Saturday, November 17, 2007

Economic Theory at Work: when demand exceeds supply in downtown TO

One of the most basic principles of economics is that when demand outstrips supply, the price will rise. You might of heard about a recent real life example of this at the corner of Young and Bloor in downtown Toronto a few days ago.

The Story: Units in what will be the country's first 80 storey condo went on sale with a frenzy. Apparently, people camped on the street and realtors paid university students to stand in line for weeks (three rotating 8 hour shifts) to make sure they could buy their condos (two max per person) (CBC story). If waiting in line for weeks was not crazy enough, what followed was pure economics at work.

Once the doors opened, realtors at the front of the line bought their two condos and then promptly began selling them to likely unsuccessful investors at the end of the line (who where obviously desperate for a piece of Toronto's famous corner). In fact, they started a live-fast-paced-auction on the sidewalk. As I understand it, one realtor made $500,000 in 25 minutes (less the $6k paid to the three university students with camping gear).

If I was the builder, as soon as I realized that there were people waiting in line for weeks before sales started, I think I would of started to ask some questions (perhaps to an economist). Clearly, the selling price was too low and they left a lot of cash on the table. I am sure they realized in retrospect that they should of been the one auctioning off the units, one by one. I heard they raised the price before the sales started, but this method would never capture all the consumer surplus . For this builder, a chalk board, a piece of chalk and an eraser could of made hundreds of thousands of dollars by matching peoples' willingness-to-pay to the sale price.


MadJenny said...

Speaking as a non-economist, I can't figure out why anyone would want to live on the 80th floor of a building. If there was a fire you would die. You would likely not be able to open windows because of the wind. If there was a power outage you'd be stuck. Why would you want to live like that?

Canadian Economist said...

Good question: what are the risks of living in a huge building? I think this is one for the builder. Several news articles (such as this one)suggest that people who are purchasing these units never plan to live there ... they just hope that someone else will want to when it is built in 3 years.