad Lederer, an analyst at Veritas Investment Research, a Toronto-based provider of independent analysis to the investment industry. Like many others, Mr. Lederer was surprised by the extraordinary growth of the condo industry and wanted to understand it better. But instead of setting off on a wild-goose chase for non-existent numbers, he took a different approach, examining some of the basic assumptions about the market. The project included mystery shoppers dispatched to a couple of downtown Toronto sales offices. Mr. Lederer comes to some some interesting conclusions.

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“We believe that buyers in the current condo market exude hope over experience,” he said in the report, adding that despite claims of a buoyant rental market investors are ending up with “an astonishingly low return on invested capital.”

Mr. Lederer starts out by trying to figure out the math behind the buy-to-rent market, said to represent a large chunk of overall buyers. After looking at 84 units for sale in Toronto and Vancouver and comparing them with similar rental units, he concluded that buyers looking to rent their properties are facing annual returns on their investment of below 4%. Simply put, they’d have been better off with some good-quality dividend bearing shares.

When a 15% market correction is added to the equation — not beyond the realm of possibility — the picture gets worse.

Perhaps the most intriguing aspect of the report was the use of mystery shoppers to suss out action on the ground. Two pairs of researchers posing as husband and wife visited sales offices for two downtown Toronto developments close to Yonge Street. According to the report, the only requirement to make a purchase was a cheque and a valid driver’s license. “No mortgage pre-approval was required . . . This is surprising because banks generally talk about pre-approvals being in place for approximately 70% of units before the development loan is released to the developer.”