Would you pay a premium for a third bedroom? Image

Would you pay a premium for a third bedroom?

By Newinhomes on Jun 03, 2019

Would you pay more for a condo unit because it has an extra bedroom, even if the square footage was the same as a unit with fewer bedrooms? 

In 2016, Vancouver apartment units made up 61% of all new housing units. That means more people, including small families with children, are deciding to live the apartment lifestyle. In Toronto, completed apartment units made up 55% of all completed housing, as of 2011. 

According to a recent analysis by the Canada Mortgage and Housing Corporation, buyers in Vancouver will pay more for more bedrooms, while Toronto buyers don’t feel the pressure to pay more for another bedroom. 

“This analysis seeks to identify if the prices for units with three bedroom units significantly increase because of their bedroom count, when accounting for property characteristics of the unit. Results of this analysis suggest that units with more than two bedrooms in Vancouver are undersupplied,” says Tim Gensey Senior Analyst, Economics, CMHC.

More than 50% of sold apartment units in Vancouver in 2016 were two-bedrooms, and less than 5% were three-bedrooms. CMHC found that there is a significant premium between one-bedroom units and three-bedroom units, suggesting that adding a bedroom would increase the price buyers are willing to pay by 12%, regardless of square footage. 

Three-bedroom units in Vancouver are rare, so CMHC believes that scarcity has something to do with the premium buyers are willing to pay. The lack of supply of three-bedrooms is likely the culprit because Toronto is apparently well supplied with three-bedrooms and it looks like buyers aren’t willing to pay more for a three-bedroom layout. 

In 2016, of all the sold units in Toronto, 40% were two-bedrooms and 30% were three-bedrooms. The three-bedrooms cost more, but it’s typically because of larger square footage, not because there’s a third bedroom. The high number of three-bedroom sales in Toronto suggests that it’s not difficult to find a three-bedroom condo unit, so there’s no pressure for buyers to pay a premium. 

“Neither city had a significant premium for two-bedroom units,” it says in the report. “This suggests buyers do not place a large value of moving from a one-bedroom condominium to a two-bedroom condominium. Given the large values taken by the coefficients on unit size and the lack of a significant two-bedroom premium, the value of a two-bedroom unit is better explained by the size of the unit and not the fact it has two bedrooms.”

Compared to Vancouver, it seems like Toronto is better prepared for more families to embrace a high density lifestyle. We wonder if the trend of fewer single-family homes and more condo units continues if Toronto will eventually hit a point where buyers do have to pay a premium for a three-bedroom layout. 

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