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Canada’s real estate boom discussed back in February 2022 was heavily investor-driven, especially in the context of new construction. Betterdwelling.com sifted through ownership data and discovered that most condos built since 2016 are investors owned. Those owners could be landlords who want: (i) a second home (ii) an income source or (iii) just a place to seed equity. Regardless of the motivation, the “most affordable” housing option is, by an overwhelming majority, investor-owned.
As reported earlier by the Residential Construction Council of Ontario (RESCON) and Global News rising Canadian interest rates as well as some other trends in the construction industry may be changing the trajectory of Toronto’s condominium market.
In its Condominium Market Survey for the second quarter of 2022, Urbanation reported that 6,792 new condo units were sold in the second quarter. This is a decline of 19% from Q1, and just under twenty-five percent year-over-year. The global news article entitled, Here’s how high-interest rates are impacting Canada’s condo demand noted the experts forecast the sale of only 10,000 more units launched between now and January 1, 2023, with 10,000 units being delayed or scraped.
Those residential homebuyers, who are looking for a condo, detached, or semi-detached home have likely noticed that there are more housing units to choose from in recent months. Inventories on each front shot up by almost sixty percent from a year ago. However, the higher interest rates are negatively impacting homebuyers’ purchasing budgets.
The Housing Market Index or HMI is a 100-point scale that the Canadian Home Buyers’ Association (CHBA) uses to gauge the confidence of Canadian residential builders. The HMI observed that there was a dip in the latter part of Q1 and a subsequent dramatic drop in developer confidence in the entirety of the second quarter of 2022. The CHBA attributes this mainly due to drastic labour shortages, noting that the Bank of Canada’s quantitative tightening has impacted, but is not reflected in those Q1 and Q2 numbers.
Like the pinch Canadians have felt for household staples, Homebuilders are finding the cost of their industry materials climbing up, several rungs at a time. Many builders have felt the sting of development charges, also. Although the reason for this could be a combination of factors, some builders point to the commonality in presence and timing of it across municipalities as an end-run clawback method to regain the loss of revenue cities experienced due to COVID-19 lockdowns. While there is no confirmation of this at the municipal level, there’s a heavily debated topic amongst councillors in neighbouring cities around whether to follow Toronto’s model of an additional land transfer tax (LTT) at the city level. Toronto’s LTT was long in play before the global pandemic; The talk on neighbouring city officials’ lips is its implementation may prove a formidable part of a larger debt-recovery strategy.
In March of this year, industry watchers observed that the pre-construction was already beginning to pause as builders shut their sales offices to John and Jane Q. Public. This prediction of the postponement of any new development appears to ring true as well.
Investors make up most of the pool of pre-construction condo market buyers. As has been noted by many an economist, the real estate industry, with all of its complexities, when boiled down is a wonderfully, dispassionate system fueled by supply and demand.
In its October 14th article, Pre-construction condo flippers may be left holding the bag as buyers disappear the Financial Post noted industry watcher observations that nervous investors who are seeking to offload their pre-construction condos in the secondary buyer market may find themselves out of luck. A shifting, softening real estate market coupled with existing interest rate hikes and the looming threat of more by the Bank of Canada are sending buyers to the sidelines.
Several REALTORS ® in the Greater Toronto Area shared with the publication that they’re experiencing a spike in email and telephone queries asking about “assignment sales”
By way of background, an assignment sale is a kind of real estate transaction whereby the initial pre-construction condo buyer “assigns” or transfers the rights and obligations of the purchase agreement to another buyer via a legally binding contract. An industry leader commented that he's never seen the assignment market this soft before. Online chatter supports his supposition; topics using the words “assignment,” “assign” or “flip” combined with “Toronto” “GTA” and “condo” or “condominium” lept from four percent in 2017 to fourteen percent this year.
Historically, there have been some pre-construction buyer clients who don’t intend to close. They never intended to complete the sale and were hoping to flip the contracts for a profit. Part of their investment strategy is to get in on the proverbial ground floor. As the construction progresses, when they feel their initial investment has hit their perceived sweet spot, they sell it and consequently assign it to the next buyer.
Since pre-construction units are not yet registered, those sales are not advertised on the Multiple Listing Service (MLS) system. Subsequently, comprehensive data on the market is limited. There’s some debate as to whether the proportion of the market of the buying pool that may never actually intended to close on is much higher than in the past or what the market can sustain. This perceived uptick is further complicated if there’s a possibility that factually some of those deliberate assigners may no longer be able to afford to close.
If this seems like a lot of whispered what-ifs and maybes from dark corners, we’re with you. We turned to industry juggernauts and real estate Sales Representatives Tony Sbrocchi and Aleksandra Nowak of The Condo House to share not only what they’re seeing from the trenches of the pre-construction condo market, but their 2-year forecast, and their up-to-the-minute north star advice given to their exclusive buyers-club clients for navigating the waters of the fast-paced and dynamic GTA pre-construction condo market.
When asked to share their observations of the current Toronto and surrounding area pre-construction condominium market landscape and its two-year trajectory, Mr. Sbrocchi noted the following:
“The current market conditions are a factor of interest rates and marketplace uncertainty. With rising rates, we will always see a decline in market activity. Typically rate increases take some time for the marketplace to absorb. As it has been in the past, the market will adjust accordingly. Is there a concrete timeline, No, will there be a recovery, yes. In the next 2 years, we’ll likely see a levelling out of rates and pricing which should bring stability back to the market. One thing to note, regardless of the current conditions, builders are not in a position to reduce pricing on preconstruction as their costs had been elevated before the rates hikes due to supply issues and land costs, the latter being the biggest driver”.
Mr. Sbrocchi and Ms. Nowak, revered by their clients for their innate attentiveness and aptitude for righting the ship in any of the rough waters that the real estate throws at their clients, had this gem to impart to our readers,
“Real Estate is not something measured on a month-to-month basis. There is always the bigger picture, which is that investors should always use a minimum of a 5-year timetable to quantify how their investment will perform”.
These times can feel uncertain, particularly when folks see potential evidence that seemingly affirms their mounting concerns for the sustainability of their investment, such as a rollback of new pre-construction units. The crossroads they face may feel daunting and the future offers no guarantees. It’s become clear that the star that one may need to find true north, or perhaps if you’ll pardon the turn of phrase, true growth is working with proven navigators with a long-standing history of purposeful market reading and cultivating meaningful relationships. Many REALTORS ® can offer big promises but take the time to look at their track record. If they have a proclivity for high peaks followed quickly by low valleys, that may be a sign that you need to send up a flare. This red flag is indicative of responsiveness to the market rather than the proven strategy buttressed by those long-standing relationships of trust and knowledge. That’s potential smooth sailing and a return on investment that you should bank on!
In a changing market, it helps to have agents who know their stuff. At The Condo House, you have the opportunity to work with experienced agents who have unique insider knowledge to make your pre-construction investment go smoothly. To learn more, visit https://www.thecondohouse.ca/ for information on the hottest new projects and listings and to get in touch to find out how they can help you achieve your investment goals.
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