Toronto’s Pre-Construction Condo Sales Faces Historic Lows
The Toronto pre-construction condo sales market has hit an unprecedented downturn in 2024, with sales plummeting to the lowest levels recorded since the 1990s. Data shows that only 567 new condo units were sold across the Greater Toronto Area (GTA) in Q3-2024, marking an 81% decrease year-over-year and a shocking 87% drop compared to the ten-year average. For a city renowned for its high housing demand and skyline expansion, this sharp decline is reverberating through the development and investment communities, sparking concern about the viability of new condo projects in the current economic climate.
Urbanation’s recent report highlights a trend that has seen just 3,641 condo units sold throughout the first three quarters of 2024, projecting this year to close as the slowest for new condo sales in almost three decades. The absorption rate – representing the percentage of units sold upon a project’s initial release – has fallen to a meager 17% for the most recent launches. This figure is well below the decade average of 56%, indicating a cautious approach from buyers amid economic uncertainties and elevated interest rates.
Underlying Factors Contributing to the Pre-Construction Condo Sales Crisis
- High Construction and Financing Costs: One of the most pressing issues facing developers is the escalating cost of construction and financing. Land acquisition, building materials, and labor expenses have all risen considerably. For instance, the cost of land in the GTA has remained high, with developers paying a premium during market peaks that now affects their ability to price units competitively. This, combined with rising interest rates, means that both development and financing costs are squeezing margins, making new projects financially risky unless they are priced at higher rates. However, buyer appetite has not met these prices, resulting in a backlog of unsold inventory.
- Decreased Investor Interest: Toronto has long attracted both domestic and international investors due to the strong rental demand. However, the current economic climate, along with recent restrictions on foreign buyers, has deterred many investors. In an effort to address housing affordability, the Canadian government introduced limitations on foreign ownership, which have reduced the pool of potential investors who previously contributed to Toronto’s pre-construction condo sales market. Additionally, many investors, particularly those facing higher carrying costs and reduced resale price growth, are now opting for lower-priced resale properties over pre-construction condos. Furthermore, high deposit requirements (often at least 20% upfront) make pre-construction units less appealing to both local and international buyers facing increased financing hurdles. This significant decline in investor participation has further exacerbated the dip in new sales.
- Shift to Rental Market Development: To adapt to the changing landscape, many developers have started shifting focus to rental properties, particularly in high-demand locations like downtown Toronto and transit-connected neighbourhoods. Rentals offer a more secure, steady return on investment, particularly as rental prices in Toronto continue to climb amid a high demand for housing. The government’s recent decision to eliminate HST on new rental projects has also incentivized this shift, further reducing the number of pre-construction projects available for sale as more developers pivot to rental-oriented projects.
- Stagnant Prices Despite High Inventory: Despite the significant drop in pre-construction condo sales, asking prices for pre-construction condos have remained relatively steady, seeing only a 2.6% decrease over the past year. This “stickiness” in pricing reflects the high development costs and financial investments made by developers in securing prime land during market peaks. The average price for unsold units currently sits at approximately $1,361 per square foot, which many buyers find prohibitively high. Consequently, these high prices have not enticed new buyers, resulting in a large inventory of unsold units. Toronto currently has a staggering 34 months of supply in the condo market, far exceeding the balanced level of 10-12 months, further indicating a market in flux
Consequences of the Decline in Pre-Construction Condo Sales
- Record-High Inventory and Project Delays: The GTA’s unsold condo inventory reached a record high of 25,893 units in Q2-2024, a level approximately 60% above the 10-year average. This backlog is primarily composed of pre-construction units, with over 15,000 still in development stages. Developers have responded by postponing new projects, with only one project comprising 177 units being launched in Q3. This cautious approach has contributed to Toronto’s condo market slowdown, as the supply-demand imbalance grows wider each quarter.
- Increased Project Cancellations and Restructuring: The Toronto market has also seen an uptick in project cancellations, as developers struggle to meet the pre-sale targets necessary to secure financing and move forward. In certain cases, projects originally slated for sale are being restructured as rental buildings to avoid financial losses. This trend has reshaped the condo development landscape, as developers now prioritize rental units over for-sale units in response to market pressures and government incentives.
- Economic Impact and Long-Term Predictions: With fewer new starts and an emphasis on completing existing projects, the construction industry may see a contraction in job creation and project volume in the near future. While a reduction in inventory could balance supply eventually, the short-term implications of this market slowdown are profound. Experts suggest that without significant government intervention or a drop in interest rates, the condo market could continue to struggle, with potential supply shortages on the horizon due to the reduction in new construction starts. Some projections indicate a possible recovery by 2027, but this is contingent upon market conditions stabilizing.
What Buyers and Investors Should Consider
For those still considering entering the pre-construction condo market, several strategic points are worth noting:
- Project Due Diligence: With cancellations and delays becoming more common, thorough research on developer history and project viability is essential.
- Evaluating Long-Term Value: Buyers should weigh the benefits of pre-construction pricing against the likelihood of resale value growth in a shifting market. Projects in emerging neighborhoods or with unique amenities may provide better long-term value.
- Awareness of Financing Requirements: The high deposit requirements in the pre-construction market can impact cash flow, making it essential for buyers to prepare financially for multiple mortgage approvals if interest rates fluctuate over the development period.
- Rent vs. Buy Scenarios: Given the rental market’s strength, prospective investors might explore rental properties as a safer option for cash flow and potential appreciation. This consideration could also apply to buyers who are seeking immediate occupancy and are deterred by uncertain completion timelines for pre-construction units.
The Future of Toronto’s Pre-Construction Market
The pre-construction condo market in Toronto is unlikely to bounce back rapidly. Unless there are adjustments in municipal development fees, HST, or interest rates, the market may remain strained as developers hold back launches and re-evaluate project financing. This downturn could, however, eventually correct itself if demand for housing outpaces the existing inventory, leading to a possible rebound in condo construction activity within a few years.
Ultimately, the pre-construction condo market will require strategic adaptations from developers and a stable economic environment to restore confidence among buyers and investors. For now, both buyers and developers are treading carefully, waiting for market conditions to recalibrate.
