Condos have always been considered affordable for homebuyers under 35. Those living in a downtown condo find their commute to work simpler, and as first-time buyers, the smaller footprint of a condo is more appealing than a larger home in suburban areas. However, first-time buyers don’t plan to live in a condo forever.
With the Bank of Canada increasing interest rates and the once scorching real estate market beginning to cool (in some areas more quickly than others), what does that mean for condo prices?
Back to Normal?
During the pandemic, while people were working from home, many migrated out of the city into less urban areas. As people spent most of their time at home, they moved out of the city to find a more affordable cost of living and get more housing space for their money. With the worst of the pandemic hopefully behind employers and us recalling a large portion of their workforce back into the office, more people are returning to the city.
Immigration
The number of immigrants coming to Canada is returning to pre-pandemic numbers. As a lot of immigrants choose to live in high-density cities like Toronto and Vancouver, developers are building up instead of out. Condos are becoming a scorching commodity. There is a high demand for condos, but the construction of condos takes time, which drives down availability. In 2022, condos will be an excellent choice for investment property.
The government estimates that 410,000 immigrants come to Canada yearly. Many will rent for three to four years before settling into home ownership. Owners who have condos will have no shortage of renters for their property. In Toronto, there is some expectation that the ratio of owners to renters will shift from 70:30 to 35:65. Additionally, according to Benjamin Tal, the deputy chief economist for CIBC, there is a rise in gifting by almost 30%. This means parents are giving their children either the total amount or partial amount of a down payment so those kids can get into the market.
Investors Sweeping the Condo Real Estate Market
As investors see these trends, the push to purchase condos will be challenging, but the risk is being felt by some investors who bought pre-pandemic and are now feeling the pinch and trying to pass on higher costs to those tenants. The Bank of Montreal says that the high cost of home prices isn’t actually due to a shortage but instead due to the disappearance of investors that had previously influenced the demand. It’s possible to see investors selling their properties, hoping to retain any gains before prices fall to pre-pandemic levels.
The Liberal-NDP coalition has some policies that will not only increase housing development but remove barriers for those wanting to enter the market. This includes funding to help municipalities build housing faster, a Homebuyers Bill of Rights, and to ensure housing is available within 12 months of agreements. While in April, the Trudeau government stated they wanted to quash foreign investors from taking up Canada’s real estate, according to the Canadian Housing Statistics Program, in many Canadian cities, 0% of condos built since 2016 have gone to end-users. Time and again, end-users cannot compete with investors for condos, which are by and large considered the affordable option for home ownership. Real Estate Investors have often been blamed for the increase in housing prices over the last year. However, even with the large volumes of condos being purchased, many economists have not been able to prove the investor effect on pricing. Bank of Canada spokesman Alex Paterson said, “Determining the precise level at which investor activity should be a cause for concern is difficult and requires further study.”
With all these factors considered, the condo market, according to Rob Kavcic, senior economist at BMO Capital, is not yet out of the pricing woods. Sharp corrections in the market are still possible, resulting in a significant drop in pricing. But Kavcic adds that as condos did not see the rapid increase in pricing as single dwelling homes did, they do not have as far to fall.