This week, the band got together to announce a development charge reduction program here in Toronto. Basically the way it works is that the City is receiving "up to $1.5 billion for eligible housing-enabling infrastructure projects" and this, in turn, will allow the city to reduce its reliance on DCs and lower them by 40-60% (depending on the housing type) between 2026 and 2029.
40% reduction:
Studio and one-bedroom apartments
Multi-unit homes
60% reduction:
Single and semi-detached homes
Apartments and multi-unit homes with two or more bedrooms
Dwelling rooms
The provincial and federal framework requires cities to maintain the lower rates for at least three years. So if everything passes this year, it will expire in 2029. My assumption is that you'll need to have submitted a Site Plan Control application within this time period to lock-in these rates, but as always, you're going to want to consult with your planner and planning lawyer.
While this is certainly positive for housing, it is not a long-term, sustainable solution. The federal and provincial governments had to step in because the infrastructure funding model clearly isn't working for cities, and they're having to overtax new housing as a result. Let's not stop here.
Cover photo by Patrick Tomasso on Unsplash
As we all try to figure out what the future of the condominium market looks like in Toronto, it might be helpful to consider the forms it has taken over the years. When our nascent condominium market started to emerge in the 1990s, it solved a clear problem: it was an affordable solution for first-time buyers. It was a way to buy a place, build equity, and then trade up to a single-family house.
Because of this use case, it was also true that pre-construction condominiums typically sold at a discount relative to resales. This was because buyers wanted to be compensated for the time they had to wait to move in and the risk of buying something off a plan.
As the market grew and evolved (and the cost of constructing new housing rose), this pricing dynamic flipped, and pre-construction condominiums started to be priced at a premium relative to resales. The narrative, then, was that new condos were newer and nicer relative to older stock.
But more importantly, it was also because the buyer profile shifted more toward investors, and therefore, the problem to be solved also changed. Investors, as we spoke about here, started to view the timeline to occupancy as a feature rather than a bug. It meant more time for the unit to appreciate and more time for rents to grow.
This market largely disappeared in 2022, and so now the industry has returned to focusing on end-users. But Toronto is a different, more urban city than it was in the 1990s. Somewhere around 95% of the new housing built in the city is now multi-unit housing. The Baby Boomer generation is also starting to age out of staircases and low-rise houses.
Today, at this very moment, the pre-construction market is trying to address a new problem: large, luxury suites for wealthy buyers. It's the most fertile segment of the market. But how deep is this buyer pool? And what does it tell us about the next condominium cycle? The only thing we know with any certainty right now is that we're seeing a return to end-users.
Over the years on this blog, we have spoken many times about what Pouyan Safapour, president of Devron Developments, wrote about in this recent Maclean's article: the method of pre-selling condominiums (which is what we customarily do in Toronto) biases the market toward investor buyers and smaller, more cost-effective suites.
Unlike end-user buyers, investors have generally viewed waiting three to five years for their condominium to be complete as a feature in recent years, rather than a bug. It has meant asset appreciation without having to carry or actually manage the property.
The pre-sale model works very well for a number of other reasons, too. Firstly, by pre-selling, developers minimize market risk for both themselves and the construction lender. Now you have contracted revenue to take out the construction loan at the end, as opposed to building on "spec" and hoping the market will be there, which may or may not be the case.
It's also an equity-efficient model for developers. Banks are able to offer higher LTVs because of the contracted revenue, and insured purchaser deposits can be used as a source of funds for the project, reducing the amount of required equity.
But it is certainly true that many, perhaps even most, end-users would prefer to buy when the building is complete. So how might we reorient the model to better cater to these homebuyers? This is especially relevant in today's market, where end-user buyers have overtaken investors.
In the current framework, there are a couple of things that can be done. Developers can just build smaller projects. This minimizes the window between pre-sale and completion. Another option is to segment the project between homes that will sell quickly upfront (and fulfill lender pre-sale requirements) and homes that are geared more toward end-users but won't sell until later. In this case, you're trying to sell enough to start construction, and you're building the balance on "spec."
Changing the entire financing model requires a lot more work. Removing pre-sales means more market risk and more required equity (unless these risks somehow get shifted by the government). If this happens, then there's a reasonable argument that we would see far fewer condominiums getting built, even if the ones that do get built are better suited to end-users.
There are developers in Toronto today that do not believe the investor pre-sale market is coming back, or at least not coming back anytime soon. If that ends up being the case, and I'm not sure it will be, then market participants, whoever they might be, will be forced to meet this demand in one of two ways: building more rental housing (which is by definition on "spec") or getting better at delivering end-user condominiums.
Cover photo by Fernando Strabuli on Unsplash