Welcome to my blog on housing, culture, and design in Toronto, where I share my insights, ideas, and point of view on the many facets of the Toronto - and the Canadian - Real Estate Markets.
Like all Canadians, we're 8 months into navigating the COVID-19 pandemic. For each of us, we're bearing witness to how it's altered the way we live our lives in many unexpected ways. And, as a realtor in his 28th year in the shelter industry, the lens by which I'm experiencing this significant change has been momentous - particularly in how it has had different impacts on Toronto’s various real estate segments depending on type and location.
In my newest series, COVID-19 & Toronto Real Estate I've explored a wide range of topics, including how I anticipate residential design will change as a result of COVID-19, the growing desire to purchase properties that have private outdoor space, the increased need for the 'Work From Home' office, and the booming market for 'Forever Homes' by Canadian families.
COVID-19 has even changed the natural ebb and flow of the Canadian housing market that has typically been shaped by our distinct seasons: The Season Of COVID-19 & Canadian Real Estate.
In this two-part series, I'll examine the significant impact COVID-19 has had on Toronto's condominium market. In this first installment, I'm going to summarize what's happened in the condo market since the pandemic struck, as well as where it is likely to head from here. In Part Two, I offer advice to Buyers who are looking to jump into the condo market, by outlining specific criteria that will help them make prudent purchasing decisions.
The Shifting Toronto Condominium Market
The Toronto condominium market has seen the most significant shift this year; supply and demand tilted like a see-saw, leaving everyone utterly surprised at the sudden rush of available product. As I wrote in How Urbaneer’s Tailored Toronto Real Estate Marketing Sold This Condo During The Pandemic, it was a series of intentional and unanticipated factors that decimated the momentum of the long-time firing-on-all-cylinders condominium market.
The year started with a landmark City of Toronto policy change (announced in September 2019) which imposed restrictions on short-term rentals in Toronto on platforms like Airbnb. This policy banned renting furnished suites unless they were occupied by the resident (i.e. their primary residence), therein eliminating 'ghost hotels'. This led to a flood of fully-equipped condos coming to market because real estate investors who held them as assets could no longer legally rent them out on convenient third-party sites.
Then the COVID-19 lockdown arrived in Canada on March 13th, 2020. Subsequently, the borders were closed, suppressing the rental market as migration to the city went from a tsunami to a trickle. Following in short order, locals who would otherwise rent downtown but who were working in non-essential occupations that require people to be physically present with others in the same space (like retail & food services, travel & leisure, and culture & sports fields of employment, etc) found themselves unemployed or with reduced hours of work, impacting their housing affordability (and prompting many to relocate outside of the downtown core - or even back to their parents). Furthermore, the growing 'work from home' movement made a lot of professionals - particularly couples in urban housing - realize they required more space than most small condominiums offer, which spurned vacancies. And, as a building typology ill-suited to a virus where the risks of exposure are heightened because of its high-density design, the resistance to condos grew. Add all those factors together, and you can see why interest in the condo waned; within months there was a deluge of similar condo housing stock hitting the market for sale or rent.
So, what was the result of this sudden and significant increase in supply? A drop in values in the condominium market, noticeably around Autumn. Although it depends on the location, size, condition, and features of any particular unit and building, I have documented price declines of around 10 percent from their peak values at the beginning of the year. However, with the recent announcement of a Covid vaccine, all arrows now point to a renewed interest by Buyers who are keen to potentially purchase a condo at these recently discounted sums.
Are you one of those prospective purchasers? If you're considering acquiring a condo, here's a direct springboard to Part Two that identifies the criteria and factors you should pay particular attention to for making a prudent purchase?
My Take On The Condominium Market From The Real Estate Trenches
The thing with Toronto real estate is that history has a way of repeating itself - albeit usually with a twist.
Back in summer 2018 in my post Here’s What’s Happening With The Toronto Condominium Market, I wrote about how the Federal government's Mortgage Stress Test introduced in Autumn 2016 and Ontario's Fair Housing Plan implemented in Spring 2017 were interventions intended to bring skyrocketing housing prices back down to earth. The Federal government aimed to reduce the purchasing power of Buyers who did not have a down payment of at least 20% of the acquisition price for a primary residence, mitigating the risk of defaults (a larger down payment is typically required for secondary purchases such as investment or recreational properties). Meanwhile, the Provincial government included introducing a 15% foreign buyer's tax on a property purchase plus measures to combat flipping assignment sales, reduce speculation, and regulate questionable practices by realtors. But that's not all! Further policy interventions included updating requirements for annually reporting all property sales to the Canadian Revenue Agency (in an effort to catch flippers who move frequently from one residence to another), initiatives to track money laundering, and analyzing the flow of capital by foreigners to different parts of the country. Two of my posts that address this in more detail include Foreign Buyers, Property Prices, And Toronto Real Estate - and - Foreign Buyers, Inadequate Policy, And Canadian Real Estate.
As well-intentioned as it may be to implement policies that try to regulate real estate prices so housing becomes more affordable for Canadians, the unintended byproduct of the mortgage stress test was that it compressed one of the largest and most active pools of buyers - first-time purchasers - to compete for a limited supply of even less expensive real estate. In the original City of Toronto (and Vancouver & Montreal), the most affordable dwellings are small condominiums, often situated in high-rise high-density developments. By reducing their purchasing power, they effectively had to compete and pay new precedent-setting sums to buy smaller spaces.
Although the government interventions did achieve the intended flatlining of values for freehold housing for around 12 to 18 months, this did not happen to the more affordable condominium market. Instead, it experienced double-digit gains due to all the competition. One upside was it closed the price gap between the values of freehold and condominium housing, which helped existing condo owners climb the property ladder into the freehold housing market. This movement up the property ladder is essential for the natural flow of real estate from one generation to the next, but it came at the great expense of first-time Buyers (and Mom & Pop investors) who had to aggressively compete and pay new record prices for condominium housing. The government interventions did nothing to correct the mismatch between supply and demand. Instead, we saw condominium prices surpass $1000 per square foot in the central core in 2019 with a heightened frenzy occurring in January 2020 right until the lockdown was implemented.
The Role Of Investors In The Condominium Market
The most recent Statistics Canada data identified that nearly 40 percent of Toronto condos are not owner-occupied, meaning that they are either vacant, rented, or used as a secondary residence. What this underscores is that as much as condominium units serve as primary residences for urban dwellers, they play almost as important a role as investment vehicles. Rather than serving the primary need of shelter, they're financial instruments purchased primarily for profit generated through market rents.
This is because Toronto, until recently, has seen very little purpose-built housing constructed over the last three decades. And with a steady stream of rental demand, there has been a greater reliance on the secondary market (i.e. investor-owned condos) to fulfill that demand, which has long been a compelling argument for investors to snap up condominiums. With tight vacancy rates, condo rents have increased consistently in Toronto, which continued to make them attractive options for investors, so much so that large-scale production-based condominium developers began shifting their attention to promoting their projects to large local and international pension and investment funds first (who would purchase multiple floors of high-rise towers), with the balance marketed to smaller groups of investors and end-users. And this isn't recent. This has been occurring by the production-based shelter consortiums globally since the 2000s, and occasionally brought to light by the media including Doc Zone's The Condo Game (2012) and more recently in ‘PUSH’: A Documentary On Rising Real Estate Prices (2019) on the financialization of housing.
This Guardian article from 2019 "Nearly 40% Of Toronto Condos Not Owner-Occupied, New Figures Reveal" outlines some of that progression - including a very foretelling quote by John Pasalis - housing market analyst and president of Realosophy Realty - who said “Five years down the road, do we really need 50,000 micro-condominiums that are renting for CDN $2,000 a month?”.
And here we are today, with a significant amount of that type of housing supply on the market.
COVID-19 Creates Imbalance Between Supply & Demand
For those who seek the experience of urban living, the condominium has long been a smart choice; it provides proximity to all the essentials - transit, work, dining, shopping, entertainment, and cultural & sporting events. For many urbanites, the bulk of their lives are spent outside their living environments, which is why being in proximity to city amenities is so appealing (and why the lack of square footage in a condo matters less).
However, in the wake of COVID-19, most professionals shifted to working from home and were restricted in frequenting nearby amenities. In some cases, owners had to also care for children in their now combined live/work space, making compact condominium living (most with temporarily-closed communal amenity spaces) less appealing.
Both university students and immigrants have long been central components in fueling the rental market in Toronto. But post-secondary education is largely done online at the moment, and borders remain relatively closed which has restricted immigration. As a result, both the Buyer and tenant pools have shrunk for the condominium market. The question on everyone's mind is whether the solid supply of investors who have long comprised a major segment of the Buyer profile for condominiums (small ones in particular) will withdraw due to the uncertainty in the market and, if yes, for how long, and whether many existing property investors will list their units to extract their financial gains rather than face high vacancy rates and plummeting rents, especially those who were earning better-than-rent revenue streams through Airbnb.
Recent stats from TRREB show that this downward trend for condos, which began to gather steam throughout the summer, really gained speed during the autumn. Condo listings have doubled year-over-year, but sales have only risen by 2.2 percent, leading of course to a drop in rents. In fact, in October, according to Rentals.ca, rents fell dramatically in Toronto, with one-bedroom apartments down 17.3 percent and two-bedroom apartments down by 14 percent.
What The Media Has Been Saying
On April 7th, I wrote the following in a blog entitled, Assess Your Risk: Buying & Selling Toronto Real Estate During The COVID-19 Pandemic. Here is an excerpt:
"Over the next 4 to 8 months – and for as long as the Canadian economy is frozen or in flux – I anticipate we'll see an increase in the number of properties being listed. The greater the economic (and mental and emotional) tolls the pandemic fosters, including the chain reaction that occurs when, for example, one company declares bankruptcy forcing all its partners to do the same, the likelihood even more properties will come to market for sale.
At some point, the media will spin the doom and gloom news documenting the economic hardships of the pandemic with such intensity it will, in turn, prompt buyers to withdraw from the market in anticipation real estate values will experience even bigger drops in value. This will, in fact, exacerbate market conditions. It's too premature to estimate how significant Toronto property values will be impacted, but under the best of circumstances, the better properties (in terms of size, condition, and location in the original City of Toronto) will suffer minimal declines in value, while inferior properties – or those located in areas where there is a greater supply of properties listed – may experience significant price drops."
Corroborating what I've witnessed and experienced in the real estate trenches, here are some of the recent pieces in the media which show the turn the condominium market has taken, including "Toronto Breaks More Real Estate Records, But Condos Under Pressure" (Yahoo.com), "Condo Sellers Flipping The Calendar Early" (Globe & Mail) and "Canadian Condo Buyers At The Beginning Of The Pandemic Now Nearly Underwater" (Better Dwelling).
This Morning Star article, "Residential Real Estate: A Reckoning Or Just A Softening?", touches on some of the perils of carrying rental units with negative cash flow unable to cover carrying costs. This article also points out that many rents in Toronto are $2000k plus, which is more than the COVID rent relief program contributed by the Federal Government, creating problems for those renters who have suffered a job loss or income reduction as a result of the pandemic. This spells greater risk and extremely thin margins for investors, as long as this downward pressure on rent continues. This Bloomberg Wealth article tells it all in "Toronto’s Languishing Condos Put Mom-and-Pop Investors in a Bind".
As mentioned in this Toronto Life article, "What’s The Short-Term Future Of Residential Real Estate? We Asked Seven Market Experts" pre-pandemic Toronto had 21,000 short-term rental units on the market. Many of those have returned to market recently as unfurnished or furnished suites for rent, or for sale. But it's not just the sudden jump in existing condos available that one has to be mindful of, but whether this imbalance snowballs as condominium complexes purchased preconstruction by investors get completed over the next four years (over 80,000 condominiums are under construction across the GTA). After all, large-scale production housing - like a high-rise tower containing a couple of hundred units - takes 3 to 5 years from inception to completion so the magnitude of a shift in the market may not be fully realized for several years (in retrospect, of course). This was the case with Toronto's first condo boom beginning in the mid-1980s (when a lot of the first high-rise condos on Bay Street south of Bloor were built) that soared until it was suddenly derailed - along with the rest of the Toronto real estate market - by an Exhaustion Movement in the late 1980s. It wasn't the initial wave of resale units being listed that decimated the market, it was simply unexpected, then uncertain, and then it unraveled as hundreds upon hundreds of 'new and never lived in' condominiums flooded the market for sale or rent through the first few years of the 1990s. (Btw, here is my post called What Do I Need To Know About Buying A Condo Preconstruction?
Let’s remember too that interest rates continue to be extremely low, and Canadians continue to show an appetite for (or perhaps an insensitivity to) debt. In the wake of COVID-19 people are indicating that they will happily pay top dollar for more space, which means that the condominium market - a product where the median size built in Ontario in 2016-2017 was 665 square feet is at greater risk than the freehold market in the City of Toronto. Through my lens in the real estate trenches, Buyers who were considering purchasing a downtown condo are fleeing the urban core to pursue marginally more expensive freehold houses in the suburbs (one of our Buyers lost a bidding war against 18 others in Whitby last night) or beyond. The reasons Buyers are prepared to pay slightly more for the house? First, the drop in interest rates has translated into an increase in purchasing power (you can borrow an additional $9000 of mortgage debt with today's five-year fixed interest rate than the rate one year ago) and one-half of a condominium's monthly common fee is added to all Buyer's monthly housing expenses when pre-qualifying for a mortgage, while this is not a necessary expense for freehold Buyers (although I believe lenders should require house buyers to save a similar sum for major building components). Click here to read "Developers Target Suburbs As Condo Demand In Downtown Toronto Falters Amid Pandemic" by the Globe and Mail.
All in all, if condominium values continue to drop moving forward, will the price adjustments reflect the declines in rents? If you're old school like me, where you believe the value of any property investment is based on fundamentals like its location and condition (desirability and cachet), legality by zoning and retrofit requirements (safety, particularly for older converted multi-unit houses and less so for condos), plus a critical eye to income and expenses (aka cap rate, after accounting for vacancy, property management fees, repairs & maintenance, and/or capital improvements) then one would think the answer would be "Yes!" But at best in Toronto, it's "Maybe?". Unfortunately, Toronto real estate investors often ignore issues of legality and safety (beyond smoke and CO2 detectors), foolishly disregard the importance of condition, and consider the cap rate rank secondary to the property's 'potential future value'. Because 'Location, Location, Location' is important for future value, it's important to investors, but buying based on the blind hope that the real estate market will continue to escalate with consistent returns is actually speculation rather than investment. Regardless, it’s not easy to be a condo investor trying to generate a profit, as it also appears that carrying costs could be increasing (as indicated in this Huffington Post article: "Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump"). Recently, in Alberta and B.C. the costs of insurance have risen dramatically, and it is feared that the same fate could await condo owners in Toronto, putting an extra squeeze on the cash flow that is already greatly reduced because of dropping rents. Incidentally, here's my post called --> Does It Still Make Financial Sense To Invest In Downtown Toronto Real Estate?
And meanwhile, the number of listings of freehold houses is still not satisfying the demand, which has been the case in Toronto for well over a decade. And it's been exacerbated by the growing number of Buyers who are keen to purchase a “Forever Home” during the pandemic, which is pushing demand even higher. Have you read my post on this subject? This was another unanticipated byproduct of the pandemic: 'Demand For ‘Forever Homes’ In Toronto’s Downtown Family Neighbourhoods Persists Despite COVID-19'.
Impacting Movement On The Property Ladder
It’s not just investors who are finding themselves in a bit of a real estate bind. If condominium values have already dropped ten percent, then already a portion of high-ratio CMHC insured first-time Buyers (who purchased with down payments less than 20 percent) have slipped into negative equity. It's not only how long condo prices remain depressed that will have bearing on this market segment, but also how substantially the economic impact of the pandemic ricochets through our post-industrial economies moving forward. Will these typically-young, educated, upwardly-mobile professionals crater due to high levels of indebtedness or employment scarcity? These are the issues we should be concerned about.
Although it's premature to know whether recent first-time Buyers can tread water with negative equity indefinitely, right now the more tangible negative impact of shifting values is that those who were hoping to buy and move up the property ladder ... can't. The oversupply of condominium product is making it difficult to sell their units or to obtain the selling price necessary to realize the equity necessary for the down payment required for a bigger home. This truth is well-documented in this excellent Financial Post article: "Canada Housing Squeeze: Buyers Moving Up 'Handcuffed' By Hard-To-Sell Condos"
As some investors list their units in an effort to pull out their profit, and condo end users sell in their quest to climb the property ladder, one group I didn't anticipate extracting themselves from the condominium market so quickly is affluent Boomers who are moving towards retirement. This group comprises a lot of seasoned Buyers and Sellers who weathered the real estate collapse of the early 1990s when Toronto property values dropped upwards of 35% (which I witnessed first hand when I began my Toronto real estate career) and subsequently took over a decade to recover. Although I was initially surprised to see them pull the trigger and aggressively unload their condominiums lickety-split over these past few months (even when it meant taking a financial loss!), it makes sense this market segment would prioritize financial liquidity essential to moving forward. There is merit in this approach, especially when you're north of Freedom 55; it's more comforting to feel financially secure. Instead, their strategy is to invest their capital into accessible secure money markets and investment vehicles that will generate reasonable, reliable returns over the next few years, rather than having their money tied up in an asset they no longer want to use.
As one of my clients said, "Sure we're taking a $100,000 loss, but the $1.2M we're pulling out of the property can make a 4 percent return over the next couple of years and we'll be solid, whereas we're not interested living with the uncertainty of having our money tied up in a downtown condo we no longer feel comfortable using during a pandemic". And there you have it! This decision made for several happy clients, but the impact it had on the values in their complexes was immediate and substantial. This is one of the risks of owning a condominium, as the value of any unit in any condominium is predicated by the most desperate of Sellers (even when those Sellers are wealthy, albeit motivated).
What I find fascinating about the real estate market right now, is that we're no longer operating in a climate where the demand for all types of properties has been exceeding the supply, which has long been the norm. Instead, the level of interest for each listing can vary dramatically, as can the motivations of each Seller and Buyer. Instead of seeing values flocking with some consistency, we're seeing significant price differentials for similar products. One reason is that Buyers are negotiating hard with opening bids on a property being as much as 10 to 15 percent lower than the asking price, and walking away from negotiations if the Sellers aren't willing to bend on their price. In other instances, Sellers who have already made their next-move purchase have found themselves caught with a condo that isn't generating any viewings, rendering the possibility of not being able to close. Those Sellers sometimes have no choice but to slash and burn their asking price to secure a purchase. It isn't that a large segment of Sellers is becoming financially untethered, but some are. And then there are all the Sellers who have, in the face of COVID-19, decided to pack up and make a life change, whatever form that may take. It's these folks who are listing and considering the offers Buyers are submitting, and if it's reasonable and enables the Sellers to move forward with the next chapter of their lives, they'll take the cash and exit - regardless of whether or not the offered sum is even close to what they might have achieved at the beginning of the year.
Market values no longer have the consistency we've been experiencing for many years (trajectory: UP!). It's now the individual actions, choices, and decisions by active engaged Buyers and Sellers that are influencing prices.
Condo Market Returns To First-Time Buyer Territory
So - what lies ahead for the condominium market?
First, anticipate those Mom & Pop investors who have been a significant contributor to frothy sales in the past to be monitoring this market segment with eagle eyes prepared to potentially scoop up that which represents good value. It's been a long time since Toronto witnessed any sort of volatility in its market, and the fact it occurred with lightning speed to one of the best performing real estate markets on the globe may cause some pause. However, it may just be a blip relative to how long the Toronto condo market has been considered an excellent place to park some cash for a future payday.
This isn't to say we won't see niche markets evolve. A lot of boomers who have been hanging onto their single-family dwellings for the past decade enjoying its price appreciation (while the stock market has been volatile) will be choosing to cash out of city living, both because this mature population is at greater health risk to the COVID-19 virus, and because they're spending more time at their secondary residence (or they've recently purchased one) since the pandemic started. Now that this demographic has spent 6 months or longer away from the city, they're realizing that most of the qualities they once considered an essential part of their lifestyles - like being in proximity to cultural amenities and their long-time social worlds - are being reconciled as less important. Basically, as the pandemic shuttered the doors on the familiar ways of life without any choice in the matter, boomers have adjusted to the benefits afforded by a quieter life in proximity to nature. That said, it's only a matter of time until this influential group reconsiders the merits of owning a city pied-a-terre, especially one in proximity to the health care specialists, family, or care workers in downtown Toronto.
We may also see their 40 to 50-something-year-old children jump into the condominium market. After all, this group is currently living with their near or current university-aged kids in the family home, and it's realistic to say that there are occasions for frayed nerves when so many members of the same household are living under lockdown! Anecdotally I'm hearing stories of (affluent) professional parents renting or buying small condominiums in boutique buildings located within walking distance of their residences to use discreetly as 'Work From Home' offices, so they can escape their laughing barking brood and fully concentrate on their Zoom calls. Those who are making purchases have their eyes on the long game of passing these condos onto their university-aged kids once we return to a new normal.
Meanwhile, it's realistic to presume that as the freehold market ramps up due to both the pent-up demand from homebuyers sidelined by the impacts of lockdown, and to the federal government's commitment to ensure low-interest rates, house prices are poised to escalate to new precedent-setting sums while condominium prices flat-line. How this plays out will be entirely dependent on location, as those areas where there are large numbers of new condominium towers being completed means greater risk of an over-supply and therefore more competition. Eventually, there will come a point where the condominium market will return to balance, or demand will again outstrip supply because it's the most affordable type of housing. Will it be when condominium prices better align with the rents they generate so investors aren't faced with covering the gap between income and expenses? It really depends on how soon investors scoop up condos with an eye on the long game.
Despite efforts that theoretically were in place from the Fair Housing Plan in 2017/2018 to help close the gap between the low-rise and high-rise markets, the pandemic is pushing it wide again; what recent events demonstrate is that you can’t predict all trends in real estate. Clearly, the market has shown a tendency to oscillate between freehold and condominium markets, all while walking the tightrope of affordability. It's now even more apparent that Toronto has long had a serious divide between these low-rise and high-rise markets, which I have written about often in my Real Estate Forecasts from years past.
The burning question is this: considering all the influences on the market right now, is this a good time to buy? The cornerstone of my approach for any real estate purchase involves patience, prudence, research, and tactical strategy - all of which combine to mitigate risk and help make a real estate purchase that helps you today- and tomorrow as well. Whether you are buying or selling property right now - strategy is paramount. Although real estate is cyclical - the refrain of 2020 is that we are encountering unprecedented experiences through this pandemic. The key is to remain calm and have a strategy in place to carry you to your goal.
Here's Part Two of my post - An Overview Of The 2020 Toronto Condo Market And What Lies Ahead: Part Two - where I share step-by-step advice for those contemplating getting into the condominium market right now, based on the factors I've listed above. Is now your time?
We welcome your email to Steve@urbaneer.com. My team and I are here to help!
Want to delve a bit deeper in the Toronto Condominium Market? Check out these past informative posts:
Now more than ever, it is essential to plan a well-researched, data-driven, tactical strategy if you are in the market for a condominium. The pandemic has required a shift in focus, which I am happy to help guide you towards as you reach your real estate goals. I’m here to help!
May we be of assistance to you, or someone you love?
Thanks for reading!
-Steve & The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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