Guest writer R. Scott Davie, President of Davie Real Estate, has been a leader in the sales and marketing of new high rise and low rise projects around the Greater Toronto Area (GTA) for decades and has represented many of the GTA’s top Developers. Davie recently wrote a book on the GTA Affordable Home Ownership Crisis.
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2020 has certainly been a year that will be remembered.
GTA residents that owned their own home, or an additional investment property, were generally the best positioned to weather the economic effects of the Covid-19 quarantine. Considering the quarantine, the new home and condominium apartment numbers for 2020 were surprisingly positive. 2020 was the second-highest year for new condominium apartment completions since 2015, with 18,305 units completed. According to Altus Group, 20,696 GTA pre-construction condominium apartments were sold in 2020, down 22% from 2019, and down 11% from the 10-year average. The average price of a new GTA condominium apartment was up 8% from 2019 to over $1 million, or $1,072 per ft², an all-time high for the second year in a row.
Construction at Mississauga site of Edge Towers, image courtesy of R. Scott Davie
Real Estate is local and in order to understand the GTA new condominium apartment market, it is important to examine other GTA residential markets and their effect on the preconstruction markets. An extreme shortage of inventory in the GTA resale market has fueled a seller’s market, with multiple offer situations being commonplace, and according to the Toronto Regional Real Estate Board an average price increase of 13.7%, year over year. This shortage has driven many GTA buyers towards the low rise preconstruction market, creating a feeding frenzy in many new home sales offices.
Altus Group reports that new GTA single-family home sales were up 81% year over year, with 16,973 total sales, and setting a new record average sale price of $1.3 million.
The downtown Toronto condo rental market was hit hard by the quarantine due to university students, and many young downtown workers, giving up their rental condos and moving back into their parents’ homes while studying or working online. The problem was compounded by the extremely high vacancy rate in the downtown Toronto short term rental market, caused by Covid-19 travel bans. The result has been a high vacancy rate and lower rent for both regular rentals, and short term rentals, in downtown Toronto. Other GTA rental markets remained fairly healthy in comparison.
The Bank of Canada is expecting a strong recovery in 2021, as the population gets vaccinated, projecting GDP growth of 4%. With a strong recovery, we should expect to see the downtown Toronto regular and short term rental markets bounce back very quickly, once Ontario residents return to work and travel restrictions have been lifted.
The vacancy rates and discounted rents are expected to disappear rapidly. One effect of the quarantine has made it the best time in years to commit to a downtown Toronto lease because the current savings of hundreds of dollars per month will be amortized over the overall length of the Tenant’s stay.
During the quarantines, we have seen a major pause in immigration, in local consumer’s confidence to buy, and in municipal approvals of new high rise condo projects. These factors impacting supply and demand have offset each other and have caused the relationship between supply and demand to remain the same, and the shortage of available new GTA condos continues to create a sellers market and puts upward pressure on sale prices.
The available supply of new condos for sale is currently down by 20%, year over year. Immigration is a major factor driving demand. Average immigration was about 250,000 new Canadians annually before the current Federal Government was elected. Now it has been increased to 1.3 million new Canadians over the next three years.
Developers were not able to build enough new homes and condos for GTA residents with 750,000 new Canadians arriving over a 3 year period, so with 1.3 million, demand will certainly drive prices much higher in the midterm. The Bank of Canada expects interest rates to remain at record lows for the midterm, so this factor will also fuel demand for the next 3 to 5 years.
A shortage of zoned residential land, and a slow municipal process to update zoning to residential, creates a shortage in supply. Limited supply and robust demand puts upward pressure on prices, not only to buy the land to build on but for the new condominium apartments as well.
Covid-19 quarantines have also had an effect on construction that will impact pricing. During the quarantines, a dramatic reduction in road traffic allowed excavation and concrete deliveries to increase, and early-stage construction to proceed faster, but had an adverse effect on the finishing stage of high rise construction.
Many finishing tradesmen stayed home, due to the close contact in their jobs and in small construction elevators. The new social distancing rules limited the speed and number of workers that could access buildings with their material and equipment.
So, with faster early-stage construction, and slower later stage construction, there will be a bottleneck effect in labour for new GTA high rise condos. The result of this bottleneck will be a shortage of finishing tradesmen and a rise in the cost of labour. The cost of materials is also expected to continue to rise.
With the change in the US Administration, we should see a cancellation of the 25% tariff on steel and the 10% tariff on aluminium, however, local suppliers are not expected to pass on the savings to Developers. The Federal Carbon Tax has also recently seen a dramatic increase. Since the cost of steel, concrete, glass, and other building materials require a large amount of energy to both be manufactured and delivered to market, the construction industry will continue to see sharp increases in the cost of materials for years to come.
So, when we examine the factors affecting supply and demand and the factors that drive the cost of labour, building materials, and development land, all indicators point to higher prices for new homes and condominium apartments in the midterm.
As I mention in my book, The GTA Affordable Home Ownership Crisis, GTA residents who do not buy today will not be able to afford to buy the same size property, in the same location, in three to five years.
Over the last number of years, housing prices have forced many GTA residents to “drive to affordability” by choosing new low rise properties outside of the GTA. We are now witnessing a similar phenomenon with GTA buyers of Downtown Toronto new condominium apartments. Price points beginning at $1,400 or $1,500 per ft² in 2021 are causing many GTA buyers to choose new condominiums in Mississauga, Vaughan, other 905 area code cities. This is compounded by the loss of rental demand and rental rates that has not been experienced by 905 new condominium apartment Investors.
New condo buyers who can afford downtown Toronto prices, and have the ability to pay a 35% to 50% down payment should buy downtown and will do well. The majority of new condo buyers should focus on Mississauga, Vaughan, and other 905 cities.
No matter your budget, the answer is the same. If GTA residents wish to have financial security for themselves and their children in the future, homeownership and investment is the answer. Buy today because it may not be an option in the near future. You and your family’s financial security is not optional.
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