“Record number of condos to flood Toronto market in 2023”
Should you be concerned?
There are 3 things in the article that I want to comment on.
#1 Record Condo Completions
During the past 2 years, many condo constructions were delayed because of covid restrictions, construction worker strikes and supply chain issues.
As the problems get resolved, a record number of new condo units will be completed in the Greater Toronto Area in 2023.
Back in 2020, we saw a record high number of completions.
That was 22,473 new condo units.
We are going to see a new record high in 2023.
How many new condo units do you think we will get?
Almost 32,000 units.
Is that going to flood the market?
Well, it’s all about supply and demand again.
According to Urbanation, about 97% of the new units were sold at the pre-construction stage.
That means a majority of these units are owned by investors.
Because it takes an average of 4 years to construct a condo and it is very difficult for end-users to plan that far ahead.
And what’s the implication of investor-owned units?
That’s right. A majority of them will be going to the rental market.
So let’s take a look at the rental market in 2022.
The average year-over-year rent increase was over 20%.
What does that tell you?
Demand exceeds supply.
In 2023, there will be added demand from would-be buyers who become renters because of the high interest rates.
And what about the population growth in the GTA in 2023?
The forecasted number is around 60,000 more people.
So with demand already exceeding supply the way things are, then 60,000 more people are coming and we’re only adding less than 10,000 condo units to the market.
The extra supply may help to slow down the rent increase in 2023, but to flood the Toronto market?
I really don’t think so.
#2 Qualifying for Mortgage
“Now, many buyers are having problems qualifying for a mortgage, with five-year interest rates topping 5 per cent. As well, lenders are appraising units at lower prices, meaning that the buyer has to come up with extra funds to make up the difference between the smaller mortgage for a unit, based on the lower appraised price, and what the buyer agreed to pay.”
So it is trying to say that the buyer has to come up with more money to make up for the price drop.
Like we said earlier, 97% of the new units were sold at the pre-construction stage.
So most people bought these units at pre-construction prices at least 3 years ago.
We are working with our investors on completions in 3 different condos at the moment, they bought the units 3, 5, and 7 years ago.
If you compare the condo prices today with 3 years ago, they are roughly 15% higher.
Compare with 5 years ago, around 40% higher.
7 years ago, almost 100% higher. Prices roughly doubled in 7 years.
You see, that’s the power of time.
That’s why I always like pre-construction projects with a long closing timeline.
So regarding the concern about the appraised price today being lower than the price on the pre-construction agreement, I really don’t see that as a common problem affecting a majority of buyers.
I am sure some buyers will have mortgage problems, but I don’t see it as a big enough problem to affect the overall market.
We shall see.
If you do want to sell your unit at the price on your pre-construction agreement, definitely let me know!
#3 Pre-Construction vs Resale
“Preconstruction condo sales in Toronto had been on the rise for years, driven by demand from investors and developers. But since home prices started to fall in 2022, it has become somewhat cheaper to buy an already built condo on the resale market.”
This is an incorrect statement.
Do you see what’s wrong?
Resale prices are always cheaper than pre-construction prices.
It has nothing to do with the price drop in 2022.
Pre-construction prices have always been at least 15% more expensive than resale because you are buying the future value of something.
It takes a few years to construct the condo.
Material costs, labour costs are all going to increase throughout those years.
The biggest thing that people are buying with pre-construction investment is TIME.
It is never because of a lower price because the price is simply not lower than resale.
If you want to learn more about pre-construction vs resale, check out the videos at the links below.