The high cost of borrowing, completing condos is leading to an oversupply in Greater Toronto

Content of the article

TORONTO – Greater Toronto Area-real estate watchers say the combination of high interest rates and an uptick in new condo units coming online has led to an oversupply that will take time to balance out.

A report by TD economist Rishi Sondhi said sales activity has not caught up to supply fast enough, with July condo sales in the GTA down 25 percent from pre-pandemic levels.

Sondhi said the trend is related to factors such as a wave of newly built condominiums on the market, higher debt levels that make it difficult for some buyers to close on mortgages, and investors looking to sell properties due to declining rents and negative cash flow. they have no profit.

Content of the article

“The relatively elevated interest rate background means that the gap between the rate of return of condos in the GTA … and from risk-free’ government bonds has narrowed,” he said in the September 5 report.

“This may reduce the incentive to hold condos as an investment, although the decline in yields may help to spread this spread.”

Sondhi’s report shows there were about 19,000 condo completions in the area between January and July this year, up from about 12,000 in the same seven months in 2023 and 10,000 the year before.

The pace suggests this year could see “record highs” of condo completions in the GTA, said Brendon Cowans, sales representative for Toronto-based brokerage Property.ca.

“You can imagine all this supply in a high interest rate environment. It’s not a good combination,” he said.

active condo listings across the GTA were up 63.9 percent in July from the same month last year, many from 5,416 to 8,879, according to data from real estate firm Zoocasa. The city of Toronto has seen a similar jump, with active condo listings increasing year-over-year by 61.5 percent in the same period.

Content of the article

Content of the article

Although the GTA leads the country in active listings gains, the trend is in line with major cities across Canada. Active condo listings are up more than 40 percent year over year in London, Hamilton-Burlington, Mississauga and Ottawa in Ontario, as well as Vancouver. Montreal and Calgary each grew by about 23 percent.

Zoocasa said that while interest rates have increased over the past three years, the cost of holding investment properties, such as condominiums, has also increased.

“Some of the carrying costs for these properties, especially people who have bought in the last five years and are on variable rates, they’re seeing their carrying costs go through the roof,” Cowans said.

However, for buyers, increased supply means better prices. Condo prices fell two percent year-over-year in July across the GTA, according to Zoocasa, compared to a one percent decrease for townhouses and a 0.1 percent decrease for detached properties.

Condo prices in the area are also down about five percent since the third quarter of last year, said Sondhi, who predicts a “gradual recovery” in sales as supply and demand become more balanced.

Content of the article

He estimates that condo resale prices could drop to the mid to high range early next year.

“There are risks to the near-term condo price outlook on both sides,” he said in the report.

“On the downside, the wave of condos that will be completed will continue to be added. On the upside, condo sales may react more aggressively to falling rates than expected, or investors may remove properties from the market, tightening the situation at a faster rate than expected. anticipated.

Earlier this month, the Bank of Canada cut its key lending rate by a quarter of a percentage point to 4.25 percent. While this marks the bank’s third straight cut, governor Tiff Macklem warned that it may adjust the reduction this year as conditions warrant.

Sondhi said interest rates would remain “relatively elevated” until 2025 amid ongoing affordability challenges, thus holding back activity.

Others who are more optimistic can be faster.

Debbie Cosic, founder and CEO of In2ition Realty, said she believes the oversupply situation is temporary.

Content of the article

“We expect next year to be a very strong year as we believe interest rates will continue to decline,” he said.

For buyers, he said now is the time to lock in your purchase and take advantage of the incentives on offer.

“We believe the oversupply comes from the public just standing back to see when the market hits rock bottom,” said Cosic.

“We believe we have reached the bottom.”

Cowans said the number of Bank of Canada rate cuts over the next year and a half will be key to the equation.

He said while planned condo completions will slow over the next few years, sales could rebound over the long term.

“I see things going back in the future. I don’t expect it to be super fast,” he said.

“I can expect it to go up as more rate cuts continue to happen … and in 2027 I just think it’s going to be crazy. If people can continue for the next two years, even three years, it’s going to be a very different story.

This report by The Canadian Press was first published on September 11, 2024.

Content of the article