Achi news desk-
Condo construction in Ajax, Ont., is shown on Nov. 30, 2023.Christopher Katsarov/The Canadian Press
New condo sales in the Toronto region fell to their lowest level since the 2009 financial crisis, with investors latching onto high purchase prices and higher borrowing costs.
The slowdown has disrupted home building at a time when governments are desperately trying to spur more building in an attempt to make housing more affordable. The cost of housing is out of reach for many Canadian residents with the average monthly rent around $2,000 and the typical home selling for more than $700,000. The process of building homes needs to be accelerated to meet the demand of a growing population. But the drastic drop in new condo sales will lead to less investment in housing.
There were 1,461 new condo sales in the Greater Toronto Area and Hamilton in the first quarter of the year, according to industry research firm Urbanation Inc. global recession.
“He’s dead. I would never use words like this, but I do because it’s true,” said Simeon Papailias, managing partner with real estate brokerage REC Canada, whose company sells new condos, also known as pre-construction condos because which have not yet been built.
Mr Papailias said his company used to deal with an average of 300 pre-construction sales a day. So far this year, there have been an average of 500 pre-construction sales per month.
The pre-construction condo market began to fail in 2022 as the Bank of Canada raised interest rates to cool inflation. Pre-construction buyers do not take out a mortgage until their condo unit is built and that process can take several years. However, they need to show developers in advance that they can qualify for a loan when the condo building is completed.
And it’s not just the high borrowing costs. New condo prices have been climbing as developers face higher construction costs. Although prices have dropped incrementally from the fourth quarter of 2023 to the first quarter of this year, some projects in downtown Toronto have been selling for at least $1,800 per square foot. That means a 500 square foot studio would cost $900,000. That is unattractive to prospective homeowners who intend to live in their condo, as well as to investors, who account for the majority of pre-construction purchases.
Buyers can find cheaper and larger condos that have already been built. “Existing square footage is so much cheaper. The builders and their future prices are a huge problem,” said Tuli Parubets, a mortgage agent with Mortgage Scout who works with home buyers in the Toronto region.
Investors would have to charge more than the current market rental rate to cover their mortgage and other condo-related costs. “It’s very difficult for investors to make the numbers work on buying new condos, given their record high price premium over resale and steep negative cash flow on rentals,” said Urbanation president Shaun Hildebrand.
Pierre Carapetian, who has sold real estate in the Toronto region for 18 years, said he steered his clients away from pre-construction homes into the resale market because resale homes are cheaper.
“In the last two years, I have not recommended a single project,” said Mr. Carapetian, who runs his own real estate brokerage. “We cannot in good conscience recommend anything at this point because it makes no logical sense.”
As a result, demand has collapsed and developers have postponed projects. Urbanization said that since the market began to slow down in 2022, it has counted five dozen projects that have been postponed indefinitely. That accounts for 21,505 condo units.
For projects that have been launched, the weak pace of sales is affecting their ability to get funding to start construction. During the first quarter, projects in the pre-construction phase were only 50 percent sold, on average. That compared to an average of 61 per cent in the first quarter of 2023, and an average of 85 per cent in 2022.
Lenders typically require developers to sell 70 percent of their units for construction financing. The longer it takes to sell pre-construction condos, the longer it will take to get financing and start construction. That will ultimately lead to fewer homes being built.
“No launches, no sales and no start,” said Mr Papailias. “This is the most vicious cycle of all.”
The slowdown comes as governments try to make it easier for real estate developers to build. The federal government recently announced that it will allow first-time home buyers to take out a 30-year mortgage for a pre-built home if they make a deposit of less than 20 per cent of the home’s purchase price and pay for insurance a mortgage The old mortgage rules did not allow insured mortgage lenders to take out a loan for more than 25 years.
However, given that Toronto-area developers typically require a 20 per cent deposit, the longer amortization is not expected to make a big difference in the new home market.
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