What an eye-catching headline! Although that headline is true, this is not as alarming as you may think. The sky is not falling. We’ve had record years in the condo market for the last 4 years with over 10% growth in prices. That type of growth rate is simply not sustainable. It’s great that we are levelling off and stabilizing now.
The Numbers are IN! – Here are the numbers from Urbanation, take a look at the graph below.
I’ve circled in red the difference in sales that we experienced from 2017 to 2018 (I know, it’s a ridiculous drop off, isn’t it?!). Again, most of that was due to the foreign buyer tax and the mortgage stress test that we got hit with in the last 2 years. Although the 42% drop off is a catchy headline, we actually just reverted back to our 10-year average in the range of 20,000 new condo sales – you can see that with the green line that I put across the graph below for you.
The Healthy Green Line – Given the green 10-year average line, the results for 2018 are actually relatively healthy in contrast to what the headlines may indicate. 2017 was simply a ridiculous record-breaking year for pre-construction condos. We are now back to more “normal” growth rates.
Thinking Pre-Con? Anyone who is looking to buy pre-construction for investment purposes and is banking on appreciation alone should ought to reconsider. If that sounds like you, then make sure you do your due diligence on the project to ensure that it will cash flow and your investment will have the capability to carry itself upon completion.
In an article that I wrote in December of 2018, I outlined how you can profit from the biggest price gap between pre-construction condos and resale condos. This continues to apply in 2019. The link to that article can be found HERE.
Absorbing Available Units – Remember, sales in pre-construction are dictated by the builder and when they release their inventory. It is much more controlled than the resale market whereby each individual owner puts their property on MLS (via a Realtor). So with pre-construction condos, it is often very important to look at absorption rates. I’ve broken out the sales volumes and absorption rates from the last 3 years below.
Rest Easy, We’re Stable Now – The absorption rate in 2018 for pre-construction condos is significantly lower in 2018 (i.e., 16% less). In other words, for every 100 condos available to be purchased from a builder, 16 more are not sold relative to 2017. However, as with most numbers and stats, it’s all relative. The 10-year average for sales volume and absorption rate is 20,493 and 58%, relatively. The sales volume in 2018 was slightly lower than the 10-year average (20,028 vs 20,493) while the absorption rate in 2018 was slightly higher than the 10-year average (68% vs 58%). So you can rest easy – the sky isn’t falling, just stabilizing!
Pre-Construction Pricing – If you read the article in the link above, “How to Profit from the Biggest Price Gap in Years”, you’ll see how quickly pre-construction condo prices have jumped in the past 2 years. There are a ton of reasons why the prices have gone up in recent years but for the first time in Q4 2018, the prices have stayed put (only up about 0.4%). This means that we’re at about the cusp of pricing for pre-construction condos.
Below is a chart to show you the rate of growth for pre-construction condos, resale and condo rents over a two year price period. The sole purpose of this chart is to show you the correlated growth rates that I monitor in the condo market. These categories are independent of one another, but you can see why I have been steering many clients away from pre-construction investment in the last few years, UNLESS it was absolutely a home run type of project.
- 19% price increase in condo rents is ridiculous – that’s 9.5% per year. The normal rate should be roughly 3-5%.
- 35% price increase in resale condos is also ridiculous – that’s 17.5% per year. The normal rate in this category should be approximately 3-5%.
- 56% price increase in pre-construction condos is just absolutely, ridiculously nuts!! Need I say more?
The Shock Effect – There are many reasons why the price of pre-construction condos have jumped by so much. I’ve written a ton about city permit delays, Toronto secretly doubling the development charges overnight, land acquisition costs, labour and material costs, etc. So as a result of all of these things that have happened, the spike in pre-construction condo prices should not be a total surprise and hence, why a 42% drop off in sales should not be a shocker either.
The Wrap – Similar to most sectors in the real estate market, the number of transactions have dropped but the prices have stabilized. I don’t anticipate that prices will continue to fall, but rather I believe they will stagnate. Every sector of the market is behaving quite differently now, so if you plan to make a real estate move in 2019, make sure you are equipped with the proper knowledge along with the guidance of our team who keeps a close eye on these matters on a daily basis. Contact us today to see how we can help.