How Much Is That 3rd Bedroom Worth?

The world is growing.  The population is growing.  People seem to be taller and bigger than they were a century ago.

And yet, our domiciles are shrinking, more and more, every year.

Much of this has to do with the growing cost of real estate, but perhaps it’s in tandem with a societal shift in “wants” as they relate to “needs?”

The market for 2-bed, 2-bath houses in Toronto is on steroids right now, so let’s take a look at the cost of that coveted third bedroom, and whether or not it’s necessary…

Bedroom

My very first condo was a 1-bed, 1-bath, measuring 590 square feet.

And as is always the case, and many of you can attest to this, my Dad came in for the very first time, looked around, and said, “Geeeez, how do you live in a box like this?”

Who would have ever thought that years later, condo developers would find a way to make 560 square foot 2-bed, 2-baths?

It’s true.

And it’s insane.

I can’t imagine my first condo – 590 square feet, somehow being made smaller, and adding a second bedroom, and a second bathroom.

Can you honestly picture that?

You’d be looking at bedrooms that are 6 x 8, with no space in the living room for anything but a couch and TV, and quite possibly a “wet floor” in the bathroom like they have in Japan.

And 1-bedroom condos these days?

Don’t get me started…

Have you seen the floor plans for “Art Shoppe Condos” at Yonge & Eglinton?

Guess how many floor plans they have under 500 square feet?

Lots.

So how about this instead – guess how many floor plans they have under……wait for it…..400 square feet?

The following:

321 sqft
325 sqft
325 sqft
331 sqft
339 sqft
379 sqft
379 sqft

That’s nuts.

That’s the very definition of “living in a shoebox.”

A client of mine recently told me, “I’m going to live in a box for all of eternity, so I’d like to avoid that while I can over the next 50-60 years.”

I can’t say I blame him, with that logic.

But with 1-bedroom condos being build smaller, and smaller, and smaller, how long until we see something like this:

KramerDrawers1

KramerDrawers2

God, I miss that show…

So far in 2016, there have been several “crazy” sales, that come with equally-crazy stories.

Carolyn Ireland wrote about a few of them in the Globe & Mail today, have a read HERE.

Two of the crazier sales have been for 2-bed, 2-bath houses on the east side.

And it got me thinking: what is the current value for that third bedroom?

For the longest time, 3-bedroom houses were the standard, and 2-bedroom homes were treated like the step-child in an otherwise-happy family of six.

I suppose it depends on the neighbourhood, of course.

3-bedroom houses are looked upon as “lesser” in areas dominated by 4-bedroom houses.  That’s logic, not rocket-science.

detached, 3-bedroom house in Leaside, for example, is in the minority.  The big money comes in the form of 4-bedroom homes, and even though most people aren’t having three kids these days, and don’t need 4-bedrooms, there’s a massive difference in price for that extra 10 x 12 space, and all that comes with it.

In the sub-$1M price point, however, we’re dealing in 3-bedroom homes.

And that’s what most people in Toronto can relate to.

Most of the houses on the east side are 3-bedrooms.

Whether it’s Riverside, Riverdale, Leslieville, Pape Village, Danforth Village, The Pocket, Upper Beaches, Woodbine Corridor – the “semi-detached, 2-storey, 3-bedroom” dominates.

There are scores of detached houses, and no shortage of 4-bedrooms, but overall, your semi-detached, 3-bedroom is the most common.

And for today’s home-buyer, looking under $1,000,000, that’s the product that’s going to dominate the search.

For the last five years, the competition for 3-bedroom, semi-detached houses on the east side has been fierce.

I remember when 3-bed semi’s on Milverton, Glebeholme, Strathmore et al were selling for $500,000.  I attacked this area HARD for years, putting all of my first-time home-buyers in here, which seemed to be one of the few places were you could find value in a red-hot market.

For those that couldn’t quite muster up the cash, whether it was 2009, or 2015, the odd two-bedroom house was lurking, and offered an opportunity to get into the housing market, albeit without the space and potential life-cycle offered by a 3-bedroom house, but it was still a solid option.

Fast-forward to 2016, and only four weeks in, as of yesterday.  What we’re seeing on the east side, with 2-bed, 2-bath houses, is absolutely shocking.

You all know that RECO rules ensure that I can’t give out sale prices (even though RECO and TREB won’t touch Lawrence Dale for doing so…), so I’ll provide the numbers, and then you can feel free to look at www.tosolds.com to easily figure out which houses these are.

Last week, “a house on the east side” was listed at $535,000, and sold for $705,010.  This was a 2-bed, 2-bath, semi-detached.

This week, “a house on the east side” was listed at $599,900, and sold for an absolutely jaw-dropping $802,000.  This was also a 2-bed, 2-bath, semi-detached.

The first sale was a bit nuts, since there were 24 offers, and being extremely under-listed made it seem like it sold for a huge premium.

But the second sale is just wacky.  $100,000 more than something that, personally, I found to be quite similar?

There were differences, no doubt.  The first house had a better, higher basement.  The second house had an addition that added more square footage to the main level, and a supremely upgraded kitchen.

But a $100,000 difference?

We have to ask ourselves: is this an outlier, or is this the new norm?

Let’s look at sales of 2-bed, 2-bath, semi-detached houses in E03 over the last two years:

2014:
Sales: 23
Average Price: $528,824

2015:
Sales: 24
Average Price: $593,333

That’s an increase in value of 12.2%, which is ahead of the 9.8% market average during the same time period.

How does 2016 look so far?

2016:
Sales: 2
Average Price: $753,505

I know, the sample size is TWO!  it’s not fair, and it’s tough to draw any comparisons.

But the average 2-bed, 2-bath in this area sold for $593K last year.  That’s the average!  And yet two sales so far this year are over $100K and $200K higher!

So take that second house – the one that sold for $802,000, throw a third bedroom on the back, and what is the house worth?  Well, an “in need of a gut,” 3-bed, 3-bath, semi-detached on that street, two blocks over, sold in November for $600,000.  And an “IKEA-reno” 3-bed, 2-bath sold a few blocks the other way in November for $677,000.

So how the hell are these 2-bed, 2-bath houses fetching such incredible numbers so far in 2016?

And what does that mean the 3-bed, 2-bath houses are worth?

With these recent sales of 2-bed, 2-bath semi’s, did the owners of 3-bed semi’s just make $100,000 overnight?

Or did everybody on the east side, under $1,000,000, make $100K overnight?

Is this a function of the would-be, entry-level home-buyer scrounging to find what’s left under $1,000,000 to avoid the CMHC-mandated 20% down payment?

Is everything under $1,000,000 on fire?

There’s a big difference between a 2-bed semi and a 3-bed semi, and I don’t care what the sale prices say to the contrary.

A 3-bed house offers more space to grow into, but it offers the owners an opportunity, through good times and bad, to stick it out in that house medium to long-term.

A 2-bed house will be outgrown quicker, and the buyer pool is, or should be, different.

Don’t get me wrong, I sell a ton of 2-bed semi’s on the east side.  They’re great entry-level options, and not everybody “needs” a third bedroom.  The single guy or girl, the childless couple, the expectant couple, and the one-child couple – they’re all a perfect fit for the 2-bed, 2-bath house.

But the prices for 2-bed, 2-bath houses are increasing so rapidly that the gap between the 2-bed semi and the 3-bed semi is giving people less and less reason to shoot a bit lower and obtain that “affordable” 2-bed semi.

It seems to me that the value of that third bedroom went from $150,000 to $75,000 over the past year, and that has to make buyers, for both properties, give their option set another think-over.

Maybe it’s just two sales.

Maybe it’s only January.

Or maybe it’s a trend, and we’ve just spotted it really, really early…

12 Comments

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  1. condodweller says:

    I suspect the reasons are twofold. 1. People are scrambling to beat the Feb 15 deadline for the 10% downpayment deadline. 2. We are getting close to the euphoria stage of the emotional curve of investing. People are thinking the RE market is going to go up and as it accelerates they feel afraid of being left out and get in to make sure they don’t miss the boat.

  2. Natrx says:

    Millennials at work here. They have no frame of reference to even 3 years ago. So hence, down the line, 800K is around the cap. Could be a single bedroom semi 5 years from now.

  3. m says:

    The 3rd bedroom is why we ended up buying a house, even though we would have preferred a condo. 3 bedroom condos are like hens teeth, at least in the vicinity of Little Italy / South Annex. It bewilders me that there are so few family sized condos. The few that I’ve seen, seem very expensive — I assume due to their rarity.

    1. daniel says:

      One barrier is the HST. The rebate declines as the value of a new unit goes up. On a $350k unit the effective HST is ~5%. On a $1M unit it is ~10%. So, on a $650/sf there’s a 32 psf premium that either the buyer or the builder needs to make up.

      Also, in many areas of the city it’s still a good chunk cheaper psf for a house than a condo. I think once the cost psf gets closer together (which is happening in some parts of the city) you’ll see more large units.

      Lastly, condos are pre-sold, which works okay for investors (who want small units to rent out) but not so well for end-users (who want larger units to live in).

      There’s about a half dozen other reasons as well that act as barriers to doing larger units.

  4. Geoff says:

    What’s also interesting is the notion that children can’t share bedrooms, a very common experience for many kids in previous generations.

  5. A Grant says:

    If the cost of a third bedroom is now approx. $150,000, one wonders what “value” a couple without children/grown children/no plans for children, or one child families, will see in it. For these families, a third bedroom will undoubtedly serve as a guest room or office which they will use, what – 3% of the time? Meanwhile, the cost of this additional bedroom could equate to 17 – 18% of the cost of the house itself.

    “The world is growing. The population is growing. People seem to be taller and bigger than they were a century ago.

    And yet, our domiciles are shrinking, more and more, every year.”

    The trend for larger domiciles is only a recent phenomenon, thanks to the suburbs/exburbs. The reality is that, for the longest time, small dwellings used to house very large families. The house my wife and I currently share is a two bedroom post-WW2 victory home (formerly a three bedroom, but like a lot of houses in our neighbourhood, the ground floor bedroom was removed to increase the living space). There is only one bathroom, which is smaller than most two pieces. Excluding the recently finished basement, the house is approx. 800 sq/ft. Yet two generations were raised in this house. One family of six, one of four. They made it work. Maybe this generation is coming to the realization that they can make it work too.

  6. jonnathan says:

    ‘It seems to me that the value of that third bedroom went from $150,000 to $75,000 over the past year’

    Damn this makes me feel I may have overpaid for my house or maybe not because I am west of the DVP in the downtown core. I still feel lucky to be out of the market.

  7. Joel says:

    “A 3-bed house offers more space to grow into, but it offers the owners an opportunity, through good times and bad, to stick it out in that house medium to long-term.”

    This is exactly why we bought a 3 bed. While not a dream home it would certainly be doable to live here the rest of our lives if we had to. It takes the need to move up in 5 years out which is worth more than $100,000 to me.

    1. GinaTO says:

      Agree with Marina and Joel. When we were house shopping in 2012, we hesitated between a very cute 2-bedroom and a 3-bedroom with some issues, but knowing we wanted to have kids, I pushed for the latter, even though it was 100K$ more. Glad I did – moving is such a nightmare that I couldn’t see us doing it again when kid #2 shows up. With no kids, though, I would have happily bought the cute 2-bedroom. Interestingly, that house sold for 495K$ and sold again 18 months later for 615K$.

  8. Paully says:

    Given the high cost of real estate transactions including: commissions, double land-transfer tax, legal fees, moving expenses, title insurance, HST, etc., I could believe that it might cost less to build a small addition onto a two-bedroom house than it would to sell and buy a three bedroom. So it makes some sense to buy the two-bedrooms that you need now, for less, and if your needs change, you can add on to it.

  9. AndrewB says:

    To be quite honest I don’t see the value or market for sub 400 sq ft condos in Toronto. I’m sorry but this isn’t HK, Tokyo or NYC. In those cities you will never get great space and living small is the only way to budget living expenses. That’s the only reason people live in those small quarters.

    I can also see why 2 bed semis are selling so well. Many couples don’t want kids and like having that second room as an office/guest room. If they were to look for a 2 bed, 2 bath condo in a decent building, plus condo fees at current interest rates, the gap between the condo and semi isn’t all that wide.

    Just my $0.02.

    1. Marina says:

      Agree.
      I know two couples, both no kids and no immediate plans for any, who bought 2 brm houses (a semi and a bungalow).
      Both mentioned that they looked at condos but felt ready for a house lifestyle. I think as people have kids later and later (or not at all), the buyer pool for smaller houses will just keep growing.

      That said, I’m so glad that we bought a 3 bedroom rather than 2! We had a second baby kind of fast and feel no pressure to move. The room to grow is saved us so much stress!

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