Condos also more attractive for buyers on a budget
Resales often dominate conversations about housing markets, while transactions of newly built housing, especially condominiums, do not receive the same attention despite transactions of new or pre-built condominiums constituting a sizable chunk of residential transactions.
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For example, 21,782 new condominiums were sold in 2022 in the Greater Toronto Area (GTA) alone, even though last year’s slowdown in housing demand hit sales, which were down 30 per cent from 2021, according to a report by Urbanation Inc., a market researcher specializing in condominium, rental and land markets.
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Nevertheless, the new condo market is maintaining a balance between supply and demand such that unsold inventory in the fourth quarter last year was about 15,000 units, which is in line with the 15-year average.
The resale market, of course, influences new condo sales. But the market downturn hit the resale condo market more in 2022, with condo resales in the GTA dropping by 36 per cent to 19,105 units, a record eight-year low in transaction volume. Resale prices averaged around $847 per square foot (psf) in the fourth quarter. Even with the decline in sales, the 2022 price of $1,427 psf for new condos was higher than in 2021.
The market slowdown was more pronounced in the fourth quarter when sales dropped by 68 per cent compared to the same time a year ago. While the 21,782 new condo sales in 2022 are in line with the long-term average, the bulk of those sales were realized in the first half of the year.
Despite the decline in new condo prices in the latter part of the year, the gulf between resale and new condo prices widened to $580 psf. The gap was $332 in the fourth quarter of 2019 and $227 in the fourth quarter of 2017.
New condo prices in the GTA had been rising at 10 per cent annually. The recent price slowdown, similar to the previous decline that coincided with the great recession, might force some investors to pause. But the imbalance between sluggish housing supply and the expected growth in housing demand because of heightened immigration targets suggests that prices will resume their upward climb after more favourable mortgage lending conditions return.
Urbanation data shows the average purchase price for condos available for occupancy in 2023 was $876 psf. The current resale price in new buildings is around $1,050, 20 per cent higher than the purchase price, allowing investors to realize a profit should they choose to sell.
But investor sales are likely to increase even if profit margins are smaller because of the difference in ownership costs and rents. The estimated ownership cost for newer units is currently $4.59 psf, while the market rent for a similar quality condo is $3.98 psf, resulting in a monthly loss of $452 psf for an average-size condominium. If investors choose not to sell, they will likely subsidize tenants even with the current elevated rent levels.
The difference in rents and ownership costs suggests that renting might be more advantageous in the short run. For example, the Urbanation report said that “over the past decade, the ownership cost for condos has risen twice as fast as rents (133 per cent vs. 66 per cent), creating an unprecedented advantage for renting.” This comparison, though, ignores that part of the ownership cost pays down the principal amount.
In Toronto and Vancouver, low-rise housing prices are much higher than condominiums, making the latter more attractive for budget-conscious buyers. For example, low-rise housing in the GTA was on average 71 per cent more expensive than condominiums in December 2022. Even though the gap was 95 per cent in December 2021, condominiums continue to be more attractive because of their relatively lower prices.
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Mariana Milborne, chief operating officer of the Milborne Group, which specializes in pre-construction sales, said the price difference between low-rise and high-rise units has altered the composition of housing supply. Before 2005, two-thirds of new sales comprised low-rise housing in Toronto. Since 2005, multi-family residential accounts for two-thirds of new housing.
High-rise housing will continue to be a significant component of the housing market in populous cities. In the GTA, 42,190 condos were rented last year, providing both shelter for renters and investment opportunities for landlords. Multi-family residential also dominates the housing supply in populous cities.
The status quo in policy frameworks and uncertainty in housing markets will not help governments meet their expanded supply targets. A rapid growth in housing stock will, therefore, require more favourable conditions for investors to provide risk capital for under-construction units.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.