Canada to experience worse housing shortage with high developmental fees that have impacted undersupply issue
A significant housing shortage “the likes of which we’ve not yet experienced” is coming for Toronto’s real estate market in the next few years, despite the current glut of condo listings, experts say.
Construction starts are trending less than 10,000 for the current year and Toronto needs around 30,000 to 40,000 a year to satisfy population growth. Just 23,900 condos and purpose-built rentals are projected to be complete in the Greater Toronto and Hamilton-area in 2027 — a 10,000 unit decline from 2024, an Urbanation projection shows. And numbers will continue to spiral downwards.
“There is a fundamental and inherent supply shortage in Toronto, and we can’t meet the existing targets,” said broker Ralph Fox, founder of Fox Marin Associates based in Toronto.
“The current situation of high interest rates and development fees has multiplied our undersupply issue. We’re going to face a significant housing shortage, the likes of which we’ve not yet experienced. The spigot of new supply will be turned off in two to three years from now.”
There’s a misconception that there’s too much inventory in the market, experts say. This is because low interest rates during the pandemic led to a wave of preconstruction buyers entering the market. Now, their units are starting to come online at a time when high interest rates have led to a dearth of buyers.
“It’s the worst time for a whole bunch of the wrong product to be coming to the market,” said Pouyan Safapour, president of real estate developer Devron, meaning that studio and one-bedroom apartments are better for investors than end-users. “It feeds into this idea that we have too many (condo units).”
Last year, Statistics Canada reported that around 56 per cent of Toronto condos built since 2016 are owned by investors, but many investors have exited Toronto’s condo market as rent is unable to cover mortgage costs, condo fees and property taxes. Condos have also become less attractive for investors as prices have dipped.
Although end users are also on the sidelines due to high interest rates and borrowing costs, those who can buy aren’t interested in studio or one-bedroom properties, Safapour added.
New listings in Toronto’s condo market surged by 26.5 per cent in the second quarter of 2024 compared to the same time last year, while sales dropped by almost 20 per cent, according to the Toronto Regional Real Estate Board (TRREB).
But the ample supply on the market will be short-lived once interest rates reach more affordable levels, Fox said. What will reverberate is the dramatic slowdown in preconstruction sales and construction during this period. According to a report from Urbanation, the percentage of pre-construction condos that are pre-sold is at a more than 20-year low of less than 50 per cent.
The slowdown has left developers wary of starting new projects, offering up only 3,625 new preconstruction units in the second quarter, compared to 7,349 units the same time last year. Only 17 per cent of those units have sold.
Cancelled projects will lead to a shortage in tens of thousands of units in years to come, experts warn.
“Right now, preconstruction doesn’t make sense when you look at the spread of pricing per square foot between a resale condo or preconstruction condo,” said Fox, adding that buyers are also put off by the risk associated with preconstruction as more developers go bankrupt and projects aren’t finished.
“The resale market is the leading indicator of where preconstruction is going,” he said. “With so much inventory (in resale) it will need to be cleared out and prices must move up significantly for preconstruction to make sense to buyers again.”
During the pandemic, assignment flippers and mom and pop investors flooded the market hoping to get a good return on their unit. Right now, buyers in the preconstruction market are a mix of investors who have access to capital and feel they’ll gain equity once the unit is built in the next five years, and end-users who are able to afford the high cost of preconstruction units, said John Lusink, president of Right at Home Realty.
A flood of units have entered the assignment sale market as buyers who purchased preconstruction at the height of the pandemic are now unable to close on their deals due to appraisals coming up short and having to qualify at higher interest rates compared to when they put a deposit down a few years ago,” he added.
But those too will likely dry up.
“This year we’ll likely see the number of units coming to the assignment sale space peak,” Lusink said. “People are facing 6 per cent interest rates, which is much higher than when the bought the unit. As interest rates drop, we’ll see the number of units up for assignment sale drop as well.”
The Bank of Canada’s two consecutive rate cuts have brought the key interest rate to 4.5 per cent, with economists forecasting another 0.5 percentage-point rate drop by the end of the year.
Once more buyers jump into the condo market, competition will heat up and prices edge upwards. That will signal to developers demand is on the rise and construction starts will ramp up, Safapour said. But they’ll likely build smaller units favoured by investors due to their chances of being cash flow positive, not the two- to three-bedroom apartments end-users and renters desire, which means the city’s housing crunch won’t be any better off.
“We’ll have a huge drop off in supply in a few years time, leading to a shortage and feverish market again where developers make a product that is not desired by consumers,” he said.
“I really hope we learn the right lessons here, it’s an unfortunate challenge.”
This article was first reported by The Star
