Finding opportunities in the GTA condo market

Supply is plentiful, but will we see demand catch up? Analyst discusses key trends

Interest rates have fluctuated dramatically over the last two years, and the condo market has felt the impact particularly strongly. Now, with condo inventory in the Greater Toronto Area (GTA) reaching record highs, this is becoming an area of increased interest for mortgage brokers.

According to Ted Wei (pictured), senior financial analyst at Neighbourhood Holdings, housing sales haven’t seen a significant improvement yet, despite a 25bp rate cut by the Bank of Canada in June. House prices have also remained relatively flat, with condo prices dropping by as much as 20% (or more, in some markets) since the 2022 peak. As a result, some developers have offered financing at below-market rates to help increase demand.

High inventory, low demand

Rising inventory levels have been the biggest trend emerging in Toronto’s condo market. Wei attributes this to several factors, from high interest rates, to increased delinquency, to a surge in new condo completions.

“Elevated interest rates have impacted housing affordability and debt-to-service requirements for loan approvals, creating stronger barriers to entry and reducing buyer demand,” Wei told CMP.

“The prolonged period of high borrowing costs has also led to higher delinquency rates. Rental units with higher loan-to-value (LTV) ratios are operating at negative cash flow, not even considering equity opportunity cost, and homeowners are facing substantial increases in mortgage payments.

“Finally, there has been an increase in completed and unsold condos listed on the market due to a construction boom that began during the peak market conditions in 2022.”

Recent regulatory changes, such as the foreign buyer tax and rent control measures, have only added weight to these trends. Wei noted that these measures are likely to affect supply and demand dynamics in Toronto’s condo market, disincentivizing investment into rental properties and impacting future supply.

 The Federal Immigration Minister, Marc Miller, also announced a targeted reduction of temporary residents by 20% over the next three years. This may further dampen investor appetite to hold rental properties, although only time will tell the full implications of these measures.

How long this dynamic will last is unclear, but what is clear is that developer pre-sales are currently slow which means that new projects may be delayed or shelved. That could lead to supply issues in a few years.

Being a ‘trusted advisor’ in a strained market

Looking ahead to the next 12-18 months, the biggest factor set to affect Toronto’s condo market is undoubtedly interest rates. The Bank of Canada announced another cut on July 24 and this may well lead to an increase in buyers, though it’s difficult to forecast how quickly this might happen.

“Many buyers are waiting for interest rates to drop before they decide to buy. CIBC’s latest homeowner and Intenders Poll show that more than three-quarters of homeowners say interest rates and inflation have forced them to push out their timelines.” Wei said.

“Right now, the implied market rate, which can be derived from CORRA rate forward contracts, suggests that interest rates might go down further, as much as 0.50% by the end of 2024. How much and how quickly rates drop will affect the market.

“While we can’t be sure what will happen, it looks like the condo market will stay the same for the rest of the year, HPI data shows that the GTA home prices have fallen 0.71% year-to-date following a slow spring market. RBC housing report shows optimism that home prices might start to increase over time if rates go down as more favourable conditions emerge later in the year and in 2025.”

For brokers, keeping a finger on the pulse of this market is crucial. Wei highlighted that brokers are increasingly competing with major banks, as well as other brokerages, for a smaller pool of deals. In this environment, brokers need to position themselves by providing in-depth expertise and access to discounted rates.

Wei noted that even if brokers do not win a deal today, securing a level of confidence and trust in potential clients will still pay off in the long run.

“By providing valuable insights and maintaining strong client relationships, brokers can position themselves as trusted advisors and potentially capture future business as the market evolves.”