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Rising Interest Rates and Falling Sales Impact Toronto's Condo Market

For years, investing in new condos in Toronto has been a safe bet. However, the current landscape of rising interest rates and slowing sales prices has created challenges for some investors, making it harder for...

For years, investing in new condos in Toronto has been a safe bet. However, the current landscape of rising interest rates and slowing sales prices has created challenges for some investors, making it harder for them to close on projects they've invested in. Particularly, those who purchased preconstruction condos are finding themselves in difficult financial positions. Appraisals coming in lower than expected and significantly higher interest rates than when they made their purchases are creating financial burdens for these investors.

Jordon Scrinko, CEO of Precondo, a firm specializing in preconstruction projects, explains, "Preconstruction condos that were purchased in 2019 through 2020 may not yield any profits. In fact, investors may even face losses after commissions and fees." Scrinko adds that his firm has been working extensively to help clients facing challenges as their projects near completion.

The changing market conditions have prompted both investors and developers to adopt a wait-and-see approach with new condo projects. Data from October reveals that there were fewer new condo project launches in 2022 than expected. This caution has raised concerns about the long-term impact on the supply of condos, which is crucial given the high demand.

Crunching the Numbers

Although the average sales price of condos in the Toronto area has increased by 4.5% compared to last year, recent figures from the Toronto Regional Real Estate Board show a drop of nearly 12% in the average sales price of condos in the Greater Toronto Area, and almost 11% in Toronto since March. Concurrently, the Bank of Canada has steadily increased its trend-setting interest rate, which currently stands at 3.75%. This has led to a five-year fixed-rate mortgage at most Canadian banks sitting at around five percent.

Ron Butler from Butler Mortgage in Toronto explains, "We have seen a significant change in the mortgage environment. Rates that were once low are now in the fives." Investors who bought multiple units in recent years are the hardest hit, as financing the closing of these properties becomes challenging, especially when rental incomes may not cover the cost of the mortgage.

Moreover, investors who bought preconstruction units with the intention to sell before closing are now encountering a saturated market of assignment sales, where the original buyer sells their contract to a secondary purchaser. This has resulted in a drastic increase in assignment volume, offering more competitive prices due to the high supply.

Fewer Launches

In the third quarter of 2022, new condo sales witnessed a decline of nearly 80% compared to the previous year, as reported by data firm Urbanation. Shaun Hildebrand, the president of Urbanation, states that investors make up a significant percentage (around 60-70%) of buyers in preconstruction projects. Developers heavily rely on these investors to proceed with their projects. However, figures from Urbanation indicate that developers are already reducing the number of new project launches.

Hildebrand warns, "Investors are scaling back, possibly leading to 10,000 fewer units being launched for pre-sale this year." While he predicts a record number of condo completions next year, he expresses concerns about potential slowdowns in 2023. This slowdown in the supply pipeline could have grave consequences, as it coincides with Ottawa's plan to increase immigration and the growing demand for affordable housing.

Although many believe investor confidence will eventually return, considering the high demand for housing in cities like Toronto, the short-term outlook remains uncertain. The trajectory of interest rates, which are expected to continue rising, plays a crucial role in the market. Ron Butler warns, "Winter is coming. It's here for those investors. There's just no mathematical sense to being able to make money on the property."

Jordon Scrinko - Founder of Precondo Jordon Scrinko is the founder of Precondo, specializing in preconstruction condo sales.

Rising interest rates impacting condo investors Rising interest rates coupled with the flattening of average sales prices are making it a challenge for some investors to close on condo projects. (Patrick Morrell/CBC)

Ron Butler - Founder of Butler Mortgage Ron Butler is the founder of Butler Mortgage and a 27-year veteran of the real estate industry.

Shaun Hildebrand - President of Urbanation Shaun Hildebrand is the president of Urbanation, a real estate data analysis company.