Brushing up on what’s happening in the GTA real estate market? Check out these condo sector predictions, courtesy of Urbanation…
As the year winds down, those of us in real estate are looking back at the housing market in 2018. We’re pouring over recent studies—and making our own real estate predictions for 2019
One of my all-time favourite sources for condo market insights is Urbanation. The research company recently released a year-end webinar, and I must say that I was thoroughly impressed by it. Here are some of the biggest highlights, including trends from 2018 and condo market predictions for 2019.
Growing demand, inadequate supply of condos
There’s no shortage of demand for condos in the GTA, a point that Urbanation drove home with the following statistics.
• Toronto’s population grew by 122,000 in 2017 (Statistics Canada)
• By the end of 2017, there were 565,000 jobs in the downtown core
• Over the past three years, 150,000 condos have been sold in the GTA
Over the last 10 years, half of all housing resale activity has occurred within the condo market. Currently, a whopping 120,000 condo units are under construction. And it’s still not enough to meet demand in Toronto.
If you’ve been following developments in the GTA real estate market, you’re probably aware that there’s been significant growth in the single-family home market during the last five months. That said, condos are still outperforming when it comes to price appreciation.
As of October, 2018, there were just 1.7 months of condo inventory in the region (the lowest it’s been in 16 years). Demand for studios has been particularly high, resulting in significant price growth for this condo type in the market.
Condo affordability challenges
When looking at housing affordability in the GTA, mortgage interest rates are an important piece of the puzzle. In the third quarter (Q3) of 2018, average condo prices grew to over $1000 per square foot in the downtown core (the highest they’ve ever been). Combining interest rates and mortgage qualifications, buyers have to make $100,000 per year to purchase an average condo.
Urbanation also looked at the percentage of household incomes required to service the debt on a mortgage at current prices. That number was 34 per cent, which is close to the 35 per cent allowable under standard lending guidelines.
Condos remain a more affordable option for GTA homebuyers, but the price gap between units and single-family homes is closing. In the spring of 2017, detached houses sold for $1.1 million on average. Prices have since corrected for this housing type, but condo prices have continued to grow.
Are condo prices going to drop in 2019?
These trends have implications for first-time buyers. Basically, there aren’t any units available at or below $400,000. That said, there’s been significant growth in the upper middle part of the condo market (with 140 per cent growth in the $800,000-$999,000 range). We’re also seeing prices rise in (more affordable) areas outside of the city’s core—like Etobicoke and Scarborough.
On the whole, low supply will likely keep pushing up demand and prices in the near future—though that’s going to change in the long-term.
New construction condos in Toronto
It’s likely that there will be around 20,000 annual new-construction condo sales when the year ends. That number is below what we saw during the boom in 2017 and 2018, but it’s back in line with what we were seeing prior to that.
In recent months, there have been a record number of condos in development. That said, 90 per cent of these units have been presold (which has had an impact on supply levels). For Q3 of 2018, there were 5.2 months of inventory—well below the ten-year average. It’s also worth noting that, this year, condo project cancellations were the highest they’ve been in five years. Fortunately, these canceled units represent a small slice of the overall market.
On the whole, inventory levels are poised to grow as the condo market becomes more balanced.
What about prices? The average price for new launches is significantly higher than the resale average in the city. While there’s nothing unusual about paying a premium for a new condo, the price gap between resale and new-construction units is worth watching. New-construction condo prices will likely continue to rise in the short term.
The role of condo investors
According to a study carried out by Urbanation, CIBC, and Teranet, close to half of all new units in 2017 were sold to investors. These units were then rented out. As investments, 56 per cent of them were in positive territory. Just over 44 per cent were in negative territory. Many buyers who wound up with cash flow negative investments accepted their losses, believing that price appreciation will offset them. That said, looking at current rents and purchase prices this year, investors generally won’t achieve neutral cash flow with a 20 per cent down payment.
On the other hand, here’s a highly-encouraging statistic for investors. For units completed in 2017, there was an average appreciation of 51 per cent during the period between presale and construction. The result was an ROI of 155 per cent.
Bottom line: the market is dependent on investors to supply rental units in the years ahead. There’s a growing number of condo buildings and purpose-built rentals under construction (and they should improve inventory and limit price growth in late 2019). That said, this construction isn’t enough to meet demand.
You can access the full recorded Urbanation broadcast video here. Please not that you may need a Google account to watch the video on Google Drive.
Thinking about purchasing a condo in 2019? Want to learn more about how market factors could impact your purchase? Call or text me at 416-500-5360, or send me an email at rashid.notash@rogers.com and ask away!
