Are more investors set to hit the panic button as cashflow-negative mortgages in the space continue rising?
An annus horribilis for Toronto’s condo market is showing no sign of improving, with the number of investors losing money in the sector continuing to surge.
Fully 82% of new condo investors’ mortgages were cashflow negative in the first half of 2024, according to a recent CIBC/Urbanation report – a sharp contrast to 2020 and 2021, when much lower interest rates helped owners on average turn a profit each month.
With that figure having spiralled since 2022, jumping by 30% amid higher borrowing costs and climbing interest rates, could there be opportunities for new buyers in the city’s condo market?
Chris Bargis (pictured top), mortgage broker and team lead at Mortgage Edge, told Canadian Mortgage Professional the current landscape could present an opening for buyers hoping to take their first steps into the housing market.
Government stimulus to keep beleaguered building projects afloat may arrive – “but until then, there might be opportunities on new inventory in the coming months if we see price reductions,” Bargis said.
What’s behind the recent panic sweeping Toronto’s condo market?
A slew of real estate insolvencies – especially on new construction condo projects – over the past year has spooked the market and pushed many would-be investor buyers to the sidelines.
Skyrocketing developer industry costs and labour wages have caused fresh headaches for builders in the condo space. “As projects get further into the development phases, the greatest cost to a builder is the interest on the construction loan,” Bargis noted. “As a result of the significant increase in construction costs, builders are forced to anticipate and price these into their projects – which people just aren’t willing to pay today.”
Victor Tran of RATESDOTCA urged Canadians to safeguard their homes and credit scores from the potential impact of income or job losses.https://t.co/JQOQnzG5ns
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 21, 2024
The current malaise amounts to the Greater Toronto Area (GTA) condo market’s biggest challenge for 33 years, according to Urbanation’s Shaun Hildebrand and CIBC’s Benjamin Tal, authors of the recent report.
They characterized the picture as one of “economic lockdown” that makes little sense for either investors or developers. “Prices are too high for investors to buy relative to resale prices, rents, and interest rates,” they wrote, “while developers can’t lower prices due to high development costs.
“As a result, new condo sales – the primary driver of new home construction in Canada’s largest market – have dove off a cliff to their lowest level since the late 1990s.”
Tal and Hildebrand highlighted the growing appetite of investors to list their units for sale, a trend that’s contributing to the “record high” number of current condos on the market but one that could also spell bad news for renters now likely to face a diminished supply of rental stock in Toronto.
Are interest rates likely to continue sliding in the months ahead?
For the overall market, though, two consecutive summer rate cuts by the Bank of Canada have helped boost consumer confidence and drum up higher levels of interest among potential buyers, according to Bargis. “We’ve been noticing a reignited interest from buyers after witnessing our first sign of relief from the Bank of Canada,” he said, “and the number of inquiries has certainly picked up.
“While the rate cut in June wasn’t significant in itself, it did serve as an indication that our central bank might be realizing that we can’t function well in a high-interest-rate environment for much longer. It was what many folks needed to see, who have otherwise been remaining patient on the sidelines before making a move in the real estate market.”
Fixed rates are likely to continue falling in the weeks and months ahead – although that descent won’t necessarily be in a straight line – and variable rate discounts could also decline after the end of October, Bargis said, although that’s by no means a surefire thing.
Recent tremors in a slowing US economy have also seen expectations of a Federal Reserve interest rate cut in September surge. That outcome, Bargis said, “should spur a decline in fixed rates in Canada… it will be interesting to see exactly how this all unfolds in the fourth quarter.”
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