Investor interest shows signs of cooling in Toronto’s pre-construction condo market

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Investor sentiment has started to cool for new Toronto condos, the latest sign that the sharp rise in borrowing costs is slowing the country’s frenetic real estate market.

Realtors are seeing a pullback among retail condo investors as they wait for fallout from the next round of interest-rate hikes from the Bank of Canada. The central bank’s two rate increases this year have already made mortgages more expensive. At the same time, a jump in new condo prices has helped curb investor interest, according to condo research group Urbanation Inc., which forecasts market activity to drop significantly.

“We do expect new condo launch and sales activity to slow materially in the second half of the year,” said Urbanation president Shaun Hildebrand. “Buyers won’t be as willing to absorb higher prices because of diminished profit outlook and rents not covering expenses,” he said.

The cost of a preconstruction condo is at a record high near $1,400 per square foot, which makes it difficult for investors to cover their monthly mortgage, condo fees and other housing expenses with rent from tenants.

Condo builders are also dealing with a shortage of construction workers and soaring building-materials costs, which means developers will likely delay project launches as they reassess the market.

Although home resales started to slow after the first interest rate hike in March, activity in the new home or preconstruction market had remained strong. Preconstruction homes are those which have yet to break ground or are under construction, and sales for these projects are often viewed as a bet on the future, because buyers wait years for their units.

But like the resale market, preconstruction homebuyers are starting to put their purchases on hold amid uncertain economic conditions.

“They’re sitting on the sidelines because they’re just not in a rush, they want to see what’s happening,” said Ryan Coyle, managing director at Connect Asset Management Corp., which helps retail real estate investors buy and manage preconstruction condos in the Toronto region. His company works with about 400 investors every year. “There’s definitely been a downward pressure on demand due to people waiting,” he said.

Preconstruction condos have become sought-after assets for individual investors looking to build their wealth. Urbanation estimates that these investors make up about 70 per cent of preconstruction buyers.

“As preconstruction buyers see that the resale market is starting to slow and inventories are rising, they become more cautious as expectations about future growth are tempered,” Mr. Hildebrand said. “Developers are pretty astute in recognizing these shifts, and will scale back new launches accordingly,” he said, adding that soaring construction costs make some projects unfeasible.

So far in April and May, the number of condo project launches has topped this year’s first quarter. There have been 23 confirmed launches with a total of 7,064 units. That compares with first quarter volume of 29 launches with 6,070 units, according to Urbanation.

Simeon Papailias, senior partner with real estate brokerage REC Canada, which specializes in condo sales, said sophisticated investors see buying opportunities and are peppering him with questions on how to continue investing.

But he said retail investors are nervous about interest rates and the federal government’s plans to crack down on real estate speculators with a tax on preconstruction condo sales. As well, so-called end-users, or those who intend to use the condo as their primary residence, are in wait-and-see mode.

“You have both camps waiting for the shoe to drop. It’s just fear right now,” he said.

Editor’s note: The comparison period for the number of condo projects launched in April and May has been corrected in the online version of this story.

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