We recently sold another downtown condo and although we employed our normal service and strategy to attract multiple offers and achieve the highest and best price, I was still surprised to see just how much demand we saw on offer night. I’ve often felt the disconnect between the reported market statistics or the media’s representation of market conditions versus the reality of what I see from the front line. However, this time it really surprised me. The reality and perception of the condo market have never been more extreme. And it made me think about what’s really going on in the condo market…
The headlining story in Toronto of course, is the overall shortage of housing in our city. The housing crisis is real, and I doubt anyone would deny it at this point. And it’s this story alone that makes it easy to tell the supply and demand narrative about stagnant growth of new units and an ever-growing population of new buyers, which, over the long run, I am certain will continue to push the average price chart up and to the right.
But it’s what’s happening in the short term that gave me pause to think… in the face of this desperate need for more housing units to balance the ever-growing population growth, and multiple offers on our resale listings, why has the construction of new units stalled and for the first time in a decade the price for preconstruction inventory has fallen…
Now once upon a time, buyers never had to pay such a premium for preconstruction inventory. In fact, over a decade ago, the time value of money and the risk inherently involved in preconstruction made new inventory cheaper than existing. After all, why would you pay a premium for something you can’t see, touch, or rent for four or five years? But we’ve been discussing this topic on Toronto Realty Blog since its very inception.
On the flip side, investors always tell me they like the timeline between deposit and project completion, as it gives ample time for the project to appreciate before paying the full price for it. And I can see their point sort of; at a certain price it would make sense – but not when you’re buying at prices that are already well above current market value… that’s just called speculation. And don’t get me wrong, there’s nothing wrong with speculation, a lot of people make a lot of money this way, you just must know the risks.
But I started to suspect that this price differential had something to do with what we’re seeing in the market right now and sure enough, upon taking a deeper dive into the stats, I discovered that we are now seeing the largest delta between existing condo inventory and preconstruction in the history of our Toronto.
The average price per square foot for an existing unit is roughly 68% of the price per square foot for preconstruction, which really creates quite a dichotomy. For all those Torontonians on a budget in need of housing or just looking to get on the property ladder, the resale market is the logical place to look. Yes, you may face competition, but relative to preconstruction you’re still getting a sweetheart deal.
There are not many in this demographic that would look to buy preconstruction at today’s prices, and this end-user demand for housing is much more price inelastic than speculators or so-called investors. Quite simply, everyone needs a place to call home regardless of interest rates or the general economic environment.
So, while we might be reading about some doom and gloom on preconstruction sales and prices, the (cheaper) resale market is still showing signs of strength. And this explains what we continue to see on our offer nights; multiple buyers looking for a downtown place to call home, while simultaneously explaining the slowdown in the preconstruction segment. They are two very different markets right now… more different than ever before.
As I mentioned over a long enough time horizon, I believe both markets will continue to rise in price due to the overarching demand and supply imbalance. But in the short term, one of two things will become true to create more balance between the two sectors of the market; either the price of pre-construction inventory needs to drop substantially, or the price of existing inventory will rise substantially, or some combination of both.
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