Yahoo Finance Toronto's condo crisis signals more pain for housing affordability, rental market
Canadian housing market faces 'the most significant test since the 1991 recession'
The glut of condos for sale in the Greater Toronto Area (GTA) is a dire signal of worsening housing affordability and rental supply in a market where the math “doesn’t make economic sense,” according to a new report from CIBC and Urbanation.
Various statistics show that the GTA condo market is “clearly in recessionary territory,” and the nationwide housing crisis is at a level not seen in over 30 years, write CIBC’s Benjamin Tal and Urbanation’s Shaun Hildebrand in the report, published Thursday.
“In fact, it is fair to say that given the current environment, the Canadian housing market in general and the GTA market in particular are facing the most significant test since the 1991 recession.”
Various factors, chief among them inflation and high interest rates, have left the condo market frozen in a no-win situation. Condo investors are “critically important for growing rental supply and contributing to the improvement in overall housing affordability and growth in the GTA economy,” Tal and Hildebrand write, but investors in recent builds are mostly losing money and prospective investors are studiously avoiding new projects for fear of the same. Developers, meanwhile, are contending with construction costs driven up by inflation and dwindling interest for future projects — causing future supply to “dramatically slow down.”
In an email to Yahoo Finance Canada, Tal says it is "reasonable to assume that similar forces are at play" in Vancouver, "although probably to a lesser degree."
The report notes that falling interest rates, a projected slowdown in population growth and a stabilization of construction costs provide a glimmer of relief, but the authors expect that relief to be limited. At Wednesday’s Bank of Canada announcement of a second consecutive 25 bps cut, senior deputy governor Carolyn Rogers took pains to note that interest rate cuts aren’t “the magic solution” to Canada’s housing problem.
“It would be a mistake to pin all of our hopes on our housing imbalance on interest rates,” she said. “Canadians need a more fulsome policy response than that.”
Record-high inventory
Urbanation’s report on the Toronto and Hamilton condo market for the second quarter of 2024 showed unsold inventory at 25,893 units, a record high and more than 60 per cent higher than the 10- and 20-year averages. Sales in the second quarter were the lowest in 20 years outside of the first months of the COVID-19 pandemic. In an interview with Reuters, John Lusink, president of Right at Home Realty, says Toronto’s historically high condo inventory amounted to “a buyer’s market with no buyers.”
For those investors who have bought condos in the GTA recently, the results have not been good. Tal and Hildebrand found that 82 per cent of condo investors who bought with mortgages in 2023 were cash flow negative in the first half of 2024. Investors who closed on a condo in 2023 had negative cash flow of -$597 per month, more than double the monthly loss of investors who closed in 2022, who had negative cash flow of -$223 per month. Investors who closed in 2020 and 2021 have positive cash flows on average.
With high costs, high interest rates and poor investment prospects, condo presales are under 50 per cent, a more than 20-year low, the authors write. New projects won’t start construction with less than 70 per cent presales, they note, “a fact that is working to dramatically slow down the supply pipeline.”
“This reality will result in a sharp pullback in completions and a stagnating housing stock in the coming years, which is sure to make the affordability situation even worse.”
(As construction slows, construction jobs have also declined in Ontario, with June figures down 7.5 per cent from June 2023. Tal and Hildebrand say this is the weakest since the 2008 recession.)
The gloomy situation “appears to be causing a recent shift in behaviour” among condo investors, the authors write, with many seeking to sell their properties. The record-high listings “can be correlated to the approximately 60% share of the stock built in recent years that is owned by investors,” they write.
“This is a troubling sign for the outlook for rental supply in the region and raises an alarm bell over the necessity to increase purpose-built rental supply.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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