If you’re looking to buy a new construction home in the Greater Toronto Area right now, you might run into a lack of standing inventory.
Still, that doesn’t appear to be slowing down motivated purchasers just yet as investors and end-users — those who intend to live in their pre-construction property — transact in this year’s busy marketplace.
The GTA’s pre-construction market is in short supply of inventory. According to the latest information from the Building Industry and Land Development Association (BILD), remaining inventory for single-family homes dropped to a record-low of 550 units in January, well below the 15,000-plus units on average for the 2000 to 2009 period.
Condo inventory increased slightly compared to the previous month up to 8,333 units, which equals just 2.9 months of inventory based on average sales for the last 12 months. Meanwhile, a record 2,274 new condominium apartment units were bought in January, the highest number of new homes sold in the month of January in 19 years.
“I would say in my career of nine years being active in the pre-construction space, this is probably the period of lowest standing inventory that I’ve ever seen, maybe only rivaled by 2016 and 2017 when the resale condo market ran really aggressively and then all of that inventory from previous launches was absorbed by the market,” said Jordon Scrinko, founder of Precondo and a sales representative with Cloud Realty Brokerage, who mentioned that there’s “no question,” that there are more active buyers.
Scrinko explains that it has been “incredibly difficult,” to find inventory in projects that launched a year or more ago that isn’t above the $1 million mark, an attractive price range for end-users and investors. As a result, pre-construction purchasers can find themselves competing in new launches and worksheet lotteries where there may be far more applicants than the number of units available in a development.
“As a new investor or even an end-user looking to get into pre-construction specially below that $1 million mark, there’s almost no standing inventory, and so they’re kind of relegated to doing new launches,” said Scrinko.
While low inventory may be on people’s minds now, investor outlooks don’t fluctuate often with respect to different market cycles and trends, said Simon S. Mass, CEO of The Condo Store.
Although the current situation may reflect shallow inventory levels, this could change in the near future with respect to reporting on inventory as news, Mass said. While a minor increase in investors into the market could be a source of higher activity and lower inventory, experienced investors can navigate these conditions.
“Activity levels tend not to stray from a consistent plan within each investors’ portfolio, however, what you are seeing is a small uptick in the quantity of investors entering the space,” he said. “So that alone could lead to the low inventory and higher activity numbers, but an experienced savvy investor will manage the circumstance — not overextend to projects that don’t fit their criteria because interest rates are low currently, or other specific situations.”
Resale challenges push end-users into pre-construction
With the average price of a resale Toronto home now well over $1.3 million, it’s no surprise that buyers are looking for other options.
Scrinko notes that more end-users are getting into pre-construction. Typically, 60 to 80 per cent of pre-construction purchases are investors, but Scrinko says that last year, his team experienced the highest percentage of end-users they’ve ever sold pre-construction to. In 2022, this trend is continuing to play out.
“What we’re seeing for downtown is more end-users than we would normally see because the resale market has literally no inventory. There’s less than one month of inventory in the resale market, which is the lowest it’s been in years,” said Scrinko. “And so a lot of end-users are just purchasing pre-construction instead.”
The percentage of end-users versus investors varies by product type. Some projects may be made up of 80 to 90 per cent of investor buyers, while other developments could gain 90 per cent end-users. Scrinko also notes that there isn’t just one type of end-user. Some are upsizers, downsizers or first-time home buyers who are getting financial support from their parents.
“With the pricing you are seeing in the resale segment, it only makes sense that buyers would look for a better option, and pre-construction is a totally different asset that is getting much more attention recently, and rightfully so from our perspective,” said Mass.
“You are seeing more of everything in the sector, whether that is a first-time investor or end-users. There is no doubt that the experience is different and one that people — once into the process — find very smooth and consistent, which creates repeat buyers,” he added.
Investors look to suburban markets, newer neighbourhoods
When it comes to investing in real estate, Canadians are generally feeling optimistic this year.
A recent global survey conducted by Finder.com with 1,200 Canadian users found that 28 per cent of participants considered property to be the second-best performing investment in 2022. This is only a few points below holding onto assets such as cash (33 per cent), and ranks higher than cryptocurrency (15 per cent) and stocks or shares (11 per cent).
For investors looking to make moves in the pre-construction market, Mass explains that gentrified and newer neighbourhoods are hot right now as these areas are seeing lots of building activity and higher return percentages. At The Condo Store, analysts are particularly drawn to opportunities in Toronto’s Junction neighbourhood, The Queensway and Oakville.
A lot of investors, especially first-timers, are focused on the suburban condo markets like Hamilton, Scarborough and Kitchener, said Scrinko. Part of this is due to downtown rental prices that have suffered lately. Condos in the suburbs that have a lower price per square foot compared to their downtown counterparts are likely to have better cash flow down the line. The urban exodus movement, which has seen residents migrate to the outskirts of the GTA, is another factor capturing investors attention.
“I think the urban exodus is a huge part of it as that sentiment shifts has resulted in a lot of investors looking [in the] outskirts,” said Scrinko. “A lot of people just want to invest in whatever the hottest performing segment of the market is, and right now that is the 905s, not the 416s, but we’re starting to see a shift now. Downtown condos are really running in the past two or three months.”
Demand for pre-construction could drive building boom
With an increase in pre-construction buyers, Mass said that this will allow more projects to come online in response to demand, which will also ensure that there are a “steady number,” of rental units in Toronto.
In a staff analytical note published in January, the Bank of Canada stated that investors have made up nearly 20 per cent of mortgaged home purchases since 2014. The share of purchases by investors grew in 2017 and 2021, with investors accounting for 21 per cent of purchases made in Toronto.
“[That] 20 per cent has an important part to play in the overall ecosystem as the source of rental properties,” said Mass. “It could increase in the short term but will regress to its long term mean over time — whatever the right amount is for the market to work, that’s where it will be.”
With local elections on the way and the findings of Ontario’s Housing Affordability Task Force report now out, there is a lot of attention being paid to the province’s supply of new housing. After developers opted to hold off on launches in 2021 and 2020 due to market uncertainty, Scrinko says that a lot of that inventory is coming online now. It’s important for pre-construction buyer appetite to be present because without pre-construction launches selling relatively quickly, this could delay construction starts that would ultimately deliver new housing.
“And so, I think over a long period of time, it helps housing supply if there are a lot of people looking at pre-construction as a viable option and not just investors, because it allows us to get more housing starts started,” said Scrinko.
