Canadian Real Estate Faces The Worst Market Since 90s Recession: CIBC

Canadian real estate is facing some of the worst market conditions in decades. That was the take in CIBC’s latest research paper, which warns investment has disappeared from the market. The problem is amplified in the Greater Toronto condo market, where investors represent over two-thirds of buyers. Complicating the issue further is a weak condo resale market, where inventory is rising and prices are falling, softening demand for new construction even further.  

Canadian Real Estate Markets Face The Worst Conditions Since 1991

Canada’s per-capita recession is worse than most people may have noticed. The bank notes this decline began in mid-2022, and it’s just been grinding lower.  “…  at the current pace of decline it’s approaching the pace of declines seen in the 2008 and 1991 recessions,” explains Benjamin Tal, an economist at CIBC. 

He adds, “In fact, it is fair to say that given the current environment, the Canadian housing market in general and the GTA market in particular are facing the most significant test since the 1991 recession.”   

Investors Are Most of Toronto’s Condo Demand & They Aren’t Buying

Greater Toronto real estate is essentially split into two very different markets—low rise and condos. The low rise market has been fairly active, and the adoption of broad upzoning helped to inflate land value since excess zoning increases values, even if it’s not being used. The condo market has been another story. 

“[The condo market] is clearly in recessionary territory with 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,” says Tal. 

Higher interest rates, a weak economy, and stagnating prices aren’t exactly a prime investment environment. Many were buying negative cashflow units, topping up rents to cover mortgage payments and banking solely on appreciation. Stagnating prices kill that option, while elevated mortgage rates make it more difficult to ride out any downturn.  

Canadian Real Estate Markets Are So Inefficient, Developers Just Can’t Build At Lower Prices

Typically in a frothy market like this, developers would lower their prices until end-users step in. However, the gap between what end-users can pay and what investors were paying is just too wide to close. The mantra of policymakers is to just build more to bring down prices, but that’s impossible. 

Developers still face elevated building costs and don’t have much wiggle room. Despite soft sales and some of the weakest demand on record, new condo prices have only dropped 5% from the peak. 

“The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill,” Tal explains. 

“As a result, new condo sales — the primary driver of new home construction in Canada’s largest market — have dove off a cliff to their lowest level since the late 1990s.” 

Source: Urbanation, CIBC, CREA

Tal warns the share of pre-construction condos that are pre-sold is currently less than 50%, a 20-year low. Projects require at least 70% pre-sold to begin construction, so the slowdown will throttle construction further. 

Compounding the issue is the existing home glut for condo apartments. TRREB reported some of the worst sales on record, and inventory is reaching a level rarely observed. As a result, condo resale prices corrected by 12%, providing even less incentive to buy a new condo. Predictably, the number of units has fallen dramatically in the past few months. 

“For condo investment to regain its appeal, we have to wait for resale prices and rents to rise faster, and interest rates to decline more significantly,” explains Tal. 

He continues on to note that until this occurs, the incentive to build will fall further. He further warns this can exacerbate the affordability crisis, making it significantly worse. 

The real estate industry and policymakers often state that building more housing will lower prices. However, there’s no way to build more housing when prices drop. Funny how that works. No wonder the CMHC only discusses that issue in private.

19 Comments

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  • Ron Bruce 3 months ago

    “Greater Toronto condo market, where investors represent over two-thirds of buyers.” Investors and developers are reaping what they sow while affordability for the average family is still nowhere in sight. Banks are becoming more like Casinos, hoping buyers still need financing at any price. Place your bets, folks, and play by the house rules.

    • GERALD 3 months ago

      You are right 100%. How is this analyst say the current market condition will cause higher affordability problems. In fact the present prices will have to come way down for affordability to improve.

  • Christopher 3 months ago

    I didn’t know the Toronto market was the only market in Canada! There is still plenty of active markets in Canada at a much lower investment point. Toronto and Vancouver have been highly overvalued for years. The money is moving elsewhere

  • Sharon Sommerville 3 months ago

    Perhaps builders should build a product that the market wants at a price that people can afford. What a concept. After WWII, thousands of two bedroom brick bungalows were built across Toronto. They are still standing and providing housing for average people. Building for investors? Today’s condo market decline is to be expected based on the real estate market cycle. No sympathy here.

  • Franz 3 months ago

    It would be great to know the make up of these investors. For instance, what percentage of them are private investors who leveraged their existing property value as it skyrocketed over the previous decade? My lawyer told me several years ago that he bought a number of condos as investment. He owns a property in an area that had seen upwards of 200% appreciate over the prior decade.

    If the incidence of private investors like this is high, it would seem implicate the broader housing market. How much negative cash flow can these people carry before they have to liquidate?

  • Alan Dee 3 months ago

    ***
    “For condo investment to regain its appeal, we have to wait for resale prices and rents to rise faster, and interest rates to decline more significantly,” explains Tal.

    He continues on to note that until this occurs, the incentive to build will fall further. He further warns this can exacerbate the affordability crisis, making it significantly worse.
    ***

    … The prior two paragraphs suggest that, unless condo prices rise and become less affordable, they will not be built and will thus become less affordable …

    • Trader Jim 3 months ago

      As crazy as that sounds, that was the bank and CMHC’s logic. If you have a moment, check out the last link. He wrote about how the industry pivoted from “more supply will bring down prices” to “we can’t build.”

  • dave frazer 3 months ago

    Condo price falls always affect single family values. Condos crash first, single family later. Many buyers or investors need to sell their condos to trade up to single family housing. Investors needing cash flow will sell condos or houses to keep afloat and many are now getting squeezed. Changes in interest rates will do little if values are falling.
    Buyers will just opt out, if they think property will be cheaper tomorrow. By now everyone is aware of the coming crash so buyers are few and far between, regardless of Real Estate agencies propaganda. When will it bottom out could be 12 months maybe 60 months who knows but it is going down probably quite sharply.

  • Chris 3 months ago

    Not only are Condos way to expensive you are also paying another mortgage with the Condo Fees. Some are as high as $1000 per month, which is insane!!

    • Mortgage Guy 3 months ago

      Condo fees are insane these days but mostly because of insurance premiums. The cost of replacing this stuff gets more expensive as more building occurs, especially when the government pays developers to build when it’s not cost effective.

  • A Person 3 months ago

    We’re gonna need a bigger boat…

  • Aryan 3 months ago

    The other important reason why investors are not buying because of broken Landlord and Tenant board. Buyer has no rights in front of professional tenants . Fear of loosing money and house also driving investors away from market.

    • Rat 3 months ago

      Bingo!
      Land load and tenant board has been discriminated and criminalized the investors for three decades; LTD board break the basic human trade rules and morality – payment for getting promises. Now, investors certainly don’t trust nobody and the social decay and riots coming next.
      That’s is bigger than the condo market issue!

  • Immigrant 3 months ago

    Inflation caused by free COVID money and uncontrolled insane immigration.

  • Paul 3 months ago

    What nobody in this comment section or the article mention is that development fees and taxes are now 30% of the price if the condo. How does the developer reduce prices with this burden?

  • Waldron Fazekas 3 months ago

    The system has been broken since way before the 90s

  • [email protected] 3 months ago

    The banks know. They catered to foreign students and investors for 20years. Now that business has LEFT FOR THE CHEAPER USA housing markets. GAME OVER FOR CANADA FOR THE NEXT 20 YEARS.

  • Michelle 3 months ago

    Another reason people don’t want to purchase condos – whether you are single or have a very small family – is that the condo space is EXTREMELY small. My past 2-bedroom condo, which was in an old building was very spacious. You are lucky if you can put a full bedroom set in a room […you step in, you step out] while the kitchen, dining room, and living room are all combined in a little bit of space. The recent condo buildings are not worth the investment at all anymore (on top of the condo fees).

  • Nobody 3 months ago

    I own 5 properties. I came as an immigrant 20 years ago. I have a decent job, but nothing outrageously amazing. I am single and make all decisions by myself. I had about 200k saved in 2013, when I started investing. I chose properties around Ontario, which made financial sense. Rented them immediately and could get mortgages for the next one in a while. One condo, two townhouses and two 50s bungalows. 6 years down the road managed to sell the condo and bought a future single 2 story in Barrie. Being a landlord, I had my share of interaction with the LTB. But managed to survive so far. Lately, I figured this is unsustainable. To pay a permit to renovate your onw property? And to be told when you can do that? But at the same time provide the best conditions and upkeep the place to latest codes? Ridiculous. The latest condo fee increases are way higher than the LTB allowed increases. So, I am selling and getting out. I will keep the two old bungalows as they are sustainable. And Ontario can keep digging itself into the whole- blaming everyone else, but not the policy makers. Cheers!

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