If you were to use 1 word to describe the current Toronto condo market, what would it be?
The Toronto Star chose this word:
Catastrophic.
There were 3,159 pre-construction condo units sold in the GTA during the first half of 2024.
That’s a 57% drop from last year.
72% below the 10-year average.
It marked the slowest first half for pre-construction condo sales in 27 years, since 1997.
The majority of the pre-construction condo buyers are investors.
So in order for us to understand where we are and where we are heading in the condo market, we need to get a clear picture of the condo investment space at the current moment.
Today, I’m going to share a new report from the CIBC with you.
It’s called “GTA condo investment: Challenging times”.
If you enjoy episodes where I share official reports with my unique analysis and exclusive market insights, give me a like, subscribe and hit the bell for more!
The pre-construction condo market in the GTA is essentially in a lockdown mode.
The demand comes from investors and the supply comes from developers.
Right now, the math doesn’t make economic sense for both the demand and supply sides.
For investors, prices are too high to buy given current resale prices, rents and interest rates.
For developers, construction costs are too high for them to lower prices.
So it’s a deadlock.
Investors are not buying, developers are not building.
If there are no ways for developers to lower prices, then how can we stimulate investors’ appetite on condo investments again?
There are 3 things that need to happen.
But before we get to those 3 things, let’s take a look at the biggest pain that investors are suffering right now.
In 2023, 34% of the newly completed condos were used in rentals, those were the investor units.
Among the investor units, 24% did not have a mortgage.
For the mortgaged ones, 18% had positive cash flow.
58% had negative cash flow.
On average, condo investors who closed their units in 2023 experienced a negative cash flow of around $600 per month.
That was 2.5 times bigger than the ones closed in 2022, which was slightly over $200 per month.
For people who closed during 2020 and 2021, they bought the units a few years back and with only a 0.25% overnight rate during the Covid years, they were enjoying positive cashflow.
Investors were put on a roller coaster ride by Covid.
They had extra cash on hand during the Covid years and the ultra low interest rates fueled a buying frenzy.
Then sky high inflation came and triggered all those rate hikes.
Condo ownership costs skyrocketed.
Rents were increasing too, but ownership costs were rising 3 times faster than rent.
So in order for condo investments to make economic sense again, a few things must happen.
#1 Interest rates must come down significantly
As expected, the Bank of Canada announced another rate cut on July 24.
The overnight interest rate is reduced by another 25 basis point, bringing it down to 4.5%.
For a typical homeowner with a $650,000 mortgage, this means roughly $100 of savings per month.
It is obviously not a life changing amount and it is not going to have a dramatic effect on the housing market.
We need rates to come down more and faster.
RBC is expecting 2 additional rate cuts this year, bringing the overnight rate down to 4% by the end of this year.
Then CIBC is expecting the rate to come down to around 2.75% to 3% by the end of next year.
It is pretty much certain that we have entered the rate cut cycles.
#2 Rents have to increase
We saw that big gap between ownership cost and rent.
In order to shrink that gap, cost has to come down and rent has to go up.
But this year, rents have actually come down.
You have heard about 2024 being the record year of condo completions, especially in downtown Toronto.
There was a sudden surge in rental supply because many buildings were taking occupancy at the same time.
To make things worse, the government announced a cap on international students.
It is taking longer to find a tenant and rents are dropping because there are so many inventories on the market.
So is there any chance for rents to go up?
I’m going to save the answer for next week.
I’ll be sharing extensive rental data for the first half of 2024.
Make sure you subscribe and hit the bell now so you won’t miss it.
#3 Resale prices have to catch up
While resale condo prices have dropped more than 10% over the past 2 years, pre-construction condo prices are still more or less the same.
There is a big price gap between resale and pre-construction.
In order for resale prices to catch up, the market must digest the existing inventories first.
They can be consumed by buyers.
They can also be removed from the market by sellers.
You see, the majority of the sellers in the current market are investors.
At the moment, many of them are trying to see if they can sell with tenants living in the unit.
Since they are still collecting rent, they are not willing to take a big loss.
Many units are just sitting on the market with no action.
If rates come down fast enough, some investors may just take their units off the market and keep them for a few more years.
Things go in cycles, ups and downs.
But it is going to take time for things to happen.
In the meantime, there are some important implications.
When you see construction cranes all over Toronto, each crane represents roughly 500 jobs.
Since the rate hikes in 2022, around 75 pre-construction condo projects have been on hold, impacting more than 40,000 jobs.
As of June of this year, overall construction employment in Ontario fell by 7.5% on a year over year basis.
This is the worst since the Great Recession in 2008, except during the peak of Covid.
The other implication is one that we have talked about before in this video.
When developers are not building today, it is going to translate into severe supply shortage starting 2027.
That’s still 3 years down the road.
Most people won’t be able to see that far, when the market is so terrible right now, it really makes you wonder…
Is the demand really there?
I’m going to answer this question next week.
See you next week!
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