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How a record inflow of new condos might impact the market in T.O.

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Toronto media have jumped on the news from real estate data analysis firm Urbanation Inc. that a record number of new condo units will be completed in the city and surrounding suburbs this year.

Urbanation puts the figure for anticipated new condominium unit completions in 2023 at almost 32,000.

Speculation abounds as to how this could affect the condo market in the Greater Toronto Area (GTA), coming at a time when hikes in mortgage rates and fears of a pending recession have hit the market hard.

Is there enough demand to absorb this inventory? Could the increase in supply bring down prices?

The expert consensus seems to be that – with many investors leasing out their units – this incoming fresh supply is more likely to provide a bit of much-needed rent relief to Toronto’s condo tenant pool than anything else, probably not causing rents to fall, but maybe helping hold them steady for awhile.

The overall average annual rent increase in 2022 in the city’s condo market was a whopping 19 per cent, Urbanation reports.

Supply chain delays

 

But while the inflow of new condos “might keep rents from rising further, it’s not a big enough splash to change the trajectory of the market,” says Simeon Papailias, an investment property specialist who heads up Royal LePage’s REC Canada.

The sizeable new condo release is “catch-up,” Papailias explains. Some of the units were supposed to be on the market previously but “are just now wrapping up due to the Covid supply chain debacle.”

He expects shortages to continue this year, and in light of Toronto’s 6+ million population, he doesn’t think that “32,000 doors” will impact condo prices.

In his opinion, due to immigration and other factors, the GTA would need 50,000 new condo units delivered annually over the next decade to meet demand.

 

Challenges for investors

 

For now, interest rates and escalating ownership costs are tending to make condo ownership more challenging and less profitable for investors, resulting in a substantial slowdown, including a 79 per cent plunge in pre-construction condo sales, according to Urbanation statistics.

Condo prices have been holding relatively steady, though, and forecasts generally anticipate that they’ll fare better than those of single-family homes in 2023.

 

Assignment sales

 

Many in the game report seeing a scramble for attempted pre-construction condominium assignment sales, with investors/speculators hoping to bail out and sell the contracted rights to their units before the building is completed and it comes time to close, concerned that they won’t be able to qualify for or carry a mortgage due to hikes in borrowing costs.

Jamie Johnston, broker/owner of Toronto-based ReMax Condos Plus, says that many vendors looking at selling by assignment purchased their units a few years ago when Toronto pre-construction prices were much lower.

 

Resale market

 

That being the case, they’re still able to get out pretty much unscathed if they can find a buyer (not always an easy proposition in this market). But Johnston generally advises his clients not to sell by assignment. “Taxes are horrendous on it. Better to close and then sell as resale,” in his opinion.

Other experts say that they haven’t found government increases to assignment taxes to be overly prohibitive, adding that there can be good deals for investors in the assignment market.

With pre-construction condo prices high in Toronto, word is that realtors could also begin to see a rise in the number of buyers looking to the resale market for already-built condos. The price gap between the two markets has widened significantly this past year, with the resale market tending to offer more affordability.

 

Market outlook

 

Nevertheless, condo activity overall in Toronto is at a low ebb. “Everybody is looking for the bottom of the market,” says Johnston. “We need to get past that. I think it will happen this year, and we’ll see an uptick in the market by the last quarter.”

He stresses that it’s important to educate clients whose heads are in the clouds. “I’ve spoken with buyers who think prices will drop 15 per cent this year – they won’t. We have to shake up buyers and sellers to be more realistic.”

Employment in Toronto is strong, and mortgage arrears aren’t much in evidence, which are good signs, Johnston notes.

With a strong Toronto rental market as well, most investors are inclined to hold on, taking a wait-and-see attitude, Urbanation president Shaun Hildebrand concurs.

The condo market in Toronto is facing headwinds. But condos have the benefit of being the most affordable option in the GTA, Hildebrand points out.

“The consensus view is that interest rates will increase early in the year and then begin to level out,” he says. “In 2023, I think we’ll see an improvement in the market if the economy remains stable.”


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