Worried For Toronto Condos: Our 2023 Outlook For Toronto Real Estate Investors

Worried For Toronto Condos: Our 2023 Outlook For Toronto Real Estate Investors


Even though we just saw another rate hike, you might have heard that some Toronto markets are starting to pick up. That’s because not all markets in Toronto fall at the same pace.

The thing is, we haven’t seen as much of a downward price drop in the condo market but fundamentally, the condo market is actually much weaker. After our year end analysis, the outlook for condos don’t look good at all. So in this video, I’ll share our insights which can hopefully help you make better decisions in the coming month.

Differences Between Investment Houses & Condos

First off, take a look at how different price movements have been throughout this year. Our clients mostly invest in starter freeholds in Toronto, and prices here have actually been tracking rate hikes pretty closely. As of the latest data we have from November, prices have dropped 30 percent from the peak so far. 

Another way to look at it is that we’ve seen a 15 percent from the average in 2021, or 19 percent from last November. And when you combine this with quickly rising rents this year, cash flows on new purchases are actually starting to look pretty decent even based on much higher 5.5% fixed rates. And this is the main reason why buyers are slowly coming back.

Now let’s take a look at Toronto condos. On the surface, they actually appear more stable than houses so far. Condos in Toronto are down a relatively smaller 12 percent from their peak, or still 3 percent higher than the 2021 average. It’s true that the rise in condo rents was a bit more but that doesn’t prevent condos from not dropping on a year over year basis because rate hikes were massive. 

If you crunch the numbers, it’s pretty clear that prices need to come down around 13% for new condo investments to see similar cash flows compared to before rate hikes… and we are clearly not there yet.

Toronto Condo Owner Holding Power

Condo demand is clearly down and we don’t expect things to pick up until cash flows start be to more affordable levels. At the same time, there aren’t many new listings either, and this has been what’s supporting condo prices. But how strong is a condo investor’s holding power really? 

Here’s the thing: Most condo investors were already taking a few hundred dollars out of pocket to support their condos investments each month even before rate hikes. That was manageable for condo investors, they were willing to invest in condos because it had a lower purchase price barrier to entry and you can still get similar price appreciation compared to houses. 

Honestly, condos are good if that’s all you can afford and you have good holding power. But this is the big problem that we’re seeing with condos and it’s just starting now after the December rate hike.

Even though we’ve seen seven rate hikes this year, and it wasn’t until September when the variable mortgages finally got triggered and monthly payments started coming up. But even then, a $600,000 mortgage for a Toronto condo was getting an under $200 increase, so it’s still ok for a few months. Now things are changing after this months’ rate hike and now mortgage payments are going to go up a much bigger $660 per month.

The impact on fixed rate mortgage holders on renewal is almost as bad. Let’s say a condo owner was on a 3 percent fixed-rate mortgage. If they had to renew at 5.5 percent, they’d also see a substantial $500 increase in mortgage payments. 

Remember, this is different from houses because house investors were cash flowing positive before rate hikes, and that buffer helps absorb a lot of the impact from rate hikes. But with condos, once you add the higher monthly payments to the negative cash flows before rate hikes, these condo investments would be a lot harder hang onto if rates hold steady for a year, and it gets even worse if condo investors are more leveraged or have multiple condos, or both.

Impact From Toronto Precons

Another thing to layer onto this situation is the new precon supply that’s coming to completion next year. The position of precon buyers are more risky by nature. You don’t get any rental income until completion, so all of your precon return eggs are in one basket. The base assumption is that you make money on closing since you locked in a price a few years ago and real estate prices go up over time. This was definitely the case for the past 10 years or so, and so precon investors felt safe with two possible exit strategies at the time they bought the precon:

  1. They can either keep the condo and become a landlord, OR
  2. They can assign before closing or sell after closing to take profits more quickly.

Now that the closing date is approaching, let’s take a look at these two options again. That first option where the precon investor keeps the condo might not actually be an option anymore. Mortgage stress test rates have gotten around 25% harder, and because of this, this might mean they would be short on closing if they can’t borrow enough to cover the purchase. 

If that happens, they would have no choice but to opt for option number two, a forced sale. This is why CBC is reporting 50 percent more condo assignments compared to a normal market.

Right now, the sales-to-new listings ratio for condos is already in a clear buyers’ market. But if demand stays weak and we see more forced sales coming up, the condo market might get even weaker. Buyers aren’t going to come back until the numbers work and so this will probably translate to double digit condo price drops next year.

Similarities Between Now And The Subprime Crisis

During the subprime crisis in the US, homeowners that were way over-leveraged so once rates started to go up in 2004, they couldn’t afford their mortgages and were forced to sell. And that strong forced downward momentum took home prices much lower. 

We aren’t in the exact same situation this time with condos. But the common theme is that condo owners had weak holding power to begin with, and it’s getting much worse with these exceptionally fast rate hikes, and yet prices haven’t dropped as much as houses yet. 

So the latest rate hikes kick in, this might end up causing many forced Toronto condo sales in the coming months, which is going to cause prices to spiral down until holding power make sense again for new buyers.

How We Can Help

We’re actually in a very interesting spot right now. Investment house prices have lead the price drops and cash flows are already making sense these days, so the gap between condos and starter houses in Toronto aren’t that far off these days and this gap might be at the narrowest point right now. 

After this point, house prices might start coming up a bit more and condos might start dropping more, and this is the best time to actually review your real estate portfolio and consider restructuring if you need to.

Keep in mind that we aren’t telling you to time the market. The main benefit of switching to houses is that you will have much stronger holding power in the long run and there’s just more value add opportunities for down the road too. Because the price gap is more narrow than normal these days, the jump between the two might actually be easier.

And if you need help with reviewing your situation and figuring out whether this transition makes sense for you, our team is happy to chat!

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