Construction workers on the top floor of the Time and Space condominium project in downtown Toronto, on Oct. 11, 2022.Fred Lum/the Globe and Mail
New condo prices in the city of Toronto declined for the first time in a decade, as developers cut rates and offered more incentives in an attempt to entice prospective buyers.
The average price for a condo that has not yet been built, also known as a preconstruction condo, was $1,549 per square foot in the second quarter. That was a 1 per cent decline over the same period last year and the first annual decline since 2013, according to a report from industry research firm Urbanation Inc. (A decade ago, the asking price per square foot for a preconstruction condo was $603 in the city of Toronto.)
The combination of higher borrowing costs and lofty prices have been deterring preconstruction condo buyers, the majority of whom are investors seeking to profit from rental income.
Because the purchase price is so high, investors are having a harder time covering their monthly mortgage payments, condo fees and other related expenses with tenants’ rent. That has motivated investors to seek relatively cheaper properties outside of the city.
As a result, condo builders have had to cut their asking prices. They have also been offering more perks such as cash back when the buyer closes on its purchase, lower parking fees and free upgrades, according to Urbanation.
“Developers lowered asking prices in response to slow demand,” said Urbanation president Shaun Hildebrand.
Meanwhile, developers are raising prices in the suburbs surrounding the city of Toronto, also known as the 905 for the region’s area code. The average price for a preconstruction condo in the 905 was $1,172 per square foot in the three months ended in June, a 2.5-per-cent increase over last year’s second quarter.
Across the Greater Toronto Area, the average price was down 2.2 per cent year over year because an increasing number of units are being launched and priced in the 905 where the price is relatively lower, thereby dragging the entire region down.
Mr. Hildebrand said investors are focusing attention on areas where prices are much lower than the city of Toronto but where the rental rates are similar. That includes many parts of the 905, where the monthly rent for a one-bedroom unit is a few hundred dollars lower than the city of Toronto’s $2,572, according to data from Rentals.ca.
The Urbanation report found that new condo sales were more robust in the cheaper areas, with the 905 accounting for the majority of the greater Toronto region’s transactions in the second quarter.
Condo developers launched projects that were on par with the 10-year average. However, the volume of sales was 35-per-cent lower than the second quarter of last year.
In contrast, there was an uptick in demand for condos that were previously owned. The volume of resale condos rose by more than 20 per cent year over year, according to the Toronto Regional Real Estate Board.
Overall, home sales across the country have slowed since the Bank of Canada resumed raising interest rates in June after a four-month break. The central bank has not said whether it will pause hiking interest rates, injecting uncertainty in the market once again.
Preconstruction condo buyers typically do not take out a mortgage before their unit is completed and they are ready to close on their purchase. It takes a few years from the sale of the preconstruction condo to completion. Mr. Hildebrand said current buyers are still affected by today’s interest rates because many are repeat buyers and are dealing with or getting ready to deal with higher borrowing costs on units that are nearly complete.