Preconstruction condominium sales fell 79% year-over-year in the third quarter as soaring interest rates and construction costs pushed Toronto-area developers to join their customers at the margins of the market.
Sixty-seven percent of developments, 189 projects with available units, sold no condos in the third quarter, market research firm Urbanation said Monday.
This calls into question the viability of some projects, especially those that started some time ago and have yet to meet their sales targets to qualify for construction financing, the president of Urbanation, Shaun Hildebrand. Meanwhile, costs continued to rise.
“But most of the projects have sold enough to continue and they’re fine with waiting for the market to come back so they can get the prices they’re asking for,” he said.
It was the largest annual decline – aside from the onset of the pandemic in the second quarter of 2020 – since the first quarter of 2009. It was the start of the global financial crisis, but Toronto’s condominium boom was already underway at that time.
But Hildebrand played down the prospect of a stock market crash, saying his company had been predicting for months that developers would end up delaying around 10,000 units this year.
It will be the second half of next year before falling sales and new project launches impact construction, he said. Until then, developers will be busy with the 96,510 condos they previously sold and are already building.
The record 8,953 unit builds that began construction in the third quarter represented a 40% year-over-year increase. But the 2,857 units that launched on presale during that period were 67% lower than the previous year and 32% lower than the 10-year average, Urbanation said.
Ninety-one percent of condos under construction in the GTA have been pre-sold. Developers depend on pre-construction sales for financing to build their projects. The majority of shares are sold to investors. Sometimes they buy them knowing that they won’t necessarily recoup all the port charges on the rent for years, but the escalation in prices in the area has been such that these investors can expect to still profit from the net value of their units.
“At the end of the day, investors have a pretty solid outlet in the rental market,” Hildebrand said. “If they want to hold their unit and they have a long time horizon, they’re not too much of a deterrent to having negative cash flow or waiting for the unit to recover price-wise..”
Despite weak sales and delayed launches, condo inventory has also continued to decline, helping to push up prices, he said.
Projects launched in the third quarter had a record average price of $1,380 per square foot on a 642 square foot unit. But the price of resale condominiums in the same quarter fell 5% from the second quarter and was 10% below the first quarter record.
This difference between new construction and resale units is part of the current hesitation among condo buyers, he said. Developers cannot drive down the cost of pre-construction units due to high construction costs which are also subject to rising interest rates.
Right now, there’s about a 20% premium buyers pay on a brand new unit. But if the gap between new and resale doesn’t narrow, it could drive down the price of pre-sale condos, Hildebrand said.
“With more and more higher priced projects coming to completion and resale prices falling, by the second half of next year, if resale prices don’t see any improvement, basically these units pre-sale will be worth less than what the buyer paid in pre-construction,” he said.
This could lead to a glut of disposal sales – these are sales by investors who bought resale building units but then resold them before the building was completed. It’s a trend that’s already started, but since assignment sales aren’t listed on the real estate industry’s Multiple Listing Service (MLS), it’s unclear how many of them are already on the market. .
“The mission market is something to watch. Unfortunately, it’s a bit of a black box in that there are no official stats,” said Hildebrand.
Ultimately, however, the delay in new condo launches will likely lead to a shortage of homeownership and rental units over the four or five years it takes to build new developments. This will likely coincide with growing immigration and higher demand pushing up prices. This is all the more reason to stimulate the development of purpose-built rentals, which are less vulnerable to cyclical lulls due to factors such as rising rates, he said.
Condominiums account for about one-third of rental housing in the GTA.
The province’s new Build Housing Faster Act, introduced last Tuesday at Queen’s Park, provides more incentive for developers to build rental units, but even with rents rising rapidly, it’s not enough to offset the costs of additional construction, he said.
“Ultimately, developers will build at the pace the market demands.”
JOIN THE CONVERSATION
#Preconstruction #condo #sales #drop #market #cools