Pre-construction condo sales plummet 79% as market cools

The third quarter saw the steepest annual decline since 2009, expected to impact construction later next year, said market research firm Urbanation. Greater Toronto Area (GTA) new condominium sales totaled 1,748 units in the third quarter, declining 79% from a year ago (8,320 sales) amid soaring interest rates and construction costs that sent Toronto region developers to join their customers on the market’s sidelines.

A record 189 projects in development reported zero sales during the quarter, a 67% share of total projects with available inventory. It was the biggest annual decline — apart from the start of the pandemic in the second quarter of 2020 — since the first quarter of 2009. That was the beginning of the global financial crisis, but Toronto’s condo boom was already underway by then.

It calls into question the viability of some projects, particularly those that launched a while ago and still haven’t met their sales targets to qualify for construction financing, said Urbanation president Shaun Hildebrand. Meantime, costs have continued to rise. “But most projects have sold enough to proceed, and they are fine with waiting for the market to come back in order to obtain the prices they are asking,” he said.

The slowdown in new condominium sales and presale launches is not expected to negatively impact construction activity until the second half of 2023, as developers will remain active in the next few quarters starting work on the large number of units that launched and sold in the previous quarters.

But Hildebrand downplayed the prospect of a market crash, saying his company has been predicting for months that developers would end up delaying about 10,000 units this year. It will be the second half of next year before the downturn in sales and new project launches impacts construction, he said. Until then, developers will be busy with the 96,510 condos they sold previously and are already building.

Ninety-one per cent of the condos that are under construction in the GTA have been pre-sold. Developers depend on pre-construction sales to obtain financing in order to build their projects. The majority of units are sold to investors. Sometimes they buy them knowing that they won’t necessarily make back all the carrying costs on rent for years, but the price escalation in the region has been such that those investors could expect to still turn a profit from the equity of their units.

“Ultimately, investors have a pretty strong outlet in the rental market,” said Hildebrand. “If they want to hang onto their unit and they have a long-term time horizon, then they’re not too dissuaded from having some negative cash flow or waiting for the unit to recover in terms of its price.”

Despite low sales and delayed launches, the inventory of condos also continued to decline and that’s helping push prices up, he said.

The projects that launched in the third quarter had a record average price of $1,380 per sq. ft. on a 642 sq. ft. unit. But the price for resale condos in the same quarter was down 5 percent compared to the second quarter and was 10 percent below a first-quarter record.

That difference in new construction versus resale units is part of the current hesitancy by condo buyers, he said. Developers can’t bring down the cost of pre-construction units because of high construction costs that are also subject to interest rate rises.

For now, there’s about a 20 percent premium buyers pay on a brand-new unit. But if the gap between new and resale doesn’t narrow, that could lower the price of presale condos, said Hildebrand.

“With more and more high-priced projects coming to completion and resale prices declining, by the second half of next year, if resale prices don’t see any improvement, basically these presale units will be worth less than what the buyer paid in pre-construction,” he said.

That could lead to a glut in assignment sales — those are sales by investors who bought resale construction units but then sell them before the building is completed. It’s a trend that has already begun, but because assignment sales aren’t listed on the real estate industry’s Multiple Listings Service (MLS), it’s not clear how many of those are already on the market.