Cautious optimism for the GTA new condo market in 2024 and 2025

The Greater Toronto Area (GTA) real estate market is currently undergoing a period of turbulence. The once-thriving new housing market has hit a rough patch, with sluggish condo sales and high borrowing costs creating a challenging environment for buyers and investors.

Developers, brokers and lenders must come to terms with the fact that the price levels achieved from Q2 2021 to Q1 2022 are unlikely to return soon, and recovering to those heights may take years, not months.

Conservative assumptions

The current downturn mirrors the market conditions of late 2012 and 2013, which led to flat pricing through autumn of 2015, with a full recovery occurring in 2016. The price growth preceding that slowdown was modest compared to the bubble-like surge from August 2021 to March 2022 in the GTA and southwestern Ontario, suggesting that the current period of flat revenues may extend beyond three years.

Several factors fueled the rapid price escalation during the 2021-22 peak, including ultra-low borrowing costs, high product inflation, increasing government fees, higher construction cost contingencies and irrational investor behaviour. Developers are also concerned about project closings, which have slowed price adjustments. There is reluctance to reduce prices or launch projects with conservative revenue expectations, as doing so might negatively affect the financial outcomes of previous developments. This hesitation is driven by fears that past purchasers may demand lower prices for new units, potentially sparking negative media coverage and further market disruption.

Developers involved in acquisitions or planning launches must adopt conservative sales price and sales assumptions. It is crucial to anticipate that resale pricing and rents could remain flat through 2024 and into 2025, driven by a significant surge in supply, as many new condo projects sold in 2020 and 2021 are set for completion in 2025.

A notable shift in the current market is the decline in pre-construction condo investors. Historically, these investors have driven strong initial sales, helping developers to meet pre-sale absorption requirements. However, with fewer investors, fewer buyers are willing to pay the premium prices. The expectation of seven- to 10-per-cent annual price growth post-purchase has shifted to more cautious projections, leading to a demand for pricing that aligns more closely with 2021 or even pre-pandemic levels.

Optimistic prospects

High-volume investors, often referred to as “whales,” are now hesitant to make new purchases. Many of these investors are focused on addressing equity shortfalls from previous acquisitions, as the current market value of their units is at or below original purchase prices. Increased carrying costs on existing investments have also reduced their capital for new purchases, further dampening market activity.

Another factor is the reduced equity in existing portfolios. Resale prices have dropped 10 to 15 per cent from their 2022 peak in most areas, reducing the available capital for investors to leverage for new purchases. Slow sales and potential project cancellations have deterred investors, leading to diminished urgency, reducing demand from end-users who no longer feel pressure to buy.

Despite these challenges, there is no forecast for a significant crash in resale values or a major pullback in rent levels. Instead, they predict flatness in shelter values over the next 12 to 18 months. This stagnation poses a deterrent to investors. For the market to regain momentum, new condo prices must align with resale prices in recently completed buildings.

Despite the negative short-term outlook, many developers are still buying land, indicating that capital-rich and opportunistic property investors remain optimistic about the GTA market’s long-term prospects. High immigration rates and an anticipated undersupply in two to four years contribute to this optimism, though many remain hesitant, waiting for clearer signs of a bottoming-out before making moves.

Historical resilience

In high-density projects, land accounts for only five to 10 per cent of the total budget, and profit is only 10 to 15 per cent of the budget. A group of developers, known as CANT (Coalition Against New-Home Taxes), is advocating for reductions in government fees, which currently make up nearly 30 per cent of the cost of a new condominium in Toronto. They argue that lowering these fees could spur more construction and reduce the prices of new units. These types of sweeping changes are needed to spur activity in the market.

Despite current challenges, the GTA’s housing market holds potential. Increased awareness of issues by all political parties, active young professionals pushing for more supply (YIMBYs), and efforts to lower government fees and streamline approvals could result in a much quicker market recovery. Toronto’s real estate historical resilience and innovation will attract investment and development, keeping the city vibrant and dynamic.

As a potential new-home buyer, there are deals to be had and tremendous investment opportunities, despite the negative sentiment above. Find a good realtor and mortgage broker, do a tremendous amount of research on market value, and I’m convinced you’ll find some interesting potential buys. Good luck.