Is now the best time to invest in a pre-construction condo? Conducting research before you buy is always a good idea, and this goes for whether you purchase a pair of shoes, a dishwasher, or a new home. Urbanation, Toronto's preeminent real estate consulting firm and provider of in-depth local market analysis, has released its Q4-2022 Condo Market Report, full of market insights. In this article, we’ll take a look at market highlights in the Greater Toronto Area (GTA) from Q4-2022 to help you make your best investment decisions.
The pandemic may seem long gone on many fronts but Canada's economy, and its real estate market, continue to deal with the after-effects. According to Urbanation, many experts expected interest rates in Canada to go up by around 125 basis points during 2022 to battle inflation, but we received a shock with a rise of 400 basis points instead.
The Bank of Canada issued a whopping seven consecutive interest rate hikes during 2022, bringing the policy rate up from a low of 0.25% at the beginning of the year to a high of 4.25% at its culmination, and this caused a significant downturn in demand for new condominiums across the GTA. The speed and size of the interest rate increases were unparalleled. Consequently, new condo sales dropped 30% in 2022 compared with 2021, and fourth quarter new condo sales were down 58% annually. Part of this was due to new launches also being down year-over-year.
Sales in Q3-Q4 2022 were low enough to match numbers last seen during the financial crisis of 2008. Unsold inventory rose 30% from Q4-2021 to Q4-2022, reaching a 14-quarter high of 15,015 units.
The good news is, while there were decreases in sales across the board, these drops were mostly counterbalanced by previous soaring highs witnessed at the start of the year, which meant new condo sales, inventory, and price growth across the GTA returned to historical averages as the market rebalanced itself. What matters now is how the new condominium market will fare going forward.
It's important to note that total sales in 2022, which reached 21,782, were directly in line with the 10-year average of 21,983 sales.
Developers were cautiously launching new projects during Q4-2022 because of weak reception from buyers due to high-interest rates. Launches decreased year-over-year. This being said, there was some good news.
New project launches increased from 2,857 units to 4,812 units from Q3 to Q4 2022, and absorptions rose from 26% to 54%, presenting some recent positivity.
Developers are becoming more competitive with their pricing, with higher interest rates lowering the demand for new condos. The average opening price for new condo launches in Q4-2022 sat at $1,329 psf, which marked a decrease of 2% year-over-year.
The substantial increases in pricing witnessed in the first half of 2022 meant unsold condos dipped in price quarter-over-quarter in Q4-2022 but remained 8% higher than in Q4-2021.
New projects under construction increased slightly in Q4-2022, indicating that new condo launches will likely remain strong across the GTA in the future.
Resale condo sales dove 36% from Q4-2021 to Q4-2022 to reach an eight-year low of 3,281 units. Resale prices also declined by 3% year-over-year, mirroring the decrease witnessed in previous quarters, which puts pressure on new condominium prices.
A record gap between prices for new and resale condos was had in Q4-2022 at $580 psf. Urbanation comments this may suggest a period of outperformance for resale prices could be needed to make new condo prices more attractive to investors as we move forward.
The good news is condo buyers who purchased a presale condo scheduled for occupancy in 2023 still enjoy a good position. The average sold presale price for units to be occupied beginning in 2023 is $876 psf, which remains lower than the average resale price at $1,050 psf in new condominium developments. If resale prices remain at this level, buyers will see their units appreciate 20%.
The demand for apartments remained high in the GTA last year, representing the second-highest year on record. Rental activity outweighed sales by a record-high ratio of over 2-to-1. More people are renting, and fewer are buying simply because owning a condo is becoming more expensive, from mortgage payments in cost per square foot to condo fees. Condo ownership costs have risen twice as fast as rents in the past decade (133% vs 66%). Once interest rates stabilize as expected in 2023 and prices soften, the cost of owning a condo is also expected to level out and decrease.
Incentives Now Available
Developers are increasingly offering incentives to attract buyers in a slow market. New incentives presented in Q4-2022 beyond the typical extended deposit structure, capped developments, and no assignment fee included:
- Zero development levies
- Discounted or free parking
- Discounted or free locker
- Lower deposit amounts
- Price discounts on select units
- Cashback/credits at closing
- Rental guarantees
Inquiring to see which incentives may be on offer can help investors knock thousands of dollars off a final deal.
Slow but Steady Growth Moving into the Future
Developers are expected to remain cautious when it comes to launching new projects in the coming months. Only two projects were launched in January, and while 42 projects representing 12,407 units may potentially launch during the first half of 2023, information is needed by developers to gain a grasp on market demand and pricing dynamics before much more action is taken on their part. Consequently, launch levels are predicted to remain low for some time. This approach is expected to help keep the new condo market balanced as available inventory is close to Q4-2022 levels, aligning with the 15-year average. This will allow new launch activity to improve in the long run as demand for new condos increases.
Experts say we will unlikely return to peak condo prices in 2023 as the economy slows and interest rates remain raised. Year-over-year comparisons will likely remain negative through the first half of 2023 as data is compared to the market highs witnessed in early 2022. This being said, the quarter-over-quarter movement is expected to show stability and modest growth if supply and demand maintain their current patterns.
At GTA-Homes, keeping you informed about the pre-construction condo market is our goal in order to help you make the best investment decisions. The Greater Toronto Area continues to experience explosive growth, and the demand for new housing is expected to remain high for decades to come. Register for our Online Condo Investment Seminar, held twice weekly, to learn more about how you can benefit.