GTA housing market in transition... development experts weigh in

Housing affordability in the GTA has been a hot topic for many years, with the more recent focus on improving affordability by adding more housing supply. Following an unexpected boom in new housing sales activity coming out of the pandemic, higher interest rates have made it more difficult for new housing developers to make “the numbers” work on future projects.

I recently sat down for a roundtable discussion with several real estate experts on the Toronto Under Construction podcast to discuss the current state of the new housing market. The panel comprised: Linda Chen, vice-president of investments at Harbour Equity, who focuses on underwriting and structuring new investments, as well as managing existing joint venture relationships; Francesco Margani, founder of Franc & Co., a boutique commercial real estate brokerage and advisory firm that delivers innovative, strategic financial solutions for developers, lenders and investors; and Noorez Lalani, president and co-founder of MOD Developments, a highrise condominium builder and developer.

Greenbelt controversy

The first topic we discussed was the Greenbelt controversy. The Conservative government and Doug Ford plan to open up the Greenbelt to housing development, and there are calls for the housing minister to resign because of it. A recent auditor general’s report concluded that there was preferential treatment to developers with financial ties to the conservative government. Margani mentioned that tackling the housing crisis would come with tough decisions, and that some Greenbelt lands are adjacent to well-established communities, with infrastructure such as GO Train lines built and ready to accommodate more passengers. Chen countered by stating that while these lands might give some housing relief, they are not the silver bullet that some think, as much of the Greenbelt lands are zoned primarily as agricultural lands for a reason: They do not have great access to public amenities such as water, sewer and power and the developers that build on them will incur significant additional costs to service these lots and those costs will be passed onto consumers in the form of high prices.

A second market point of discussion was the slow new condo sales, but a hot rental market. Gone are the days when developers could expect 95 per cent of units to be pre-sold to investors in a couple of weeks. While optimism is still present as it relates to the long-term outlook for the GTA new housing market, it comes with a dash of caution. Chen noted the tougher underwriting standards by lenders right now could stifle supply and add significantly to developers’ carrying costs on land purchases. All panelists agreed that after a long run of increased valuation across all property types, margins are not what they used to be, making things particularly challenging. The highrise condo market operates with a notable time lag. Slow sales today could lead to even greater undersupply in three to five years, as buildings that were supposed to be completed are not launched.

Transition period

All panelists were further in agreement that trades and hard construction costs were not decreasing, despite the slowdown in new home sales over the past year. Land prices have declined, but not as much as is needed to make a project work, given the lower revenue. There are not many distressed sales yet, and most existing landowners are in no hurry to sell in a softer market. To spur more housing supply, Lalani suggested reducing government surcharges and taxes, where he noted that the biggest beneficiary of new developments is not the developers, but rather the government, which takes 30 per cent of revenue without assuming any risk. On a previous podcast, Zev Mandelbaum of Altree Developments mentioned that government fees on the units he’s building in New Jersey are $12,000 per unit, versus more than $300,000 per unit in Toronto.

We remain in a transition period, with most developers unable to reduce pricing to meet demand, as costs remain high due to a high level of new housing units under construction, built-in trade union salary increases, rising government fees and requirements, and much higher borrowing costs. Savvy buyers willing to take some risk will be handsomely rewarded when the market returns to its booming ways, which may end up coming faster than we think. Good Luck.