The shifting landscape of Toronto's condo market

In the past 25 years, the Greater Toronto Area’s (GTA) new condominium market has undergone a profound evolution, marked by shifting investor sentiments, regulatory adjustments, and changing market dynamics. The early 2000s saw an influx of investors capitalizing on low pre-construction pricing and steady appreciation, reminiscent of the early 1980s.

However, the market landscape transformed after the late 1980s bubble burst, leading to stricter lending rules requiring developers to sell a substantial portion of units before securing construction financing. This shift curbed short-term speculation, but also deterred end-users who were unwilling to commit large down payments and endure extended construction timelines or project cancellations.

Persistent demand

The strategy of selling a significant percentage of units upfront, although effective in ensuring project viability and reducing risk for banks, inadvertently contributed to the rise of larger projects with extended construction times, ultimately diminishing the appeal for end-users. Nevertheless, the demand for new condominiums from investors has persisted. Prices have been driven up by rising construction costs, enormous government fees, immigration, transit investments, revitalized neighbourhoods and a shift in housing preferences towards urban living. The current challenges include higher interest rates, escalating construction costs due to labour shortages and product inflation, restrictive planning policies, NIMBYs and higher development charges.

The GTA’s new condo market operates within extended cycles due to the time-intensive process of constructing tall towers. Investors with long-term horizons have historically benefited, but uncertainties persist. The key to navigating this market lies in considering various factors, including immigration rates, employment numbers, supply restrictions and potential impacts of changing political parties. While all political parties are touting more supply, the left and the right politically differ on how much of that supply should be market and how much should be government funded with affordability provisions.

Cautious approach

Recent market trends indicate a departure from the high sales figures of the past, where the average annual sales in the GTA from 2010 to 2022 was about 23,000 sales. A notable decline in 2023, resulted in less than 13,000 sales. Economic factors, including interest rates and affordability, and absorption are resulting in some developers shelving developments for the time being.

At my firm Bullpen Consulting, we analyze new condo price premiums, which is the asking price of new condos versus very recently completed resale projects in the same neighbourhood. Over the years, the premium has fluctuated, reaching higher levels during peak market conditions in late 2021 and early 2022. However, recent launches in 2023 maintained an average premium of 24 per cent. The decline in new home sales in 2023, is attributed to less investor interest and high interest rates. Investors are looking for projects with much smaller premiums versus resale.

Developers’ and investors’ cautious approach to launches and buying decisions will result in much lower housing starts, which will ultimately impact future housing supply and drive prices and rents in 2026 and 2027. However, many investors have a hard time buying today, despite this forecast for two to three years out.

Developer incentives

Looking ahead, industry experts anticipate 2024 to be another challenging year for new condominium apartment sales, and developers may offer big incentives, and buyers should shop around for the best deal.

Despite the various challenges that face the Toronto condo market, it is still resilient and has the potential to continue to grow. This is why both investors and developers need to remain continuously informed and agile to take advantage of the opportunities that the city has to offer. Good luck.