Canary in the Coal Mine: The Crisis in Canada's Condo Market and its Economic Fallout
August 23, 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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After years of consistent outperformance, Canada's condo market is now facing a sharp downturn, particularly in its largest markets, with sales in a continuous decline. While the situation isn't dire across the entire country, the troubling trends in major markets like Toronto and Vancouver carry significant implications for both the condo market and the broader economy. Cities such as Calgary and Edmonton are exceptions, benefiting from substantial interprovincial migration into Alberta. However, in Ontario and British Columbia's larger markets, condo sales have dropped significantly. According to a RE/MAX report, condo sales in 2023 fell by 13% in Toronto and 17% in Vancouver.[1]
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Figure 1.0
According to a report by Urbanation, the situation in Canada’s largest condo market has deteriorated further in 2024[2]. In the first half of 2024, new condo sales in the Greater Toronto Hamilton Area (GTHA) totalled just 3,159 units, representing a 57% decline from the previous year and a staggering 72% below the 10-year average. This marks the slowest start for new condo sales since 1997.
In Q2 2024, of the 3,625 units launched for presale, only 17% were sold—a first-quarter absorption rate not seen in over 25 years and less than half the decade average of 56%. The drop in sales during this quarter pushed unsold inventory to a record high of 25,893 units, a level approximately 10,000 units (over 60%) higher than both the 10-year and 20-year averages. When measured against sales over the past 12 months, this unsold inventory represents 34 months of supply—nearly three times the balanced level of 10-12 months.
Most of the unsold inventory is concentrated in pre-construction projects, totalling 15,157 units. In comparison, there are 9,788 unsold units in buildings currently under construction and 948 unsold units in recently completed developments.
This shift is particularly perplexing given the significant housing shortfall emphasized in numerous reports. It raises the question: Why are condo sales declining amid a housing crisis? Due to their lower price points, condos typically serve as the entry point for most first-time homebuyers. This sudden decline prompted us to investigate what has transpired and why it has become an urgent issue for both the housing sector and the broader economy.
We can divide the market evolution into three phases:
In Q2 2024, of the 3,625 units launched for presale, only 17% were sold—a first-quarter absorption rate not seen in over 25 years and less than half the decade average of 56%. The drop in sales during this quarter pushed unsold inventory to a record high of 25,893 units, a level approximately 10,000 units (over 60%) higher than both the 10-year and 20-year averages. When measured against sales over the past 12 months, this unsold inventory represents 34 months of supply—nearly three times the balanced level of 10-12 months.
Most of the unsold inventory is concentrated in pre-construction projects, totalling 15,157 units. In comparison, there are 9,788 unsold units in buildings currently under construction and 948 unsold units in recently completed developments.
This shift is particularly perplexing given the significant housing shortfall emphasized in numerous reports. It raises the question: Why are condo sales declining amid a housing crisis? Due to their lower price points, condos typically serve as the entry point for most first-time homebuyers. This sudden decline prompted us to investigate what has transpired and why it has become an urgent issue for both the housing sector and the broader economy.
We can divide the market evolution into three phases:
Phase1: Before COVID
- Developers would typically purchase land, secure city approvals, and sell units before construction to obtain bank loans. This straightforward, well-established process relied heavily on presales as the key milestone for a project's success.
Phase 2: During and immediately after COVID
The market encountered a "perfect storm" of challenges during this period. The pandemic drove up costs, labour shortages caused significant delays, and fees and taxes increased.
The market encountered a "perfect storm" of challenges during this period. The pandemic drove up costs, labour shortages caused significant delays, and fees and taxes increased.
- Between 2020 and 2023, prices for key materials like concrete and structural steel surged by nearly 50%.[3]
- Labor costs also spiked due to a shortage of workers. By 2022, up to 20,000 construction jobs in Ontario remained unfilled.[4]
- Developers were further burdened by rising fees and taxes, with development fees for two-bedroom apartments increasing by up to 51% from 2019 to 2024, adding millions to the cost of large projects.
- Additionally, interest rates soared in response to the spike in inflation following the easy money policy during COVID-19, putting further strain on developers' finances.
Phase 3: The present
- Rising interest rates and inflation have outpaced rent income, making many condo owners' cash flow negative due to higher mortgage payments, condo fees, insurance, etc.
- A large number of buyers are now unable to secure the necessary mortgage funding at these higher interest rates. Previously, many buyers entered the condo presales market to profit from assignment sales in a rising market.
- Developers, who once welcomed assignments between 2020-2022 for a small fee, are now reluctant to do so as they struggle to sell their own inventory. Allowing assignments would cannibalize their sales, further deterring new buyers.
- This has led to a dramatic drop in new condo sales, with places like the Greater Toronto Area experiencing a 57% decline from the previous year.
Given that developers had sold 70% of all units at 2020 prices, they faced a significant revenue shortfall as costs escalated, leaving them with little choice but to hike prices on the remaining inventory, further driving up prices. So long as demand kept pace, this strategy worked, even creating the anomaly of presale and new construction condos selling at a 30%-40% premium over resale units. Many investors held onto their properties despite negative cashflow, banking on continued asset appreciation. This situation also attracted new developers eager to capitalize on high demand and rising prices. As a result, a wave of new developments is set to be completed over the next couple of years, which will substantially increase the outstanding inventory.
Math on an average 1-bedroom condo in Toronto
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Figure 2.0
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Figure 3.0
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Source: REIC Analysis
Today, the average investor is facing a $1,000 monthly shortfall. With prices falling, the once-lucrative investment landscape now appears far less attractive, prompting early investors to offload properties before they turn into unprofitable ventures. Consequently, over 80% of new condo investors in the Toronto region are currently cashflow negative.
Figure 4.0
Source: Globe and Mail
Despite falling prices and interest rates, which would typically stimulate sales given the significant housing shortfall, the expected uptick hasn't materialized. A key reason lies in the trend toward smaller dwelling sizes, which are not ideal for end use. During the investor frenzy, as prices surged, developers responded by constructing increasingly smaller units to meet investor price points, often neglecting considerations of livability, layout, and usable space. These units were not designed for homeownership but rather for renting and serving as financial instruments. Since most condo buyers during this period were investors, they prioritized potential returns over livability. Condos became financial assets to be flipped to the next investor, with the interim goal of earning rental income from the influx of immigrants between 2020 and 2023, who were willing to compromise on living space to escape escalating rents.
Recent construction trends have failed to address these essential aspects. In the past year, 47% of condo sales were for units with one bedroom or no bedroom. Moreover, only 45% of condos built in Toronto after 2016 are owner-occupied, a trend mirrored in cities like Vancouver, where the figure is 48%[5]. The result is a glut of small condos languishing on the market, with neither investors nor end-users showing much interest in them.
Recent construction trends have failed to address these essential aspects. In the past year, 47% of condo sales were for units with one bedroom or no bedroom. Moreover, only 45% of condos built in Toronto after 2016 are owner-occupied, a trend mirrored in cities like Vancouver, where the figure is 48%[5]. The result is a glut of small condos languishing on the market, with neither investors nor end-users showing much interest in them.
Figure 5.0
Source: TREB, Condo market report
Troubles ahead for the industry
As the tide turns in the condo market, it faces significant challenges. Investors are increasingly reluctant to purchase the units now available for sale, many of which are unsuitable for end-use. These smaller condos fall short when it comes to accommodating a growing family, owning a large pet, hosting guests, or working from home alongside a partner. Homeownership extends beyond mere interest rates and prices; it’s fundamentally about comfort, location, and having a space that fosters living with loved ones.
This mismatch between what is available and what is needed is causing a surge in listings, coupled with a slower absorption rate of new condos. This has created substantial stress for both developers and investors. Consequently, bankruptcies and receiverships in the real estate sector have risen sharply over the past year, with real estate insolvencies in Canada poised to surpass levels seen during the global financial crisis. So far this year, the real estate sector accounts for 55% of the receiverships, a significant increase from 30% last year and 33% in 2022. Canada is on course to reach approximately 240 real estate insolvencies this year, a 57% increase from 2023 and 13% higher than in 2009[6].
As the tide turns in the condo market, it faces significant challenges. Investors are increasingly reluctant to purchase the units now available for sale, many of which are unsuitable for end-use. These smaller condos fall short when it comes to accommodating a growing family, owning a large pet, hosting guests, or working from home alongside a partner. Homeownership extends beyond mere interest rates and prices; it’s fundamentally about comfort, location, and having a space that fosters living with loved ones.
This mismatch between what is available and what is needed is causing a surge in listings, coupled with a slower absorption rate of new condos. This has created substantial stress for both developers and investors. Consequently, bankruptcies and receiverships in the real estate sector have risen sharply over the past year, with real estate insolvencies in Canada poised to surpass levels seen during the global financial crisis. So far this year, the real estate sector accounts for 55% of the receiverships, a significant increase from 30% last year and 33% in 2022. Canada is on course to reach approximately 240 real estate insolvencies this year, a 57% increase from 2023 and 13% higher than in 2009[6].
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Figure 6.0
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Figure 7.0
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Source: TREB, Condo market report
Why is addressing the issue in the condo market important?
- Significant Share in Housing Supply: The condo market represents about a third of all housing types in Canada, with its share increasing over the years due to the affordability crisis that has made single-family homes unattainable for many. Since the market slowdown began in 2022, 60 projects, totalling 21,505 units in the Toronto region, have been put on hold indefinitely . Building a condominium typically takes four to five years, meaning the low sales figures of 2023 and 2024 will result in limited new completions in 2027 and 2028. Only 19 projects are expected to be completed in 2028, adding just 9,440 units to the market—less than half of the over 20,000 units added in 2023. This poses a significant risk to future housing supply. For the government to achieve its goal of overcoming the housing shortfall, it is crucial for the condo market to thrive.
Figure 8.0
Source: Statistics Canada, Table 4
- Contagion Risk Across Real Estate Segments: Developer and investor bankruptcies in the condo market could have a ripple effect on other segments of the real estate market, as many developers and investors are involved across multiple sectors. This interconnectedness raises the risk of widespread financial instability.
- Impact on the Banking Sector: Given the condo market's large share of the real estate market, a slowdown in this segment could negatively impact the banking sector, leading to slower credit growth. This would compound the issues arising from the increasing number of mortgages in arrears, further straining the financial system.
- Economic Multiplier Effect: The condo market's contribution to the broader economy is substantial. According to some estimates, every 1,000 condo units generate approximately 1,600 jobs and $400 million in economic activity[8]. A sharp decline in condo market activity, therefore, has a significant multiplier effect, potentially slowing economic growth and increasing unemployment.
While the Bank of Canada is expected to implement 3-4 additional rate cuts by the end of next year, these cuts would need to be more aggressive and rapid to effectively address the current decline in the condo market. Buyers and investors evaluating current market opportunities should exercise caution and seek advice from certified, knowledgeable realtors. It is crucial to consider various factors, especially when dealing with pre-sale condos, as the market conditions involve multiple complexities.
At REIC, we rigorously vet the credentials of all our members and uphold high standards of ethics and professionalism. Our members benefit from comprehensive education provided by REIC and its partner organizations, equipping them to offer tailored advice to meet each client's needs in these uncertain market conditions.
[1] https://blog.remax.ca/condominium-report/
[2] https://www.urbanation.ca/news/slowest-first-half-gtha-new-condo-sales-27-years#:~:text=It%20was%20the%20slowest%20first,the%20decade%20average%20of%2056%25
[3] https://thoughtleadership.rbc.com/proof-point-soaring-construction-costs-will-hamper-canadas-homebuilding-ambitions/
[4] https://www.cbc.ca/news/canada/canada-construction-labour-challenges-housing-1.6906587
[5] https://betterdwelling.com/most-of-canadas-new-condos-are-still-investor-owned-stat-can/
[6] https://www.heddlerealestate.ca/blog/real-estate-insolvencies-in-canada-set-to-surpass-levels-of-global-financial-crisis
[7] https://www.cp24.com/news/new-condo-sales-have-slowed-to-levels-not-seen-since-the-financial-crisis-here-is-how-developers-are-trying-to-lure-buyers-1.6878709
[8] https://www.gta-homes.com/real-insights/news/how-housing-supply-challenge-affected-by-pre-construction-sales/
[2] https://www.urbanation.ca/news/slowest-first-half-gtha-new-condo-sales-27-years#:~:text=It%20was%20the%20slowest%20first,the%20decade%20average%20of%2056%25
[3] https://thoughtleadership.rbc.com/proof-point-soaring-construction-costs-will-hamper-canadas-homebuilding-ambitions/
[4] https://www.cbc.ca/news/canada/canada-construction-labour-challenges-housing-1.6906587
[5] https://betterdwelling.com/most-of-canadas-new-condos-are-still-investor-owned-stat-can/
[6] https://www.heddlerealestate.ca/blog/real-estate-insolvencies-in-canada-set-to-surpass-levels-of-global-financial-crisis
[7] https://www.cp24.com/news/new-condo-sales-have-slowed-to-levels-not-seen-since-the-financial-crisis-here-is-how-developers-are-trying-to-lure-buyers-1.6878709
[8] https://www.gta-homes.com/real-insights/news/how-housing-supply-challenge-affected-by-pre-construction-sales/
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Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]