Current Market Conditions
The Canadian real estate market is experiencing some of its toughest conditions in decades, according to CIBC’s latest research. The study highlights a significant drop in investment, especially impacting the Greater Toronto condo market where investors constitute over two-thirds of buyers. The weak condo resale market, characterized by rising inventory and falling prices, further dampens demand for new constructions.
Comparing to Historical Recessions
The current downturn in Canada’s per-capita recession is notable, having started in mid-2022 and continuing to worsen. Benjamin Tal, an economist at CIBC, explains, “… at the current pace of decline it’s approaching the pace of declines seen in the 2008 and 1991 recessions.” He adds that the Canadian housing market, particularly in the GTA, is facing its most significant test since the 1991 recession.
Investor Impact on Toronto’s Condo Market
The Greater Toronto real estate market is essentially split between low-rise and condo segments. While the low-rise market remains active, the condo market is facing severe challenges. Tal notes that investor-driven presales, which make up 70% or more of buyers, are in recessionary territory with deteriorating conditions not seen in decades.
Challenges in the Investment Environment
Higher interest rates, a weak economy, and stagnating prices create an unfavorable investment environment. Investors who were banking on property appreciation while covering mortgage payments with rental top-ups now face significant challenges due to stagnant prices and elevated mortgage rates.
Developer Constraints and Market Inefficiencies
In typical markets, developers would lower prices until demand from end-users picked up. However, the gap between what end-users can afford and what investors were willing to pay is too wide to bridge. Despite weak demand, new condo prices have only fallen by 5% from their peak due to high building costs, leaving the market at a standstill.
Decline in New Condo Sales
New condo sales, a major driver of home construction in Canada’s largest market, have plummeted to their lowest level since the late 1990s. Tal warns that pre-sold units for new projects are at a 20-year low, with less than 50% pre-sold compared to the required 70% to start construction, further stalling development.
Existing Home Glut and Resale Market Impact
The existing condo apartment market is also struggling, with TRREB reporting some of the worst sales on record and rising inventory levels. Condo resale prices have corrected by 12%, reducing the incentive to buy new units. Consequently, the number of new units has dramatically decreased in recent months.
Future Prospects for Condo Investment
Tal suggests that for condo investment to become attractive again, resale prices and rents must rise faster, and interest rates need to drop significantly. Until these conditions are met, the incentive to build will continue to decline, potentially worsening the affordability crisis.
The real estate industry and policymakers often advocate for building more housing to lower prices. However, as Tal points out, it’s challenging to build more housing when prices are dropping, which complicates efforts to address the affordability issue.
FAQ: Canadian Real Estate Market Decline
1. Why is the Canadian real estate market facing such tough conditions?
The market is struggling due to a combination of high investor presence, rising inventory, falling prices, and weak economic conditions. Higher interest rates and stagnating prices also contribute to the challenging environment.
2. How has the Greater Toronto Area been affected?
The GTA is experiencing significant challenges, especially in the condo market where investors make up over two-thirds of buyers. The resale market is weak, with rising inventory and falling prices, further reducing demand for new constructions.
3. What role do investors play in the current market conditions?
Investors have been a major force in the presale market, accounting for up to 70% of buyers. With high interest rates and stagnant prices, many investors are holding back, causing a decline in new condo sales.
4. Why can’t developers lower their prices to attract more buyers?
Despite weak demand, developers face high building costs and can’t significantly reduce prices. The gap between what end-users can pay and what investors were paying is too wide to bridge, leading to a market standstill.
5. What has been the impact on new condo sales?
New condo sales have dropped to their lowest levels since the late 1990s. The share of pre-sold units is currently less than 50%, well below the 70% needed to start construction, which has stalled new developments.
6. How is the existing condo market performing?
The existing condo market is also struggling, with some of the worst sales on record and rising inventory levels. Resale prices have corrected by 12%, further reducing the incentive to buy new units.
7. What conditions are needed for condo investment to become attractive again?
For condo investment to regain its appeal, resale prices and rents need to rise faster, and interest rates must decline significantly. Until these conditions are met, the incentive to build and invest in condos will remain low.
