Toronto Condo Market in Turmoil: Challenges and Slowdown in 2023

Toronto's real estate market has seen a significant slowdown in the launch of new condo units this year, with nearly 14,000 units delayed due to diminished demand driven by higher borrowing costs and economic uncertainty. The original projection from industry experts at Urbanation Inc. had anticipated the launch of over 27,000 units in the Toronto region, but as of the end of September, only around 13,000 had been released, resulting in the weakest sales activity in a decade.

The rise in interest rates has been a key factor contributing to the decline in preconstruction condo sales. Buyers and developers alike have felt the impact of increased borrowing costs, making these properties less attractive. Furthermore, concerns about project cancellations and court-appointed receiverships have made potential buyers cautious about committing to preconstruction condos that may not be completed for several years.

This decline in preconstruction condo sales can be traced back to last year when the Bank of Canada began raising interest rates to combat high inflation. While there was a brief surge in activity during a rate pause in the spring, it was short-lived. With the central bank's benchmark rate being raised twice since then and the possibility of further increases, sales have continued to be sluggish.

In the current year, only 9,568 preconstruction condo sales have been recorded, marking the lowest volume in a decade. In the third quarter, only 42% of the launched condo units were sold, a significant drop from the 70% achieved before interest rates started rising in March 2022.

Elevated interest rates and market uncertainty have weighed heavily on the new condominium sector, according to Shaun Hildebrand, President of Urbanation. These challenges also extend to developers who are grappling with a surge in construction costs, which have increased by 55% since the start of the pandemic due to material and labor shortages. However, developers face limitations in raising prices too high, as many projects are unable to justify proceeding in the current market conditions.

The average selling price in the third quarter was $1,638 per square foot in Toronto and $1,112 in the city's suburbs. This translates to $820,000 for a 500-square-foot condo in the city and $550,000 for a unit of the same size outside the core. These prices have deterred potential homebuyers who are hesitant to invest in a small living space. Investors, who make up a significant portion of preconstruction condo buyers, are concerned about their ability to charge enough rent to cover the increased mortgage payments.

Given the current challenges, it is unlikely that developers will launch the remaining condo units before the year-end. Furthermore, there is a backlog of projects from 2022, with an estimated 83 projects comprising 28,428 units that have yet to be launched over the past two years. This situation reflects the complexities facing Toronto's real estate market in the wake of economic and interest rate fluctuations.