Real estate markets will feel the downstream effects from a slowdown in Toronto’s condo market, according to one real estate expert who expects fewer completions of new units over the next few years.
Last month, Bloomberg News reported that Toronto’s condo developers saw sales of new units in the first half of the year fall 57 per cent from the previous year, marking the slowest pace in 27 years amid high interest rates and a pullback in demand. Additionally, a report by CIBC Economics and Urbanation said in July that Toronto’s condo market is “clearly in recessionary territory.”
John Pasalis, president and broker of Realosophy Realty, said in an interview with BNN Bloomberg Thursday that the slowdown has spurred investors to leave the market, which could weigh on the number of future new units.
“The challenge is things are going to get worse because when we have pre-construction sales falling off a cliff, this means of course economically construction starts are going to start to slow down. In the next three, four years we’re going to have fewer completions,” he said.
Pasalis added that while Canada’s “proposed solution” to the ongoing housing crisis is to triple the number of new unit completions, he expects that number to actually fall over the next few years.
“Long term, you want a housing market driven by end users. When you have it driven by investors, prices get ahead of where they should be, which is where we are. And then when they get ahead of where they should be, eventually sales stop until things become balanced again,” Pasalis said.
As the Toronto condo market faces a major slowdown, Pasalis said there are two major trends occurring. One is that sales have fallen due partly to the fact that end users are facing challenges when buying units and “investors have largely disappeared.”
“And on top of that, we have a lot of investors selling. They’re exiting the market. The units don’t make sense from a cash flow perspective,” he said.
‘Mom-and-pop investors’
Around two decades ago, Pasalis highlighted, investors were a much smaller part of the pre-construction market, but today account for upwards of around 70 per cent of pre-construction buyers.
“A lot of our pre-construction condo market has just been driven by demand, largely from mom-and-pop investors. They want small units, the yields of them are higher. This is largely why we build a lot of small condos in Toronto,” he said.
Larger condo units are seeing more demand in the market compared to the smaller units, according to Pasalis.
“The very, very small units cater to investors and then the larger units, say 900-1,000 square feet plus that are more geared towards end users,” he said.
Pasalis also highlighted that demand has fallen for pre-construction condos.
“That’s because prices have been flat, so they’re thinking, what’s the point of buying a project if I don’t know where prices are going to be four years from now,” he said.
