Developers and lenders explore challenges and opportunities

The GTA housing market is grappling with a range of challenges, from affordability concerns to market slowdowns and difficulties for developers and lenders. With fluctuating land costs, confusing government policies and shifting buyer preferences, the question arises: How can the industry strike a balance between housing affordability and profitability in today’s economic landscape?

These topics were the focus of a recent industry event hosted by Norm Li, where key experts discussed the state of the housing market. These themes were explored further in Episode 70 of the Toronto Under Construction podcast, featuring guests Bryceson Dodge from Empirical Capital, Adit Kumar from Anbros Financial, and Richard Munroe from Atrium Mortgage Investment Corp.

Financial burdens

The discussion started with the ubiquitous topic of affordability. People’s ability to afford housing has been a concern in the GTA for years. Several factors have contributed to rising prices, including government policies, taxes and development fees, which often make up a significant portion of construction costs. In fact, nearly a third of new construction costs are attributed to taxes and fees, which inevitably get passed on to the end user. These financial burdens, alongside negative public sentiment about new housing, have added pressure to the market.

Despite these challenges, there are solutions. Expanding into suburban areas, where land costs are lower, has allowed builders to deliver more affordable housing. Areas such as Kitchener-Waterloo and Hamilton, once considered peripheral to the GTA, have seen significant growth as more people adopt hybrid work models, spending less time in the office.

Positive contributions

Developers often find themselves blamed for the high cost of housing. However, many are making positive contributions by offering innovative suite designs, such as secondary suites and flexible deposit structures that ease the burden on buyers. But the flipside is that poor acquisition strategies, overpaying for land and focusing on high-profile, high-profit developments have also contributed to the housing crisis.

The question arises: Should developers prioritise affordability or focus on delivering high-quality products for profit? The reality is that developers need to strike a balance. Buyers’ ability to afford new units is not only crucial for the developers’ profitability but also for the health of the market as a whole. High land prices and ambitious construction projects have fuelled the perception that developers are prioritising profit over affordable housing, which has tarnished the industry’s reputation.

Changing public perception about condo living and the development industry is becoming increasingly important. There is a growing recognition that a coordinated effort is needed to educate the public on the benefits of condos and higher-density housing in urban areas. Developers also need to combat the stigma around poor construction quality by ensuring their projects meet or exceed buyer expectations.

Improving public sentiment is not just about quality control – it’s also about transparency and communication. By addressing these concerns head-on, developers can rebuild trust and showcase the value of well-planned, high-density housing.

In the short term, the GTA housing market is likely to see fewer investor buyers and slower sales. However, the long-term outlook remains more optimistic. Lifestyle shifts – such as the growing trend toward working from home – are expected to drive future demand, especially in suburban areas. Government policies and an improved mix of housing products are also expected to contribute to this positive shift.

Short-term challenges

One of the key short-term challenges for developers is that many land purchases made in the past five years have stalled. Weak market conditions have prompted delays in construction, with lenders extending land loans rather than forcing repayment. This highlights how lenders are working alongside developers to maintain market stability and avoid defaults.

Valuing land and determining market value has become another challenge due to a lack of transactions in the development space. Appraisers are finding it difficult to assess values accurately, which in turn affects lending decisions. To mitigate risk, lenders are adjusting loan amounts based on loan-to-value (LTV) ratios when appraisals fall short.

In response to these market conditions, developer priorities have shifted. In the short term, many are focused on survival, operational efficiency and improving public sentiment. In the long term, the focus will shift to delivering the right product mix, improving market absorption data and adopting innovative construction methods to maintain competitiveness and affordability.

Smaller developers, in particular, are being advised to stick to their core strengths. Rather than attempting to downzone or pivot to new types of developments, they should focus on what they do best. This advice underscores the importance of maintaining discipline and avoiding unnecessary risks in an already volatile market.

For developers dealing with unsold inventory, there are several strategies to consider. Some are renting out unsold units, selling them at a discount compared to 2022 prices, or even listing them on platforms such as Airbnb as a temporary solution to maintain cash flow while waiting for the market to stabilize.

Opportunities for growth

This need to get creative extends to the sales process as well. Broker commissions have become a key factor in moving unsold inventory. Many developers are offering higher commissions and incentives such as exotic trips for agents to push sales. However, this practice has raised concerns about short-sighted decisions, with agents pushing projects that may not be viable long-term. A more balanced approach to commissions, with a focus on the project’s viability, is needed to maintain trust between buyers, agents and developers.

The GTA housing market faces several complex challenges, but there are opportunities for growth and improvement. By focusing on affordability, improving developer practices and fostering better cooperation between lenders and brokers, the industry can navigate the current downturn and prepare for a stronger, more sustainable future. The balance between profitability and affordability will remain a key issue, but with thoughtful strategies and coordinated efforts, the market can emerge from its current challenges with renewed strength.

If you’re looking to buy a new single-family house or condominium this year, do a lot of research, talk to a mortgage broker and get a fulsome understanding of what you can afford and the appropriate value in the neighbourhood you’re exploring. Good luck.