Market Insight for September 13

Real estate analysts in the Greater Toronto Area (GTA) say the combination of elevated interest rates and an increase in newly completed condo units has resulted in an oversupply, which will take time to correct.

A report by Rishi Sondhi, an economist at Toronto-Dominion Bank, highlights that sales activity has not been sufficient to absorb the excess supply. In July, condo resales in the GTA were down by 25% compared to pre-pandemic levels.

This trend is largely driven by factors such as a surge in newly constructed condos entering the market, high borrowing rates that have prevented some buyers from finalizing mortgages, and investors offloading properties due to falling rents and negative cash flow, rendering them unprofitable.

Sondhi’s report indicated that about 19,000 condo units were completed in the region from January to July this year, compared to 12,000 in the same period of 2023 and 10,000 the year before that.

Active condo listings in the GTA rose by 63.9% in July compared to the same month last year, increasing from 5,416 to 8,879. A similar trend was seen in the City of Toronto, where active listings grew by 61.5% year-over-year in the same period.

Many property owners, particularly those who purchased within the last five years with variable-rate mortgages, are experiencing a sharp rise in their carrying costs.

For buyers, however, the increased supply has led to more competitive pricing. Condo prices across the GTA dropped by 5.9% year-over-year in August to $674,706, while prices in Toronto decreased by 4.4%, bringing the average to $681,835.

Earlier this month, the Bank of Canada reduced its key lending rate by a quarter percentage point to 4.25%. Although this was the third consecutive cut, Governor Tiff Macklem warned that the pace of further rate reductions could be adjusted as conditions evolve.

The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill.

Prices are too high for investors to buy relative to resale prices, rents, and interest rates, while developers can’t lower prices due to high development costs. As a result, new condo sales — the primary driver of new home construction in the GTA — have dropped to their lowest level since the late 1990s.

The percentage of pre-construction condos that are pre-sold is at a more than 20-year low. Without at least 70% presales, a project can’t begin construction, a fact that is working to dramatically slow down the supply pipeline.

Buyer incentives offered by developers and rent growth of 30% from COVID lows help bridge some of the gap for investors, but it’s not enough. Quite simply, new condo investment doesn’t work at the current market average price of close to $1,400 PSF.