Resale values in Canadian cities stagnate as prices for other types of housing surge
Until recently, a condominium apartment in Toronto was a near-foolproof investment. And then came March 2020, and COVID-19.
Since the start of the pandemic, resale condos in Toronto and other Canadian cities have tended to stagnate in value, even as prices of other housing types have stabilized or surged. As the year ends, and with post-pandemic life in sight, real estate watchers are wondering: what will it take for condo markets to return to normal?
There are a few prevailing theories as to why many of Canada's urban condo markets have struggled during the pandemic. All of these theories revolve around the ways COVID-19 has changed life in cities.
The collapse of the short-term rental market is one likely culprit.
“People had these investment properties that they were renting out as ghost hotels on Airbnb,” says Scott Ingram, a Toronto real estate agent. “And then all of sudden the pandemic happens and their revenue goes to zero. Then you get a flood of long-term rentals.”
While long-term rental supply was increasing, virus-related travel restrictions were decimating immigration to Canada, diminishing the pool of potential tenants.
And then there was the workfrom-home factor, which may have caused some downtown dwellers to rethink plans to live, or continue living, in tiny apartments. In Ontario, as of 2017, the median size of a newly built condo apartment was just 665 square feet.
Canada's condo markets have been affected in different ways. In Vancouver, November's modest condo price increases were outshone by detached homes, which notched double-digit percentage year-over-year gains. In Montreal, condo sales volumes and median prices this fall have actually outpaced 2019, but single-family homes have been appreciating in value much more quickly. In Calgary, condos posted a year-overyear decline in average resale value in November, even as the prices of semis and detached homes climbed.
But no Canadian condo market has felt the effects of the pandemic more sharply than that of Toronto. The toll of the virus is best explained in terms of “months of inventory” — a measurement of the number of months it would take to sell every condo currently on the market, if the current number of buyers were to remain the same.
For four years, beginning in 2016, the Toronto resale condo market was chronically undersupplied. The availability of resale condos bottomed out in March 2017, at 0.6 months of inventory. For the next few years, Toronto almost never had more than two months of condo inventory. But all that changed in April, the first full month after the onset of the pandemic. The city's condo market instantly accumulated nearly four months of inventory, as listings increased. At the end of November, new listings continued to outstrip demand.
The buildup in inventory has been particularly significant in Toronto's downtown, where condo apartment supply, as of the end of November, was higher than the city average, at 4.7 months of inventory. The average resale price of a condo in the core was down nearly eight per cent, year-overyear. Citywide, average condo prices were down three per cent, even as other housing types made impressive gains. For instance, in the city's 905 suburbs, where housing markets have been especially buoyant this fall, the average price of a detached home was up 19.2 per cent, year-over-year.
If the first round of vaccines is widespread and effective enough to stop all the COVID-19 related headwinds from blowing, it's likely, some argue, that urban Canada's resale condo markets will stop lagging other types of housing.
“Once things go back to normal and you're not so nervous to be in an elevator with someone, I can't see how this trend isn't going to reverse itself,” says Shaun Cathcart, senior economist at the Canadian Real Estate Association.
Cathcart also points out that the current condo situation only looks dire in comparison to the heated condo-market conditions of early 2020. “We were looking at the tightest market conditions almost ever,” he says. “There's a lot of runway for those conditions to unwind before they become problematic.”
The Toronto condo market may have been particularly vulnerable because of its high levels of investor activity. A 2018 analysis by the real estate research firm Urbanation found that 48 per cent of newly completed condo units in the Greater Toronto Area were sold to people who intended to hold them as investments and rent them out, rather than live in them.
John Pasalis, president of Realosophy Realty, has noticed signs that investors are already beginning to return to the Toronto condo market. “We've seen a big turnaround in the past six weeks or so,” he says. “Big demand and interest from investors who are looking at the decline in prices in the downtown core and seeing that as a buying opportunity. Condos that were sitting on the market for a while are suddenly selling really quickly.”
Royal Lepage expects Toronto condo prices to eke out 0.5 per cent gains in 2021, compared to a 5.75 per cent average gain across the city's different property segments. Condos are also expected to underperform other segments in Vancouver and Montreal.
“The huge baby boomer demographic began post-children migration to suburban and recreational-style communities in the middle of the last decade, and material numbers of the equally populous millennial generation have been exiting city centre condos in search of space as they began families,” Phil Soper, CEO of Royal Lepage, said in a Dec. 14 forecast.
Immigration will be a key determining factor in whether condos remain an attractive investment in 2021 and beyond. The federal government has announced that it intends to admit more than 400,000 new permanent residents in each of the next three years, which would be the highest annual figures in more than a century. Flows of temporary residents, including international students, are also expected to increase.
“The resumption of immigration-based population growth will be important for two reasons,” says Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board. “Number one, the condominium apartment market is the starting point for a lot of immigrant households. Number two, immigration also drives demand for rentals.”
Carmin Di Fiore, executive vice-president of the debt and structured finance group at CBRE Group Inc., likewise expects condo investment to rise in tandem with immigration after lockdown restrictions begin to ease. But he cautions that condo developers may need to hedge their bets by catering more to end users, who prefer larger units — as opposed to investors, who prefer smaller ones.
“The pandemic has altered people's perspectives,” he says. “A 400-square-foot condo is actually quite a restrictive form when they're working from home or locked down. That may cause a developer to go back to the drawing board and change the product mix to create a better sales pro forma.”
Luring end-users back to downtown condo buildings in future years could require more than simply making floor plans a little bigger. Jim Ritchie, executive vice-president of sales and marketing at the housing developer Tridel Corp., said his company is already devising ways of making new condos more amenable to work-from-home lifestyles. “We recognize that more people will work from home,” he says. “We need to create space within the suite design that can accommodate that. And in addition to that we're looking at virtual conferencing rooms that would make up part of the common areas.”
At this time of great uncertainty, at least this much is clear: COVID vaccines alone can't return Canada's condo markets to normalcy. But they probably won't hurt.
Once things go back to normal and you're not so nervous to be in an elevator with someone, I can't see how this trend isn't going to reverse itself.