Are we embarking on the great reset in new home prices?

After decades of continuous price growth for new housing across the Greater Toronto and Hamilton Area (GTHA), many buyers thought pricing would never go down. However, thelandscape has changed dramatically in 2023. The average asking price for new single-family homes in the GTHA has fallen by 30 per cent annually from the 2022 market peak of $2.48 million down to $1.74 million. Similarly, the condominium sector experienced a notable 26-per-cent decline year-over-year to $1.2 million, while new townhouses witnessed a 10-per-cent dip annually, settling at $1.26 million. Before one jumps to the conclusion and declares the market is crashing, let’s delve deeper into this data.

Apples-to-apples view

In 2022, ultra-low interest rates fueled demand, while inflation was spiking costs for developers, leading to unprecedented growth. The 10 interest rate hikes have taken a bite out of demand. At the same time, several construction projects have been completed, which has eased construction costs marginally. However, it’s still important to try to “control” for various factors such as unit size and geography to give us a more apples-to-apples view of the current market:

• In the amalgamated city of Toronto, average unsold asking prices for single-family and townhouse product (low-density housing) were actually up by nearly six per cent annually so far in 2023, at $1,152 psf.
• In the city of Toronto, per-sq.-ft. pricing for new condos increased by nearly 14 per cent in 2022 to $1,637 psf. Prices have fallen two per cent through the first 10 months of 2023 to $1,607 psf. With the caveat that there are also a lot of incentives currently available.
• Despite the recent small decline in new condo prices, the long-run data shows that in 2019, the average asking price psf for two-bedroom plus den units is up 50 per cent, one-bedroom plus den units have increased by 46 per cent, one-bedrooms 35 per cent, two-bedrooms 34 per cent, three-bedroom units 31 per cent, and studios have increased by 24 per cent.

Another factor for investors to consider beyond pricing is the rental rates for newly completed condominiums, which have seen rents rise in 2023. One- and two-bedroom condo rents are up six and four per cent, respectively, over 2022. Despite affordability concerns, high borrowing costs and resale market uncertainty are keeping tenants in the rental market, with a clear affinity for well-located, modern and highly-amenitized buildings.

High-quality deals

On a recent episode of my podcast Toronto Under Construction, experts Harley Nakelsky, president of Baker Real Estate, and Erin Millar, chief marketing officer from Marlin Spring, did express optimism for the market as we advance into 2024. Both felt that developers holding off on launches or placing fewer units for sale created a sense of product scarcity. Nakelsky felt that if the Bank of Canada holds interest rates, with no more hikes, he expects a market rebound in six to eight months. During this conversation, the guests felt that with high immigration, low unemployment and the simple fact that the market is under-supplied with housing, prices are bound to start growing again. Millar also mentioned that major housing producers such as Marlin Spring “... released fewer projects this year, and the ones we are bringing to market are a little more risk averse at this time.” This means developers held off on opening sales on some of their larger, more premium developments in 2023. If there had been more premium launches, even high-profile launches at discounted pricing, the price growth may have been positive this year, as opposed to the aforementioned two-per-cent drop.

Returning to our initial inquiry regarding a market reset: Undoubtedly, the trajectory of pricing growth reached a plateau in 2022. However, astute investors, especially those with a penchant for extended holds, stand at a unique vantage point: Leverage in the buying process. The potential for discovering high-quality deals that may yield dividends five years and beyond becomes apparent in the wake of unbalanced market dynamics that favour buyers.

Success in seizing these prospects requires meticulous research, coupled with consultations with seasoned investment professionals, mortgage brokers and real estate agents. Good luck.