The Toronto condo market remains puzzling to most observers. Despite having nearly six months’ worth of inventory, price declines have been modest. The market is in buyer’s territory, but prices have been relatively flat – down just 3% year-over-year in July.
The number of active condo listings has been increasing since early 2022. Active listings refer to the number of properties available for sale on the MLS system as of the end of each month. This figure is determined by adding new listings for the current month to the active listings carried over from the previous month, and then subtracting the number of sales. Even if new listings are within historical norms, active listings can rise if demand is weak.
While active listings have been high over the past 12 months, they are not significantly higher than in 2021 and early 2022, suggesting that a decline in demand is contributing to the increase in active listing.
Additionally, home prices tend to be sticky on the way down. Sellers are often reluctant to lower prices when there is no urgency to sell and prefer to wait for market conditions to improve rather than making price reductions.
Last year, about 77% of investors with mortgages on newly built Toronto condos experienced negative monthly cash flow, up from 52% in 2022, according to a report by CIBC and Urbanation. This shift has led to a significant decline in investor interest in the condo presale market for pre-construction condos, now at a 20-year low of less than 50%. For condos to regain their appeal as an investment, resale prices and rents need to rise more rapidly, or interest rates need to decline more significantly.
The study also found that the bigger the unit, the larger the negative cash flow position. Studio units were effectively cash flow neutral on average for condos completed in 2023, while one-bedroom units averaged a negative cash flow of $523, two-bedroom units $734, and three-bedroom units $866. Notably, very few rental units completed in 2023 were three-bedroom units.
While homebuyers may be reluctant to own studio units, this hasn’t deterred investors from renting these units instead of selling them in the presale market. The surge in condo rental listings has outpaced the increase in condos listed for sale. If investors are willing and able to wait out a slow market, they may not see much downward pressure on condo prices.
In the short-term, the market appears stable. Investors will soon see some relief on the cost side from lower interest rates, but they’ll also have to contend with proposed changes to Airbnb rules and property tax increases in Toronto. In the medium term, the slowdown in presales will slow the pace of construction, leading to a potential shortfall in this important component of new rental supply.
For mortgage lenders, understanding these risks will be important to managing their loan portfolio over the coming months and years.
Independent Opinion
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