The biggest question on the minds of any condo investor is this: should I buy now or wait until the COVID-19 dust settles?
Well, the truth of the matter is that the dust hasn’t completely settled yet with new cases in Ontario increasing as we speak. Many people thought that with the announcement of a vaccine that we would start 2021 with a sharp decline in positive test rates and overall cases, but that isn’t the case.
However, rising case levels only tell one side of the story and aren’t primary catalysts for real estate investment decisions. The real estate market is quite dynamic and responds to social, economic, environmental and political conditions in a unique way.
To describe 2020 as other than chaotic for the Toronto housing market is a bit of an understatement.
The Toronto condo market was put into a literal halt as the pandemic lockdown forced businesses to close and made people reflect on why they were living downtown when no businesses were open.
With this came a wave of news stories about an exodus from major cities like Toronto because people wanted bigger houses with yards that a typical urban condo did not provide.
There was a lot of misinformation being spread about where and why people were moving, which added to the confusion about where people should be living and buying homes.
It wasn’t too long ago that the Canadian Real Estate Association (CREA) stated that May 2020 represented the lowest sales volume since May 1996. That stark reminder delivered a firm message to condo investors that perhaps it is best to hold off on any major buying decisions.
Coupled with this drop in sales volume was a large number of condo rentals hitting the market.
December: ‘Banner Month’ for Toronto Condo Market
Although the Toronto rental vacancy rate increased, December of 2020 ended the year strong with an amazing turn of events that boosted market conditions with Toronto home sales up 64.5%.
Last December’s data showed a big increase in demand for condos by investors who understood this was the beginning of a great time to get back into the market.
The data from December shows us that investors are returning to the condo market, even with rental rates still being down.
Toronto condo prices are still down about 5% year-over-year and down about 10% in downtown Toronto from their peak back in February 2020, which presents a good buying opportunity for condo investors.
There is optimism that things are working in favour of Toronto's downtown core with COVID-19 vaccinations already underway.
This isn’t surprising because many real estate experts believe that the downtown market is on the path to recovery.
And while there isn’t a lot of immigration fuelling the market, the fact remains that downtown Toronto has a limited supply of land. Anyone who follows real estate trends can understand why downtown Toronto is beginning to catch more condo investor interest.
Also, the momentum isn’t stopping anytime soon. The new year is continuing to show strong resilience in the Toronto condo market. The month of January 2021 is holding December’s gains with sales activity in the 416 nearly doubling that of 2020 on a year-to-date basis.
What Does This Emerging Condo Market Activity Mean?
Now just because the data shows condo sales are booming, does that still mean investors should buy now or keep waiting for the pandemic to subside?
While it is true that condo sales were quite strong in December of last year and the month of January 2021, what is interesting is that new condo listings were also up 66%. Adding to this equation is the fact that rental vacancy rates are also at record highs, as seen in Urbanation’s recent Q4 2020 GTA Rental Market Report.
So what we are seeing are a number of different variables at play at the same time. We have high vacancy rates, increase in new condo listings, and strong condo sales.
High Vacancy Rates
To help clear the air a bit, let us first examine the recent data on rental vacancy rates. A new report published recently by CMHC showed that the condo rental vacancy rate, also known as the secondary condominium rental market, was at 1.7%, which is higher than the historical average sitting below 1%.
The purpose-built rental market took the largest hit with vacancy rates increasing to 3.4% because of the economic impacts of COVID-19 that have left many people unemployed in the service and hospitality sector. The recent data from Urbanation matches the results found by CMHC, which show higher rental vacancy rates in both the purpose-built and condo markets.
There is no denying that this recent data provides some cause for concern, but there are two factors at play here.
The first is that, like it or not, we’re in a pandemic. This pandemic has forced people to reconsider where they live and has put financial strain on many Canadians, especially those who lost their jobs due to COVID-19 lockdowns that have negatively impacted businesses across the country. It hasn’t been an easy ride for employers or employees who felt the pandemic's effects through business closures and mass layoffs.
So is it surprising that vacancy rates are high and rental rates low? Not really. These current events surrounding the rental market are not directly linked to new condo transactions.
While the rental market is down in Toronto and across the GTA, investors making a decision to purchase a pre-construction condo should not be looking too closely at current rental market data because things will change in five years from now when a condo nears completion.
In addition, condo investors who purchased pre-construction condos five or six years ago are not in a panic to sell just because rental rates have dropped. Most of these long-term investors purchased condos when prices were much lower and are not concerned about becoming cash flow negative as a result of fluctuations in the rental market.
It’s also important to note that while there is volatility in the real estate market, many investors are still getting the opportunity to take advantage of really low interest rates below 2%. And it appears that the Bank of Canada isn’t planning on raising rates yet, so market conditions are still working in favour of real estate investors.
Also, most industry experts understand that the effects on the rental market are a direct result of pandemic pressures. The expectation is that with vaccinations, colleges and universities bringing students back on campus, and borders opening back up that allow immigration to resume, we’ll see a shift in higher demand for rentals in downtown Toronto and the GTA as a whole.
Increase in Condo Listings
Now when we look at the next variable related to the sharp rise in new condo sales listings, we need to put that into context as well.
What we see from TRREB’s recent condo market reports is that there were 1,972 more active listings for condos in the City of Toronto in December 2020 compared to 2019. At the end of December 2020 there was a total of about 3,120 active condo listings in the City of Toronto, which represented a 172% increase year-over-year or 2.7x more active listings when compared to the end of December 2019.
This rise in active condo listings was also true for downtown Toronto, which TRREB’s data showed had about 3.2x more condo listings than 2019. Some might look at these stats and think there is panic in the condo sector, but what this flood in active condo listings presents is a perfect buying opportunity for anyone looking to invest in the downtown condo market. This doesn’t mean things are “back to normal” as we see there are still some vulnerabilities with the downtown Toronto market as discussed in the next section below.
So the reality is that many investors see this as a prime opportunity to take profit off the table. This is especially the case if they own multiple condo units where it makes sense to sell in order to leverage incoming capital into other emerging condo projects. It isn’t truly surprising that as condo sales boom so too will active listings because people see this as an opportunity during high market activity.
Strong Condo Sales
The other aspect that needs a quick mention here is of course related to strong condo sales numbers, which show enthusiasm by many investors who are hopeful that the recent announcement of COVID-19 vaccines will see Toronto experience a quick economic recovery.
When we compare both November and December’s 2020 year-over-year sales we see that Toronto’s real estate condo sales jump from a 0.8% to 75.9% increase in year-over-year sales.
This increase in activity didn’t stop in December. In fact, we are still seeing strong condo sales spill over into the month of January 2021. And as mentioned earlier, year-over-year 416 sales were up over 92%, which shows sales nearly doubled the activity of 2020.
But the question is will this activity remain or is this just short term momentum in the condo real estate market?
The truth is that any economic recovery will be slow and gradual as there are still challenges that we need to overcome.
Downtown Toronto Condo Market Vulnerabilities
While condo sales are up, there are still vulnerabilities with the downtown Toronto condo market.
For the downtown Toronto condo market it isn’t business as usual, yet. The downtown market won’t truly recover until we see a return to work in Toronto’s downtown financial district. Many corporate commercial office spaces are closed due to the pandemic and this is adding to some of the vulnerabilities with the downtown area.
But on the other hand, anyone following the market can also see that with people eventually receiving vaccinations this year there is a strong possibility that offices will reopen sooner rather than later and this will bring a lot of business back into the downtown core. Nobody is forecasting a permanent closure of downtown offices - it is only a matter of time before people are beginning to gradually return back to their offices.
Toronto was significantly underperforming surrounding markets like Georgian Bay, Barrie and London/St. Thomas.
In Toronto, condo prices were relatively flat compared to March levels, while the low-rise detached home segment saw double-digit gains of over 12.2% year-over-year.
Not only that, but even the governor of the Bank of Canada was sending the message that there likely won’t be any growth anytime soon and that you can't have a housing market boom while the economy isn’t growing. But, this clearly wasn’t true because the housing market defied all odds, including the condo market in Toronto.
Message for Investors
The message is clear. Seasoned investors should evaluate this robust market activity as a ripe opportunity to expand their real estate investment portfolio.
And if you’re a new investor who has been trying to “time the market” - stop because you can never time any market, including that of the stock market. Rather than timing the market you should be assessing the most recent condo real estate data to make a decision on which condo investment is best for you.
With COVID-19 vaccines here, the spring of 2021 should see a strong resurgence and demand for condos within the Toronto real estate market.
Once activity ramps up mid-2021, it won’t be surprising to see condo prices rising to new levels. So the advantage of buying now is that new condo prices are still quite competitive as developers are more interested in attracting demand than over-pricing units.
Price growth is directly correlated with demand and sales activity, which makes the fall a prime time to start adding to your existing condo investment portfolio or even entering the market as a new investor.
Also, on the rental side, once the economy opens up again we will see new immigrants and international students re-entering the market looking for rentals within Toronto and the downtown core. This reopening will provide strong population growth for the GTA and help stabilize the condo market for the long term.
Furthermore, when we look at the latest 2021 Canadian Housing Market Outlook, RE/MAX Canada is projecting a 6% increase for the Toronto real estate market across all home types.
And while these forecasts provide valuable insight, it is important for investors to remember that real estate prices differ based on region.
Your overall budget and neighbourhood you’re interested in have a role to play in your condo investment strategy.
This is why working with a platinum access real estate agent is one of the best ways to ensure you’re making the best condo investment decision that suits your needs.
A real estate agent will act as your trusted advisor who will provide you with all the facts, data and insights to make an informed purchase decision.
And lastly, remember that investing in the pre-construction condo market is a long-term investment - making short-term goals adds risk and speculation that are not needed in today’s real estate market environment.
