Bright signs in the sluggish condo market

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Bank of Canada’s interest rate cut is a sign of optimism

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The Greater Toronto Area condo market has been unusually quiet this spring, and despite the Bank of Canada cutting interest rates on June 5, the market is not expected to recover anytime soon.

According to the Construction Industry and Land Development Association (BILD), there were 518 apartment sales in the GTA in April, down 64% from a year ago and 75% below the average over the past 10 years.

The Plaza Corporation, a major high-rise developer in downtown Toronto, is part of a larger group of developers avoiding the city center.

Plaza Chief Operating Officer Scott McClellan said the 0.25 percentage point central bank cut won’t change the situation, with overnight lending rates currently at 4.75%.

“There’s pent-up demand and a housing shortage, so there’s a lot of value to be gained from demand-based appreciation, which is what’s driving the investor market,” McClellan said.

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“But to get a mortgage that would allow that, the central bank interest rate would probably have to be 3-3.5%.”

The slowdown in activity in the high-rise sector isn’t just down to the current interest rate environment — McClellan blames it on city taxes paid by developers, too.

“Construction costs in central Toronto are still enormous and certainly prices need to come down to give buyers peace of mind, but a lot needs to happen for developers to get below $1,600-1,700 per square foot,” McClellan added.

He wants to eliminate the HST and lower development fees. “We need a presale to start construction because that’s the only way we can get a construction loan, but the lender has rules we have to follow and the city is levying us $220,000 in development fees, HST, parkland donations, community benefits, etc.”

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Isaac Quan, managing broker at Living Realty Downtown, said downtown apartment listings, which have been on the rise this year, aren’t attracting investors because maintenance costs wipe out any profits, even though rents can exceed $3,000 a month.

“At current interest rates, people are losing money and are cash flow negative,” he said. “Before the 2022 rate hikes, investors were losing hundreds of dollars a month. Now they’re losing thousands. The math just doesn’t add up.”

According to Quan, renting out a 550-square-foot, one-bedroom apartment in downtown Toronto could earn an investor $2,500 per month in rental income, but the maintenance costs could reach $3,200 — a significant sum considering that before the first of 10 rate hikes in March 2022, the monthly mortgage burden was $2,600.

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“In some cases, losses are around $1,200 per month,” Quan said. “Investors can only hold out for so long.”

Still, the Bank of Canada’s rate cut is an early sign of optimism because it should restore consumer confidence in the market, said Justin Sherwood, senior vice president of communications at Bild.

While a single rate cut rarely creates a trend, the Bank of Canada’s next policy rate announcement is on July 24, and a further 25 or even 50 basis points in overnight lending rates should spark a flurry of high-rise buyers, Sherwood said.

“It will be some time before we see any real activity in the market, but we may start to see pre-construction sales pick up. [after the June 5 announcement] “Because it’s a sale on paper and the buyer knows it won’t close right away,” he said.

“Other banks will be a bit more cautious and will want one or two more rate cuts before they feel comfortable that the trajectory of interest rates is definitely declining.”

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