Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
As we know -- because here's the data -- this is the current state of affairs:
The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill.
The above excerpt is from a recent CIBC Capital Markets article by Benjamin Tal (CIBC) and Shawn Hildebrant (Urbanation). And what it ultimately means is that the supply of new condominiums in the GTA is falling and will continue to fall for the foreseeable future. Below are two charts, from the same article, that show that.
Because of this, I actually think that, if you need or want a place to live, right now is a near ideal time to buy a condominium, especially if it's from developer inventory (in an already completed project) or it's a resale. Of course, most people won't want to do this because they'd rather buy when most other people in the market want to buy. This is how markets tend to go.
It has been a while since the GTA has gone through one of these real estate cycles, but it is typical: developers are prone to both over-building and under-building. It simply takes too long to build a building, and so it is natural for there to be moments when supply and demand don't exactly line up.
Pre-selling condominiums is -- in theory only -- supposed to protect against too much overbuilding. But as we have spoken about many times before, it can be challenging for end users to buy a new home so far in advance. And so the new condominium market has come to rely on investors who want to buy early and then either sell later or rent later.
According to the above article (and MLS data), the share of newly completed condominiums used as rentals reached a peak of 34% in 2023. So a third of new condos. My gut tells me that the actual number is much higher. Many rentals never reach MLS. Overall, I think it's very safe to assume that the majority of new condominiums are owned by investors.
But right now, fewer investors want to own condominiums, which is why the number of resale listings has spiked this year:
This is, again, why I think right now is an excellent time to buy a condo. You know, be greedy when others... Regardless, this inventory will need to get absorbed and that will ultimately happen. Some of it will go to end users and some of it will go to investors who can make sense of the rental math and/or want to take a long view on Toronto. But if more goes to the former, we will be losing a lot of new rental housing.
At the same time, while all of this is going on, construction starts are likely going to remain depressed (chart 3 above). It's impossible to know how long this lasts, but at some point we will reach a moment in the cycle where we are under-building new housing. Maybe we're already there. Development simply can't turn on fast enough when demand spikes. There will almost always be a lag.
So, since the majority of new condominiums have been serving as new rental housing, there's a strong case to be made that at some point we will run into a potentially severe shortage of rentals. Condo investors are sometimes vilified in the media, but we will soon find out what happens when you take a big chunk of them out of the housing market.
Urbanation just released its Q2-2024 condominium market survey for the Greater Toronto & Hamilton Area (GTHA), and we should probably talk about some of the data:
The new condominium market reported 1,688 sales in the quarter. Outside of Q2-2020 (the pandemic), this is the lowest in the past 20 years. Note: This number is self-reported by developers.
Of the 3,625 homes launched for pre-sale during the quarter, only about 17% got absorbed/sold. That's about ~616 homes, which isn't very much when you spread it out across the region's projects.
Unsold inventory increased to 25,893 homes. Urbanation equates this to 34 months of supply, versus a more "balanced level" of 10-12 months. This number breaks down to 15,157 homes in pre-construction projects, 9,788 homes in projects under construction, and 948 homes in recently completed buildings.
This is higher than Urbanation's 20-year average, but the way I see it is that the ~15k homes in pre-construction projects could very quickly evaporate. If those projects don't get to construction (and most probably won't in the short term), then that inventory will disappear from the market. On the other hand, the ~11k homes under construction or recently completed is a hard number. These homes exist, or will soon exist, and they'll need to get absorbed at some point.
There are also going to be homes that are currently sold, but where buyers ultimately say "yeah, I'm not going to be able to close." So there will be some non-zero percentage of homes that will need to be reabsorbed. I don't know what this percentage will be, but if it's something like 5%, that's not nothing. (See below for the number of condominiums under construction right now.)
Not surprisingly, average asking prices for unsold homes only declined about 2.6% over the past year. Prices have remained markably sticky. And this is how you know that development happens on the margin. Because developers are infinitely better off selling homes and starting construction, compared to holding lots of unsold inventory and starting construction, whenever. The fact that developers aren't dropping prices to sell more homes demonstrates that they can't. They're hitting the floor of financial feasibility.
Finally, last quarter saw 727 new condominium homes start construction. In theory, this could have been a single tall building, though that probably wasn't the case. As new starts fall, the number of condominiums under construction will naturally also fall. The current number is 87,508 homes, which is almost 19,000 less than a year ago. I expect this number to keep coming down.
As we know -- because here's the data -- this is the current state of affairs:
The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill.
The above excerpt is from a recent CIBC Capital Markets article by Benjamin Tal (CIBC) and Shawn Hildebrant (Urbanation). And what it ultimately means is that the supply of new condominiums in the GTA is falling and will continue to fall for the foreseeable future. Below are two charts, from the same article, that show that.
Because of this, I actually think that, if you need or want a place to live, right now is a near ideal time to buy a condominium, especially if it's from developer inventory (in an already completed project) or it's a resale. Of course, most people won't want to do this because they'd rather buy when most other people in the market want to buy. This is how markets tend to go.
It has been a while since the GTA has gone through one of these real estate cycles, but it is typical: developers are prone to both over-building and under-building. It simply takes too long to build a building, and so it is natural for there to be moments when supply and demand don't exactly line up.
Pre-selling condominiums is -- in theory only -- supposed to protect against too much overbuilding. But as we have spoken about many times before, it can be challenging for end users to buy a new home so far in advance. And so the new condominium market has come to rely on investors who want to buy early and then either sell later or rent later.
According to the above article (and MLS data), the share of newly completed condominiums used as rentals reached a peak of 34% in 2023. So a third of new condos. My gut tells me that the actual number is much higher. Many rentals never reach MLS. Overall, I think it's very safe to assume that the majority of new condominiums are owned by investors.
But right now, fewer investors want to own condominiums, which is why the number of resale listings has spiked this year:
This is, again, why I think right now is an excellent time to buy a condo. You know, be greedy when others... Regardless, this inventory will need to get absorbed and that will ultimately happen. Some of it will go to end users and some of it will go to investors who can make sense of the rental math and/or want to take a long view on Toronto. But if more goes to the former, we will be losing a lot of new rental housing.
At the same time, while all of this is going on, construction starts are likely going to remain depressed (chart 3 above). It's impossible to know how long this lasts, but at some point we will reach a moment in the cycle where we are under-building new housing. Maybe we're already there. Development simply can't turn on fast enough when demand spikes. There will almost always be a lag.
So, since the majority of new condominiums have been serving as new rental housing, there's a strong case to be made that at some point we will run into a potentially severe shortage of rentals. Condo investors are sometimes vilified in the media, but we will soon find out what happens when you take a big chunk of them out of the housing market.
Urbanation just released its Q2-2024 condominium market survey for the Greater Toronto & Hamilton Area (GTHA), and we should probably talk about some of the data:
The new condominium market reported 1,688 sales in the quarter. Outside of Q2-2020 (the pandemic), this is the lowest in the past 20 years. Note: This number is self-reported by developers.
Of the 3,625 homes launched for pre-sale during the quarter, only about 17% got absorbed/sold. That's about ~616 homes, which isn't very much when you spread it out across the region's projects.
Unsold inventory increased to 25,893 homes. Urbanation equates this to 34 months of supply, versus a more "balanced level" of 10-12 months. This number breaks down to 15,157 homes in pre-construction projects, 9,788 homes in projects under construction, and 948 homes in recently completed buildings.
This is higher than Urbanation's 20-year average, but the way I see it is that the ~15k homes in pre-construction projects could very quickly evaporate. If those projects don't get to construction (and most probably won't in the short term), then that inventory will disappear from the market. On the other hand, the ~11k homes under construction or recently completed is a hard number. These homes exist, or will soon exist, and they'll need to get absorbed at some point.
There are also going to be homes that are currently sold, but where buyers ultimately say "yeah, I'm not going to be able to close." So there will be some non-zero percentage of homes that will need to be reabsorbed. I don't know what this percentage will be, but if it's something like 5%, that's not nothing. (See below for the number of condominiums under construction right now.)
Not surprisingly, average asking prices for unsold homes only declined about 2.6% over the past year. Prices have remained markably sticky. And this is how you know that development happens on the margin. Because developers are infinitely better off selling homes and starting construction, compared to holding lots of unsold inventory and starting construction, whenever. The fact that developers aren't dropping prices to sell more homes demonstrates that they can't. They're hitting the floor of financial feasibility.
Finally, last quarter saw 727 new condominium homes start construction. In theory, this could have been a single tall building, though that probably wasn't the case. As new starts fall, the number of condominiums under construction will naturally also fall. The current number is 87,508 homes, which is almost 19,000 less than a year ago. I expect this number to keep coming down.
It is disappointing to me that we often vilify all condominiums as being "luxury condos." I think the rhetoric is disingenuous and I think it distracts us from finding more productive solutions. As Mike Moffatt points out in this thread, if you look at virtually all major cities in Canada, the most affordable housing options are going to be condominiums and not low-rise freehold houses.
In his case, he looked at current for sale listings in London, Ontario, and found that for homes under $400k, about 81% of them were condominiums, and for homes over $1,200,000, only 4% of them were condominiums. Again: the real "luxury homes" are the low-rise houses that not the condos.
Now to be fair, John Pasalis is not wrong in responding to the thread and saying that on a per pound basis, or a per square foot basis, condominiums are actually more expensive. I've been saying this for years on the blog. When measured this way, mid-rise buildings are one of if not the most expensive housing typologies.
So John's argument is that, while condominiums may be the more affordable option for 1-2 person households, if you're a family in need of more space, low-rise housing is likely going to be more affordable for you on a per square foot basis. And I would agree with this statement.
The problem with this approach in the real world, though, is that people don't buy and afford homes based on this metric. You can't go to a bank and say, "I want to buy this house for $1.7 million dollars because it's only $680 per square foot when I include the basement, and that's better value than this 700 square foot condominium selling for $1,400 psf."
Sorry, the bank is going to tell you what total price you can afford based on your income. And that's why condominiums in our market have tended to serve as a critical entry point for first-time buyers. They're the most affordable option in terms of their total sale price.
So in my view, labelling all condominiums as "luxury" is not exactly productive. It ignores their role in providing more affordable homes; it overlooks the supply constraint that low-rise houses represent in most of our cities; and it's a distraction from the more systemic issue at hand: how do we make housing more affordable for everyone, including families?
Photo by Marcos Paulo Prado on Unsplash
It is disappointing to me that we often vilify all condominiums as being "luxury condos." I think the rhetoric is disingenuous and I think it distracts us from finding more productive solutions. As Mike Moffatt points out in this thread, if you look at virtually all major cities in Canada, the most affordable housing options are going to be condominiums and not low-rise freehold houses.
In his case, he looked at current for sale listings in London, Ontario, and found that for homes under $400k, about 81% of them were condominiums, and for homes over $1,200,000, only 4% of them were condominiums. Again: the real "luxury homes" are the low-rise houses that not the condos.
Now to be fair, John Pasalis is not wrong in responding to the thread and saying that on a per pound basis, or a per square foot basis, condominiums are actually more expensive. I've been saying this for years on the blog. When measured this way, mid-rise buildings are one of if not the most expensive housing typologies.
So John's argument is that, while condominiums may be the more affordable option for 1-2 person households, if you're a family in need of more space, low-rise housing is likely going to be more affordable for you on a per square foot basis. And I would agree with this statement.
The problem with this approach in the real world, though, is that people don't buy and afford homes based on this metric. You can't go to a bank and say, "I want to buy this house for $1.7 million dollars because it's only $680 per square foot when I include the basement, and that's better value than this 700 square foot condominium selling for $1,400 psf."
Sorry, the bank is going to tell you what total price you can afford based on your income. And that's why condominiums in our market have tended to serve as a critical entry point for first-time buyers. They're the most affordable option in terms of their total sale price.
So in my view, labelling all condominiums as "luxury" is not exactly productive. It ignores their role in providing more affordable homes; it overlooks the supply constraint that low-rise houses represent in most of our cities; and it's a distraction from the more systemic issue at hand: how do we make housing more affordable for everyone, including families?
Photo by Marcos Paulo Prado on Unsplash
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