Without investors, TO’s condo market would be worse

If you’re reading this article, you’re probably in the market for a new home and you’ve probably had your eyes bulge at the starting prices of some of these new developments.No doubt that these prices probably make you angry.I’m guessing you already have someone in your mind to blame.

Maybe you’re someone who blames foreign buyer. Maybe you blame developers for setting their pricing too high, or maybe you blame the Boomers for hogging all the real estate. If you’ve read any articles on the new housing market in the Greater Toronto Area (GTA), you’ll know the blame is often placed on the shoulders of investors.

I started tracking the new condominium apartment market in the GTA in close detail in 2005, just when the market was starting to take off. By 2007, investors were buying about 30 per cent of all pre-construction condominiums in the metro area; by 2011 that share had nearly doubled. All anyone wanted to talk about was investors.

Clearly demand from investors has picked up significantly, however developers responded to that increased demand by drastically increasing the size of new condo projects. Gone were the 25-storey, 250-unit towers of 2007. Developers were introducing 45-storey towers with 450 units by 2011. After a temporary market blip, investors came back strong in 2016 and 2017, capturing 70 to 80 per cent of all new condominium purchases in those two years. Developers again responded by launching 60-, 70-, 80-, and now 95-storey condominium towers with up to 1,000 units apiece. More demand meant more supply.

However, despite the attempts of developers to build as much supply as there is demand, they have failed, and prices continue to rise rapidly. Instead of blaming government red tape, high development charges, restrictive zoning, a dearth of available construction workers and capable architects, the blame fell on investors (both domestic and foreign).

Some of you would like to go back to 2007. You like the 25-storey towers with 250 units, but that level of building will not satisfy underlying demand. According to RBC Economics, the GTA needs 22,000 new rental units per year to satisfy tenant demand, and we haven’t even made it to ownership demand yet. You might look at that 22,000 number and conclude that it’s not that much, but in fact it's 88 buildings with 250 units. Are you rethinking your perspective on the need for pre-construction investors?

Perhaps you’re in the camp that believes that if investors didn’t buy any pre-construction units, that end-users would be lining up to buy all 1,000 suites in a 95-storey project. If you believe this, chances are you’ve never spoken to a sales and marketing director, or an on-site sales agent for a new condominium apartment project. There are end-users that are turned off by the fact that they can’t envision a suite from a two-dimensional floorplan. Other end-users don’t want to wait three to five years to take possession of their unit, others don’t want to pay a 20 per cent down payment, while a smaller portion of those end-users is nervous about the project getting cancelled prior to completion.

Investors provide a valuable service to the industry by renting units out. In fact, close to 60 per cent all new condominiums completed over the past couple of years are leased out. But couldn’t all of those people leasing those new units actually purchase those new units? Not likely. The down payment required for the average unsold new condo in the GTA is $166,000 ­— that is a big amount to save up. Some of those tenants don’t want to wait for a new condo to be built, some tenants don’t want to own, some of those tenants are only here for a short period of time, and some tenants don’t want to have their $166,000 down payment tied up for four to five years.

There is plenty of blame to go around for why we have high new condominium apartment prices in the Greater Toronto Area, but if it wasn’t for pre-construction condo investors, the market would be much worse.