The second quarter of 2023 saw the Greater Toronto Area’s new condo market falter on a few counts. Urbanation reported on Tuesday that the average price for new condominiums in the GTA slipped to $1,411 per sq. ft last quarter, marking a 1.3% decline from the quarter prior, a 2.2% decline from the year prior, and the first annual price decline in the region’s new condo segment in 10 years.
Discounting prices, says the Toronto-based research and consulting firm, is one way in which condo developers are attempting to entice purchasers to invest in their projects as sales activity lags.
According to Roy Bhandari, Co-Founder and Broker of Record for GTA-focussed TalkCondo, some developers are also putting more emphasis on purchaser incentives.
“We are seeing an increase of incentives that we don’t typically see in high-demand markets, like low deposits (5%, 10% down with long closings), rental guarantees (where a builder will guarantee a rental amount, making it easier for a buyer to run their cash flow analysis), and other types of closing credits (cash credits, free maintenance fees),” writes Bhandari in an email to STOREYS. “Some developers are getting creative with ‘mortgage rate buydowns’ to help address some of buyers' fears around high interest rates.”
But there’s only so much developers can do, Bhandari goes on to say. “The prices of a new condo are a function of market demand, but also builders' costs. While costs remain high, builders only have so much margin to play with to incentivize buyers.”
While Bhandari doesn’t dispute that, overall, sales and prices have slid in the new condo market this past quarter, he also points out some location-related nuances.
“Average prices being down 2% is more a function of more 905 projects launching (less expensive price per square foot) than 416 projects launching (more expensive price per square foot),” he says.
Urbanation reported this week that the 905 region — which is the area code that serves the suburban markets surrounding central Toronto — represented 60% of all new condo sales in Q2. That proportion, they noted, has reached a “record high.” On the flip side, new condo sales in the City of Toronto accounted for a “record low” of just 14% of overall sales.
“I think where there's an internal conflict for people is when you look at some of the prices of downtown condos that are in pre-construction,” says Shay Asnani, a Toronto area Realtor with Right At Home Realty, Brokerage. “I've seen Yorkville projects, for example, where it's $800,000 for a one-bedroom.”
For those in the position to purchase, the draw of investing in a brand-new condo product is now being eclipsed by doubt that they will be able to recoup their investment down the line.
“I think people are just questioning what that $800,000 condo is really going to be worth in four years when it's done,” he says. “And when you look at those prices of what a pre-construction unit is with that future pricing in mind, and then you look at what you could buy today in a [resale] market that is a little bit recessed and there's a bit more negotiating power, buyers are thinking ‘why would I spend this much money on a much smaller product?’”
A Trying Time For Developers
All in all, the GTA’s new condo segment is in the thick of a challenging status quo. For condo developers with product already on the market — and even those offering units at a bit of discount — the reality remains that buyers are backing away. Urbanation reveals that just 4,610 new condo sales were recorded in the GTA in Q2-2023. That figure is 35% below the same metric from Q2-2022 and 28% under the region’s 10-year Q2 average.
As well, according to previous research from the firm, Q2 follows even slower sales activity from Q1, at which time new condo sales were down 74% annually, representing the slowest start to a year since the financial crisis of 2009.
“The condo developer who hasn't started digging yet, I don't know what they're gonna do really. The math is going against them,” says GTA Mortgage Broker Ron Butler, of Butler Mortgage. “They have extremely expensive financing costs and they have a softening market for condos.”
Butler adds that “ramped-up” development costs only add to that laundry list of challenges confronting builders.
“They’ve gone up so far, so fast. Combined with financing costs, combined with material and labor cost increases, I don't know if it makes sense to break ground any more for some of these folks.”
Without the promise of purchasers and faced with roaring overhead, condo developers are likely to be less inclined to invest in pre-sales and well, develop, in the months and years to come. And that’s not good for the GTA’s already-overextended housing market. It's particularly worrisome given that condominiums habitually account for the lion’s share of overall housing starts, adds Butler.
“If these projects are put on pause, the amount of new homes coming on the market is going to dwindle and dwindle and dwindle for the next two to three to four years unless something radically changes with real estate or real estate prices or interest rates.”
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