You may not be interested in Lytton Park specifically, but what’s going on there right now is very helpful in understanding how the residential real estate market works in central Toronto.

Lytton Park is undervalued. It hasn’t been scientifically proven, but that’s what I think. Here’s why:

First, some background. Lytton Park is an established, elegant neighbourhood. It’s one of the most desirable neighbourhoods in central Toronto. Most of these large homes are on 50′ wide lots and sell in the $2,000,000 to $3,000,000 range. They were originally built in the 1920s, but many have been renovated over the years and some have been completely rebuilt. If you don’t know the area and are wondering where Lytton Park is situated, let’s say it’s made up of Cortleigh, Lytton, Hillhurst, Strathallan, Glengrove and Glencairn between Avenue Road to the east and Proudfoot Avenue to the west. And let’s say that value is defined as what you’ll get for your money in this neighbourhood compared to other neighbourhoods.

Now for an explanation of how the market tends to work in central Toronto. It’s easy to assume that the market looks like a bunch of empty Mason jars that are all of  the same size, with each jar representing a certain home style in a certain neighbourhood. When it rains, each jar is filled at the same rate. If the water levels represent prices, under this scenario it would  appear that prices increase in unison across the board. But this isn’t how the market works because it’s more complicated than that. This is how it works: the empty Mason jars are of all different shapes and sizes and they’re filled by hand with a pitcher – some water goes in this one, then a little water in that one, then some water over there….They’re all getting filled, but not at the same rate. That’s why prices in different neighbourhoods and for different home styles have been increasing at different rates in central Toronto.

Why don’t prices move in unison? Because of the many different neighbourhoods and numerous different styles of homes. When you hear that prices have increased by 5%, it doesn’t necessarily mean that prices in each neighbourhood have increased by 5% or even that prices for each home style within a neighbourhood have increased by 5%. The 5% figure is just an average. It’s possible that prices in some neighbourhoods have gone up and others have gone down. It’s also possible that prices for bungalows in one neighbourhood have increased by 10% and prices for semi-detached homes in that same neighbourhood have only increased by 2%. There are many different factors at play here, but the thing to remember is that it all boils down to supply and demand. At certain times, some neighbourhoods and some home styles may be more in demand than others.

The John Wanless neighbourhood is a perfect example of this (let’s call this the area between Yonge and Avenue and between Lawrence and Old Orchard). At one point in time, people used to live in the bungalows that were in the neighbourhood. Then builders realized they could make decent money by tearing the bungalows down and building new homes. This pushed the price of bungalows up faster than the prices of the two storey semi-detached and detached homes in the neighbourhood. It also led to the disappearance of almost all the bungalows in the  neighbourhood. These days, you have almost as much chance of finding a unicorn or a leprechaun in John Wanless as you do of finding a bungalow.

Eventually, the price of bungalows rose to the point where they became almost as expensive as detached, 2-storey homes so builders started buying those to tear down, as well. As a result, both of these types of homes became too expensive for many buyers so they turned their attention to the semi-detached homes in the neighbourhood because they were relatively inexpensive. But that didn’t last for long because the demand for the semi-detached homes caused their prices to increase, too. Then along came the HST. Previously, builders were required to charge GST of 7% on new homes. With the HST, this tax increased to 13% so builders increased their prices to cover the additional tax expense. Get the picture of why prices don’t move in unison? Now combine this picture with similar pictures of what’s been happening in other neighbourhoods across central Toronto and you’ll begin to understand how the market operates.

So what makes me think that Lytton Park is undervalued?

First, let’s compare John Wanless to Lytton Park since they’re located very close to each other. New homes in John Wanless are beginning to approach the $2,000,000 price level. Some are already there. They’re beautiful homes on 25′ wide lots. The lots are worth approximately $1,050,000 and the homes cost between $600,000 and $700,000 to build. Compare these to a much larger, renovated home in Lytton Park that’s on a 50′ wide lot and that’s listed for approximately $2,200,000 (take 256 Lytton Boulevard, for example). The lot itself is worth between $1,700,000 and $1,800,000. Yes, most of us prefer new, but let’s face it – the underlying value in most properties in central Toronto is in the land. New homes are like cars. They’re only new once and tend to depreciate in value as they lose their newness. Relatively speaking, Lytton Park offers more underlying value which the market will soon recognize.

Second, prices in Lytton Park are considerably lower than prices in the John Ross Robertson neighbourhood which is just on the other side of Avenue Road from Lytton Park. In that neighbourhood, identical homes are approximately $200,000 more expensive. Does one block really make a $200,000 difference when we’re talking about prime, established neighbourhoods? Pretty soon, buyers are going to wake up and say “For $200,000, I’ll live west of Avenue Road” and this demand will push prices in Lytton Park up.

And third, if you look at the investment component of your home, in ten years from now, would you prefer to be living in a large home on a 50′ wide lot in an established neighbourhood or in a ten year old home on a 25′ lot? Remember, the long term value is in the land.

This isn’t to say that there aren’t definite advantages to living in a new home in John Wanless. It’s one of the best neighbourhoods in the city. So if you’re looking for new, then sure, go for the new home on a 25′ wide lot. There’s definitely value in new. But if you’re taking a long term view of the market and of your investment and you’ll be happy living in a larger, renovated home on a 50′ wide lot that’s in a more established neighbourhood, then I think that the homes in Lytton Park represent more value. Eventually, the market will figure this out and the Mason jar that represents Lytton Park will get more water and prices will jump upwards.

What’s happening in these neighbourhoods is not unique. It’s happening in neighbourhoods all over central Toronto. Hopefully, knowing how things operate will help you make a better decision if you’re thinking of buying or selling.

The only question that remains is: will you buy in Lytton Park now and take advantage of this opportunity or will you wait until it becomes the flavour of the month and prices have already risen?