What does a possible major undersupply of GTA condos in 2027 mean for you?

Attention all prospective condo buyers in the Greater Toronto Area: If you’ve been eyeing the market lately, you might have noticed some interesting trends unfolding. Let’s dive into what’s been happening and what it could mean for you as a potential condo owner.

The GTA condo market has seen some significant changes since April 2022, especially in the last six months, as the market has cooled. Things might not be looking up just yet, but there is some quiet confidence in the market about the final quarter of 2024, but we could be in for a bit of a slow ride in terms of condo transactions between now and October.

Demand pressures

With slower sales, developers are being cautious in terms of buying land for future projects. There are a lot more listings for lands suitable for apartments and condo towers, but fewer sales happening, and that there’s certainly a decent amount of listings coming on the market that are either not getting offers or not getting reasonable offers.

In the city of Toronto, there is a wide gap between what sellers think their lands are worth, and what developers believe the land is worth, based on their financial projections for condo prices and the trajectory of sales. As a result, much fewer transactions are occurring. In 2023, there were fewer high-density land sales in Toronto than in the previous year at 33, that is 53 per cent of 2022’s total (62). While this reduction in land sales won’t impact the availability of units in the short term, the market may see additional demand pressures in the near future, as it takes years for a project to go through the stages of development.

It makes sense that many developers are concentrating on the units they have for sale now, instead of buying development lands for future projects. The slower market has forced many developers to modify their absorption and revenue expectations, which has resulted in price declines for new condo projects nearing completion and good additional incentives for projects in the pre-construction phase of development.

When looking for a new condo, buyers will often look at existing units in newly-completed buildings. They will compare against buying a pre-construction unit, considering factors such as the time a project will take to be built and the unit’s overall cost. In a typical market – not including boom years – a new condo unit has been priced at a premium of about 15 to 20 per cent above a recently completed resale development. In comparison, when sales have been slower, the premium has dropped below 15 per cent. In 2023, despite the market slowdown, new condo projects launched in the amalgamated city of Toronto in 2023 carried a weighted average premium of over 30 per cent. Most of the projects with premiums in excess of 35 per cent experienced very poor sales.

'Shrinkflation'

With slower new condo activity over the last 15 months, the level of housing starts in the GTA is expected to plummet. Fewer units under construction in 2024 and 2025 will result in a severely undersupplied market in 2027 and 2028, leaving the potential for significant price increases in three to four years. There is a future opportunity to take advantage of that market, but buyers will have to be shrewd in terms of the projects they invest in today to take advantage of this future scarcity.

Finding the right unit size to invest in will be a tough decision, as unit sizes have gotten a lot smaller in recent years. As with many packaged goods, the new condo industry is experiencing “shrinkflation,” meaning that if customers cannot afford the same suites as they could a few years back due to rising costs, shrink unit sizes to an extent to improve affordability (while keeping the price per-square-foot increasing). This resulted in a large uptick in studios smaller than 400 sq. ft. and one-bedroom units less than 450 sq. ft. There will be a lot of these very small units on the market, it might make sense to purchase a two-bedroom unit and rent it out to two tenants.

Looking ahead, some developers are considering shifting their focus to rental apartments, which could have the effect of further reducing the condo housing stock. However, this professionally managed supply of apartments will compete against investors looking to rent out their suites. More food for thought.

The housing market is changing rapidly, and with many economists and bankers expecting multiple interest rate cuts in the second half of 2024, the market could come back quickly, as it has many times in the past.

Keep on doing your research, there could be some very attractive deals available in the first half of the year. Good luck.