Rising interest rates, falling sales pushing some investors out of Toronto's condo market

For nearly a decade, new condos have been regarded as sound investments in Toronto but rising interest rates coupled with the flattening of average sales prices since March mean some investors are facing an increased financial burden — even struggling to close on projects nearing completion.

Those who invested in preconstruction condos in particular are in increasingly challenging positions. In some cases, they're unable to finance the closing of a property due to lower than expected appraisals and interest rates that are significantly higher than when they bought the units.

"Preconstruction condos for the most part that were purchased in 2019 through 2020, after commissions, after fees, those individuals are not making any profits on this side. They're probably actually taking the loss," said Jordon Scrinko, CEO of Precondo, a firm that handles mainly preconstruction projects. He says it's been a busy few months for his firm.

But not busy in a good way.

"It's putting out a lot of fires, calming a lot of people down, trying to find out-of-the-box solutions," said Scrinko, who adds the firm has been getting lots of calls from other people's clients looking for help as they approach a project's completion.

"We're trying to make sure that  .. we can provide them solutions and get them through what is relatively a tough time for them."

With the changing conditions, experts say some investors are taking a wait-and-see approach with new condo projects. Developers in some cases are backing off too. Data released in October shows there were fewer than expected new condo project launches in 2022.

Experts are now cautioning about the ripple effects and what that could mean long-term for supply at a time when it's so badly needed.

Crunching the numbers

Though the average sales price of condos in the Toronto area is up 4.5 per cent from this time last year, figures from the Toronto Regional Real Estate Board show since March the average sales price for condos in the GTA dropped nearly 12 per cent, and nearly 11 per cent in Toronto. At the same time, the Bank of Canada's trend-setting interest rate has increased steadily through this year, now sitting at 3.75 per cent.

A five-year fixed-rate mortgage at most Canadian banks sits at about five per cent.

Some say the math doesn't add up for many preconstruction condo investors who bought in over the last few years.

"We have a wildly changed mortgage environment," said Ron Butler with Butler Mortgage in Toronto.

He says investors who bought into the market 18 months ago could get mortgages, both fixed and variable, with fairly low rates of interest.

"Those are long gone. Every rate that they look at today is in the fives," Butler said, adding that those who stretched themselves to invest in multiple units in recent years are in the most difficult position.

"Even if [the buyer] could come up with all the down payment, even if he could qualify for mortgages at these new stress test rates … It's a real big issue," he said.

"They've got to find a way to finance the closing of three different condominiums in a marketplace where the rents probably won't cover the cost of the mortgage."

Investors who bought preconstruction untis with the expectation to sell before closing are now finding themselves in an increasingly crowded market of assignment sales — that's when the original buyer sells their contract with the builder to a secondary purchaser. Typically, those sales have been at a profit because it happens years after the purchase date and closer to the project's completion.

Scrinko says he's never seen anything like it before.

"We're seeing a 50 per cent plus increase in assignment volume versus what would normally see," he said.

While it's difficult to track sssignment sales since they're not listed on MLS, Scrinko says he's seeing deals to be had with much more competitive prices because of the volume.

"I've said for years ... never buy a preconstruction condo with the sole intention of assignment flipping it for profit. Yes, it's worked for over a decade in Toronto but eventually it will bite," said Scrinko.

 "I guess today is the day."

Fewer launches

In the third quarter of 2022, new condo sales declined by nearly 80 per cent year over year, according to data firm Urbanation

"Outside of the initial months of the pandemic, it was the slowest quarter for new condo sales since the financial crisis in early 2009," said Shaun Hildebrand, president of Urbanation.

Though it varies from project to project, Hildebrand estimates investors make up between 60 and 70 per cent of buyers in preconstruction projects. With that, he says developers largely rely on investors to move ahead with a project.

Figures from Urbanation show developers may already be hitting the brakes on the launch of new projects.

"Investors are scaling back and will probably end up with about 10,000 fewer units launched for presale this year," said Hildebrand.

He says though he's projecting a record number of condo completions next year, he's concerned about slowdowns later in 2023.

"That longer term supply pipeline doesn't look as robust as it did earlier this year," he said.

"We rely on condo investors to supply ... much needed rental housing for the region. So if condo investors aren't active today, it's going to result in fewer rental units in a few years time."

Hildebrand says the projected slowdown comes at a time when Ottawa is aiming to ramp up immigration, and when more housing will be desperately needed.

Many observers believe investor confidence will return, especially considering the need for more supply in cities like Toronto. But in the short term, so much also depends on interest rates – which are only expected to keep going up.

"Even though rates may eventually come down, I think we're in for a pretty rough year of difficult situations coming in 2023," said Butler

"Winter is coming. It's here for those investors. There's just no mathematical sense to being able to make money on the property."