As discussed in our blog on the federal government’s recent changes, conditions for many homebuyers will improve before the end of the year.
However, these tweaks to mortgage policy and a continuing decrease in interest rates won’t fix the condo market alone. It’ll take more to spur investors to return.
Let’s review the condo market and what it could look like for the next few years.
- Current Condominium Conditions
- 2027 – 2028
- Historic Lows
- Incentives
- Outlook
Current Condominium Conditions
Condominiums are not only crucial for housing supply but also to the rental market. In fact, half of the GTA’s condo inventory is being used for rentals. And while 160,000 condo units have been built over the past ten years, we’re still not building enough to meet GTA demand.
At an average of just under 11,000 units constructed each of the last ten years, the annual unit market demand has been closer to 20,000. With a yearly deficit of 10,000 units, we’re far behind in meeting current requirements.
Over the next three years, experts anticipate that around 19,000 condo units will be built annually. While that’s more than what has been built each year over the last decade, yearly demand will also increase to 28,000 – 30,000. As a result, the supply gap will only grow as the GTA needs 20,000 – 30,000 units per year.
2027 – 2028
By the end of 2024, we are expected to see record-high condo completions (26,000 – 27,000 units + 6,500 purpose-built units). This total should grow to around 35,000 in 2025, 2026, and 2027. This impressive amount results from the strength in condo presales in 2022, which peaked in the first half of that year before interest rates began to rise.
But what about after 2027?
After 2027, condo completions are slated to plunge because construction of most developments targeted for completion in 2028 is yet to start. This is due to a drastic fall in presales. While purpose-built rentals will pick up, they will not nearly satisfy demand. As a result, the current supply outlook after 2027 is low.
Historic Lows
Most condominium projects launched over the last few years are struggling because development costs have risen. In fact, condo development costs have increased 60% since COVID-19. As a result, developers can’t lower prices to attract buyers because costs are too high, and margins are too thin.
New condo sales are thus at their lowest point since 1997. In fact, only one project was launched in the third quarter of this year. 2024 is on pace for the fewest condo sales since the 1991 recession, and while inventory has risen, it is mostly from presales. For a project to break ground, sales must reach 70% of total units to qualify for construction financing. Right now, average pre-construction sales are 40% sold. Currently, 50 preconstruction projects (13K units) haven’t been able to sell even 40% of their inventory.
Because of these low presales, many developers are considering cancelling their projects or switching to purpose-built units.
Incentives
Demand for condos must be stimulated to grow supply. But, to increase that demand, affordability must be boosted to incentivize purchasers back into the market.
Thankfully, mortgage rules have been relaxed for the first time in 20 years with increased amortization and insurance allowances. However, the CMHC adjustment of down payments for properties over $1M to $1.5M doesn’t significantly impact the condo market, given the small inventory of condos listed for over $1M.
But it’s clear that interest rates are heading lower, which should help to prompt the market to bounce back. An early indicator of a bounce-back is the higher end of the housing market beginning to move, which triggers the rest and kicks off the market’s resurgence. Notably, the best-performing properties in the GTA in the last few months have been detached houses in central Toronto.
This is a good sign.
Outlook
While interest rate decreases aren’t going to cure condo space overnight, they’re a start. Other triggers, such as additional government measures to increase activity in the detached home market, will also help overall market growth and spur condo development.
The market needs higher prices, higher rents, and lower interest rates to restart condo developments and prevent cancellations. Once these materialize, the outlook for the end of the 2020s will look much better.
Are you ready to move to the next stage? Let’s chat. Send me an email (hillary@hillarylane.ca) or text/phone (416-882-4707).
Photo by Scott Webb on Unsplash
