The Biggest Risk In Canada's Economy Right Now
The condo market, which is clearly in recessionary territory, has conditions deteriorating to levels not seen in decades. What makes the situation more challenging is the role of investors in the presale market, which have made up to 70% or more of buyers. So in today’s episode, your hosts Daniel Foch and Nick Hill attempts to answer several questions in relations to the challenges for pre-construction and resale condos in several Canadian markets.
Key Takeaways:
The Canadian condo market, particularly in the Greater Toronto Area (GTA), is facing significant challenges, with pre-construction and resale condos being hit the hardest. The market is in a recessionary state, with sales plummeting to the lowest recorded levels since the 1990s.
The current market downturn is being compared to the 1990s recession, which saw high unemployment, reduced consumer confidence, and significant declines in real estate prices. The recovery from that recession took several years, raising concerns about a similar prolonged recovery period today.
With the sharp decline in pre-construction condo sales, there are concerns about a future shortage of new condos. This could lead to a significant drop in residential construction activity in the coming years, which would further strain the housing market and potentially prolong economic recovery.
There's a significant gap between the prices of new and resale condos, with new condos being almost 60% more expensive. This is 20 percentage points above the usual difference, indicating a distorted market where new condos are overpriced relative to existing ones.
Investment in both newly completed and resale condos for rental purposes has sharply declined. In 2023, 34% of new condos were rented out, dropping to 25% in early 2024. Similarly, only 2% of resale condos were rented out in early 2024, down from 10% in 2023. This trend is driven by high mortgage rates making rentals less financially viable.
A significant majority of condo investors with mortgages are experiencing negative cash flow. In 2023, 77% of leveraged investors were cash flow negative, a sharp increase from 52% in 2022. The situation worsened in the first half of 2024, with 81% of leveraged investors being cash flow negative.
On average, condo investors who closed on units in 2023 faced a monthly negative cash flow of about $600, more than double the losses seen in 2022. This worsening financial strain is a critical concern, as it limits investors' ability to spend elsewhere, potentially slowing broader economic activity.
It might be more financially sensible to buy resale condos rather than pre-construction units. A resale condo, priced at $1,000 per square foot, would result in significantly lower monthly costs compared to a new condo, which could lead to less severe cash flow issues.
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