(Bloomberg) --The Toronto condo market is deteriorating to “recessionary territory” as the number of investors losing money each month on newly built units surged last year.
About 77% of investors with mortgages on newly built Toronto condos had negative monthly cash flow last year, up from 52% in 2022, according to a report from Canadian Imperial Bank of Commerce and industry consultant Urbanation. That means rents couldn’t cover ownership costs such as mortgage payments, fees and taxes.
Monthly losses rose to an average of $597 (US$432) in 2023 from around $220 a year earlier. The situation appears to have worsened into this year, with the share of owners with negative cash flow climbing to 81% through June.
The pain has thrust the market into an “economic lockdown” that doesn’t bode well for the housing shortage that’s been deemed a crisis by politicians across Canada. Condo investors play a crucial role in financing new projects, so the financial squeeze may result in fewer new units getting built in the coming years.
Condo prices in Toronto’s resale market have come down 12% from their peak, while new condo prices have fallen 5%, according to the report. But the financial pressure faced by investors is causing a record number of properties to be listed for sale, which may further weigh on prices, according to the authors of the report, Urbanation president Shaun Hildebrand and CIBC deputy chief economist, Benjamin Tal.
With all the stress in the market, Toronto’s condo investors have had less appetite to buy into new projects. Sales of new units — usually agreed to before construction even starts — plunged to the lowest level since the late 1990s, according to the report.
The condo construction market has also taken a hit, with the slowdown impacting nearly 40,000 jobs since 2022, the report said.
“This reality will result in a sharp pullback in completions and a stagnating housing stock in the coming years, which is sure to make the affordability situation even worse,” the report’s authors wrote.
Lower rates could help the situation improve some, according to the report. This week, the Bank of Canada cut interest rates for a second straight meeting, bringing the benchmark to 4.5%. But construction costs would also likely have to fall before developers can lower prices to levels investors can afford, while rents and resale prices may have to start rising to begin attracting them back, according to the report.