June 27, 2023 | condo investment
If you have been following condo pre-construction over the past year, you have likely noticed a sharp decline in new condo projects coming out in Toronto so far in 2023. Year after year, Toronto takes the top spot as the North American city with the most cranes in the sky, usually by a long shot, sometimes double or triple the second-place city. However, Q1 of 2023 marked a 70% drop in housing starts so far this year. When you visit sites like urbantoronto.ca, you will see them focusing on current projects working their way through the process right now instead of featuring new proposals as they usually do. It appears that many buyers are stepping away from investing in pre-construction condos at the moment, and in turn, many developers are taking a step back.
The climate of condo investing is also becoming less favorable for some landlords. The importance of affordable housing and the impact of higher prices have become bigger political issues with each passing year, and rightly so. It is likely that government legislation will discourage some from buying investment condos and push for more owner-occupied condo units. Recent statistics show that more than 10% of Canadians own two homes or more, with a larger number in bigger cities like Toronto or Vancouver. These statistics make governments uncomfortable, as they want to see more homes owned by occupants when there is such limited housing available. As a result, they may try to discourage landlords to some extent, even though condo investors play a vital role in supplying rental stock to the city.
So, are condos still a good investment?
Well, today it may appear risky to buy a condo as an investment, but when we look at the data, things are actually looking promising for condo investors in the long term.
STILL MISSING THE MARK
Despite Toronto’s leadership in condo construction in North America for several years in a row, we are still not building enough homes. Over the past 20 years, the GTA has added two million new people, yet we are still building condos at the same rate as we were 20 years ago. This means we are constructing new housing for a city that is much smaller than what it has become. We need about 30,000 to 40,000 new housing units built each year, but we are only building about half of that. Although there has been some new focus on the supply side of things from the government to encourage more new properties, it is still in the early stages and not effective enough yet. There needs to be much more encouragement for builders to construct more, and that is not happening at the moment. While there have been changes in zoning bylaws to promote the construction of more properties through laneway houses and the recent zoning change to allow more multi-unit homes in Toronto neighborhoods previously zoned for single-family dwellings, these efforts are insufficient. Just because it is now allowed does not mean that these kinds of properties will be built in high enough numbers to address the growing demand.
DEVELOPERS TAKING A BREAK
As I mentioned earlier, new condo development this year has significantly declined, even though we are still a growing city facing a housing supply problem. So, why have builders slowed down on new projects? I believe we can largely attribute this to the interest rate hikes and the subsequent fall in prices between early 2022 and early 2023. After this recent dip in prices, builders are waiting for these lower prices to rise again, allowing them to charge what they were charging before the downturn for their newer projects. They can’t bring out a new project in 2023 that costs less than a project they started in 2022. Additionally, some pre-construction condo buyers, whether investors or future residents, may not consider buying pre-construction until prices show a recovery. Unlike the resale condo market, where prices can adjust during market shifts, pre-construction condo builders and salespeople do not change their pricing accordingly. While they may offer incentives to make buying a condo more appealing, such as free upgrades or parking, the overall price remains the same as those who bought earlier. As a result, resale condo prices may have decreased until the beginning of this year, but pre-construction prices have not, making them less appealing at the moment.
It’s important to note that condo sales have been rising for the past four months, and resale condos are currently selling very well, with a 15% increase across the city since January. However, many pre-construction condo developers price their units based on a projection on how much units will cost at the date they are completed rather than current market prices. These projections often lean towards the optimistic side. Consequently, those taking possession of their pre-construction condos today may find that their units are worth less than what they paid based on these optimistic prices. Therefore, pre-construction investments do not seem very enticing at the moment. This sales slump in a growing city with a pressing need for more housing may not pose a significant problem today when fewer pre-construction units are coming to market. However, it is likely to create a significant supply issue in the future, as 2023 seems to be the year with fewer proposed condos for construction. This means that five to ten years from now, there will be fewer condo units available on the market. While the delay in construction can be lengthy, it will likely lead to a substantial drop in supply in the future. To be clear, I’m not suggesting that buyers rush out and purchase pre-construction condos. I believe that the prices are generally too high. However, it may be a good time to consider purchasing a resale investment condo.
Another challenge we face is lower productivity. Even if we want to complete more condo units and the government encourages more development, we currently lack the necessary workforce to achieve this. There simply aren’t enough tradespeople and construction employees available to handle the upcoming projects. Consequently, even if approved, many projects will not be built as quickly as they could be, leading to a lower number of completions. Some may argue that a city should not grow as much if there is insufficient housing. However, we need new people to fill these jobs, especially when considering the number of retirements that will occur among the Baby Boomers and the individuals exiting the workforce in the coming decades.
As it stands now, it does not appear that our supply issue will be resolved. In fact, at the current trajectory, we may have even fewer homes for sale in the next five to ten years, despite being a larger city by then. Based on the available data and in my humble opinion, this suggests that condo prices will continue to climb over time. Additionally, rents have already experienced double-digit growth this past year, and this trend is likely to continue. While there are limits to what renters can afford, there will still be pressure for rents to steadily increase in the next five to ten years.
Of course, unexpected factors could alter this trajectory. We can never fully anticipate what lies on the horizon, as the pandemic has clearly demonstrated. Nevertheless, by examining what we do know, we can gain some understanding of the long-term direction of the condo market.