Toronto condo market facing biggest test since 1990s recession

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Canadian housing markets have taken some knocks over the past few years as interest rates and inflation soared, but few have had it as rough as Toronto’s condo market.

While the low-rise market in the Greater Toronto Area is holding its own, conditions in the condo market are deteriorating to levels not seen in decades, says a report by Benjamin Tal, deputy chief economist at CIBC Capital Markets, and Shaun Hildebrand, president of Urbanation.

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Their report describes how the condo market has slumped into recessionary territory, a situation that could have serious consequences for housing affordability and the economy in the region.

“The GTA condo market is in a state of economic lockdown,” they said.

The problem is prices are too high for investors, which make up 70 per cent or more of presale buyers, and developers can’t lower prices because of high construction costs.

“As a result, new condo sales — the primary driver of new home construction in Canada’s largest market — have dove off a cliff to their lowest level since the late 1990s,” said the report.

The percentage of pre-construction condos that are pre-sold is now at less than 50 per cent, the lowest in 20 years or more. Since a project can’t begin construction without at least 70 per cent presales, this is “dramatically” slowing the supply pipeline.

“This reality will result in a sharp pull-back in completions and a stagnating housing stock in the coming years, which is sure to make the affordability situation even worse,” they said.

The downturn is also affecting the economy. Each condo project typically employs 500 workers, but since 2022 the number of these projects in the GTA has dropped by 75, impacting nearly 40,000 jobs, said the report.

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By June, overall construction employment in Ontario was down 7.5 per cent from the year before, which outside of the pandemic is the weakest since the 2008 recession.

The high cost of building condos these days is reflected in prices. New condo prices are down only 5 per cent from their high, while resale condo prices have fallen by 12 per cent.

Developers are offering incentives and rent is up 30 per cent from pandemic lows but “it’s not enough,” said the report.

“Quite simply, new condo investment doesn’t work at the current market average price of close to $1,400 psf (per square foot),” it said.

So what is the math? The reality is that many condo investors are losing money.

While rents on leases of newly completed condos climbed 8 per cent last year to a record average of $2,700, average monthly ownership costs rose 21 per cent to nearly $3,250 per month.

Ownership costs have soared by nearly 60 per cent since 2020, more than doubling the increase in rents over the same period, said the report.

This has caused the number of rental condo owners whose finances are in the red to grow steadily since 2022. Of owners with a mortgage, 52 per cent were cash flow negative in 2022, meaning rents were not covering ownership costs which include mortgage, condo fees and property taxes. By 2023 that share had grown to 77 per cent and by the first quarter of this year, it reached 82 per cent.

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In dollars and cents, condo owners who closed on new units in 2023 were experiencing on average negative cash flow of $597 a month and for 30 per cent of them this reached as high as $1,000 or more.

The bigger the condo, the larger the negative cash flow, said the study. On condos completed in 2023, studio units on average broke even, while negative cash flow for one-bedroom units averaged $523 a month, for two-bedroom units, $734 and for three-bedroom units $866.

“This provides some insight as to why investors favour smaller units, and the scarcity of rental options in the market for larger units,” said the report.

In Canada’s biggest housing market, condo investors are “critically important” for increasing rental supply and improving overall housing affordability and the economy, said the economists.

Yet there appears to be little relief on the horizon in the short term. Condo completions working their way through development from an earlier boom in pre-sales are set to rise sharply, increasing competition. At the same time an increasing number of condo investors are putting their units on the market, pushing listings to a record high.

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“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,” said Tal and Hildebrand.

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The giants of the stock market are stumbling, and according to BofA Global Research strategist Michael Hartnett, the big tech stocks are just “one bad payroll away” from losing their dominance.

The upward flight of a handful of tech stocks including Apple Inc., Amazon.com Inc., Alphabet Inc., Microsoft Corp., Nvidia Corp. and Meta Platforms Inc. this year has led to unprecedented concentration with just 10 stocks accounting for three quarters of the S&P 500’s returns.

But as Hartnett’s chart shows that performance has taken a dive in recent weeks and he says it could fall further if the United States economy continues to weaken and the Federal Reserve cuts rates.

“We say sell 1st rate cut … Wall St one bad payroll from ending monopolistic/oligopolistic dominance,” said Hartnett in The Flow Show, entitled this week “Peak Oligarchy.”

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• Earnings: McDonald’s Corp., Gibson Energy Inc.

You may not want to rule from the grave, but it’s understandable when you want to help your grandkids by leaving them an estate. Lawyer Ed Olkovich offers a few tips to help one reader set up a trust that pays out the earnings to his grandchildren. Find out more.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line with your contact info and the gist of your problem and we’ll try to find some experts to help you out, while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers, led by Julie Cazzin, can give it a shot.

McLister on mortgages

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Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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