Experts note market is facing ‘biggest test’ since 1991 recession
Toronto real estate investors are grappling with a challenging market, as high interest rates and stagnant rents are squeezing profits and driving losses. The current environment has created what some are calling the most significant test for the condominium market since the 1991 recession.
Investors like Shemeer Ahmad, who purchased a two-bedroom condo near Toronto in 2019, are now facing monthly losses. Ahmad, who had initially believed real estate was a safe investment, now finds himself losing approximately $830 per month due to rising mortgage rates and other associated costs. With the market down, selling the property would likely result in a substantial financial loss. “I’m in this kind of ‘Catch-22,’” Ahmad told Bloomberg. “It’s simply a bad investment.”
Investors uncertain about next steps
Ahmad’s situation is far from unique. A recent report from the Canadian Imperial Bank of Commerce (CIBC) and real estate consultancy Urbanation revealed that around 77% of Toronto investors who secured a mortgage on a new condo last year are now losing money, compared to 52% in 2022. The average monthly loss for these investors was $597 in 2023.
The implications of these losses are far-reaching, according to Bloomberg. Investors play a crucial role in Canada’s housing market, particularly in large cities like Toronto, where much of the new rental stock comes from individual condo buyers. As financial pressures mount, builders have started fewer projects, exacerbating an already severe housing shortage.
“The condo market is being tested — and this is the biggest test since the 1991 recession,” said Benjamin Tal, deputy chief economist at CIBC.
Deep in debt
Although the Bank of Canada’s recent rate cuts may offer some relief, many investors are already so deeply in debt that they may struggle to recover. Furthermore, the Toronto rental market has softened, with one-bedroom rental prices falling by 3.1% in the second quarter compared to the same period last year, according to the Toronto Regional Real Estate Board (TRREB).
The deteriorating economics of condo investments have driven many investors to consider selling their properties, leading to a record number of for-sale listings in June. Despite this, condo prices have dropped by about 12% from their peak two years ago.
“It’s really like the perfect storm in terms of bad times to sell,” Ahmad remarked,
Bloomberg noted the glut of small, downtown units, which are primarily attractive to other investors, has further dampened the market. Without investor interest, developers struggle to secure financing for new projects, leading to a significant decline in pre-construction condo sales, which are now at their lowest level since the late 1990s.
Outlook
Looking ahead, some experts remain cautiously optimistic. While the market is currently in flux, the ongoing housing shortage and strong demand suggest that the condo market could eventually stabilize. Tal said that the current difficulties may not last forever, noting that “after we pass the next year or two, the market will be tight. There will not be enough supply.”
Canada’s federal government has acknowledged the housing crisis and has set a goal to build 3.9 million homes by 2031. However, this ambitious target may be difficult to achieve, given the current market conditions and productivity challenges.
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