Pedestrians walks past the St. Lawrence Condos under construction in downtown Toronto on Oct. 29, 2020.Aaron Vincent Elkaim/The Globe and Mail
As Ontario’s government readies legislation aimed at boosting the delivery of new privately owned housing supply, the most prolific buyers for new-build homes – condominium investors – are heading for the sidelines.
The latest data from real estate analysts Urbanation Inc., points out there’s only been two times in recent decades when sales of preconstruction condominiums in the Greater Toronto Area (GTA) fell lower than they did in the third quarter of 2022: the financial crisis of 2009 and the first quarter of the COVID-19 pandemic in 2020. Urbanation records 1,748 sales, a drop of 79 per cent from the third quarter of 2021 (8,320 sales). Overall, the quarter was down 32 per cent from the 10-year average.
“This is one of the issues of relying on condos to be the main driving force of housing supply in your region: You can only build at the pace investors will buy,” said Shaun Hildebrand, president of Urbanation. “When we talk about housing supply, this is the exact wrong time to be seeing a slowdown in development. We should be ramping up.”
The extent to which Ontario relies on condominium apartments to fuel new housing supply is stark: According to the Canada Mortgage and Housing Corporation (CMHC), so far in 2022 there have been 22,737 new home completions in the GTA, of that three quarters (15,582) were apartments (a small chunk of that number are purpose-built rental apartments). In some markets as much as half of the newly completed condo apartments are pushed into the rental pool, making condos a key source of new housing for first-time buyers and tenants alike.
Ontario has set a goal of delivering 1.5 million new homes in the next 10 years, a figure that would take a three-fold increase in completions over the 55,909 homes the CMHC says Ontario delivered in 2021 (two thirds of which came from the condo-dominated GTA).
Industry experts note the third quarter is typically a slower quarter for preconstruction sales, covering the summer, but even so, there are signs that more buyers are taking longer to return to investing.
Pauline Lierman, vice-president of market research with Zonda Urban, counts a slightly better sales period with perhaps 2,891 transactions, which is still 61-per-cent down compared to previous quarters. That said, she sees worrying signs in the rate at which sales were happening. When a condominium project launches, the rate at which the units for sale fly off the shelves is called the absorption rate. That rate had averaged about 75 per cent in a quarter in recent years. While 2022 started off strong, Zonda’s figures show things have deteriorated quickly.
“We’ve seen about three consecutive quarters of declining sales: In Q1 it was about 80 per cent absorbed, but Q2 we saw a faltering absorption rate and it had fallen to 62 per cent,” Ms. Lierman said. “For Q3 three [developers] launched about 4,391 units – about half of what we saw over the last two quarters – and the absorption rate was just 40 per cent.”
Concerns about high prices for future units coupled with shocking rises in interest rates seem to be the driving factors depressing sales. Both Urbanation and Zonda saw strength in sales in the Hamilton and Brampton areas where the price per square foot for new condos can be less than $1,200, compared to Toronto-adjacent suburbs that see prices as more like as $1,400. That said, sales in core Toronto and midtown stayed relatively stable despite being the highest priced units available.
According to market research from the Bank of Montreal published on Oct. 21, a key indicator that might be scaring off preconstruction buyers is the so-called mortgage service ratio (MSR). With The Bank of Canada raising the policy rate 350 basis points so far in 2022, BMO reports the typical Canadian looking to buy a home today could expect 48 per cent of their income to be eaten up to service a mortgage, the highest rate we’ve seen in 33 years.
In Toronto it’s even worse. “MSRs are as eyepopping as ever at over 70 per cent, up from the mid-40 per cent range in early 2020 and mid-30 per cent range in 2005. That’s what happens when prices outpace income by a factor of two in the past 17 years, taking ratios to a nosebleed 11:1,” writes Sal Guatieri, senior economist with BMO Capital Markets. For resale condos – typically the most affordable housing type in Toronto – a median income family can still expect an MSR of 45 per cent of their income.
The gap between current resale condo prices and the futures price of a preconstruction contract is also widening, which may be wilting demand. For example, in the third quarter resale condo price per square foot fell to $891 – down from $988 in the second quarter – according to Urbanation, compared to a still-rising $1,427 per square foot for preconstruction condos.
The slowdown in demand for future units is somewhat at odds with what’s happening in the construction market right now. Ms. Lierman said Zonda’s data shows there’s about 120,400 housing units under construction right now – about 104,000 in condominiums and another 16,000 in purpose-built rental. Both figures are well above historical norms: “It does speak to builders revving up, that’s far higher than it was 20 years ago,” she said. Mr. Hildebrand agrees, and recalls it wasn’t long ago that barely 50,000 units would be under construction in a given year.
It can take up to five years for preconstruction condos sold today to be completed, but for a province facing an acute housing shortage the current slowdown amounts to a chokepoint that could undermine its goals for housing delivery in the future.