The evolution of the new condo market in the Greater Toronto Area

I started following the Greater Toronto Area’s new condominium apartment market 15 years ago. There were long lines at the openings of several projects, and the phrase “Manhattanization of Toronto” was starting to enter the city’s vernacular.

During this period, many investors were getting into the market and taking advantage of the value appreciation between pre-construction and completion. A slow process as many investors had gotten burned the previous years. During the 1980s, many people bought new condominiums with the intent to flip them, but the market bubbled up and crashed, leaving these investors with units worth less than they paid for them.

Stricter lending rules

Following the bust in the 1980s, lenders started to require that developers sell at least 70 per cent of each project before it could qualify for construction financing. They started paying much more attention to the financial well-being of the buyers, ensuring they were pre-approved for a mortgage. Many lenders also required a down payment of at least 15 per cent of the suite’s sales price, and required foreign buyers to make a 35-per-cent down payment.

The stricter lending rules required developers to sell more condos upfront, and investors were willing to take that risk. Many end-users didn’t want to put 15 per cent down and wait three to four years for delivery, especially with the threat that the project could get cancelled.

This sales strategy worked very well, the demand for condominiums increased, the number of towers got bigger, and the time between the pre-construction and occupancy of the projects got longer. These larger projects and longer construction times further led to the decline of end-user buyers.

Increasing demand

Surprisingly, the demand for new condominiums has continued to increase, as the cost of construction and government fees have increased and driven up pricing to unthinkable levels. But investors still believe there is more room for appreciation, as the decline in the single-family home construction market, worsening traffic and higher car ownership costs have shifted the demand for suburban housing to the urban market. Despite some recent changes to the Greenbelt, supply challenges remain in the inner-suburban markets, and young professionals will continue to buy and rent smaller downtown properties.

Despite the number of visible cranes in the GTA, the demand for condominiums continues to outstrip the supply. In 2002, the development industry built more homes than in 2022, and the average home size is significantly smaller than those constructed 20 years ago.

The rapid pace of new condo development is expected to decrease over the next couple of years due to higher interest rates, the rising cost of construction due to product and labour inflation, and higher government-related fees. These factors will lead to fewer new home completions and a rise in the prices of resale homes and rents in and around 2026-27, which will subsequently encourage investors to buy again.

Long-term investment

The GTA new condo market is characterized by long cycles, due to the time it takes to build tall towers. Buyers that have taken a 10- to 15-year investment horizon have done very well. However, it is challenging to predict the future, so we always recommend caution.

Before investing in the new condo market, it is essential that you think long-term and always ask questions. How much immigration is there? What are the employment numbers? Are there restrictions on supply? How can the changing political policies affect the housing market?

Having an experienced team of real estate professionals around you can help you navigate the various factors that impact the market. Lean on their expertise, but do your homework. Good luck.