High borrowing costs, record completions lead to condo oversupply

A report by TD economist Rishi Sondhi said sales activity hasn’t been absorbing supply fast enough, with July condo resales in the GTA down 25% from pre-pandemic levels.

Sondhi said the trend is tied to factors such as a wave of newly built condos hitting the market, elevated borrowing rates that have made it difficult for some buyers to close on their mortgages, and investors looking to sell properties as declining rents and negative cash flow make them unprofitable.

“The relatively elevated interest rate backdrop means that the gap between the rate of return from a condo in the GTA … and from a risk-free’ government bond has narrowed,” he said in the Sept. 5 report.

“This may have reduced the incentive to hold a condo as an investment, although the recent drop in yields could be helping to re-widen this spread.”

Condo completions in the GTA

Sondhi’s report showed there were around 19,000 condo completions in the region between January and July of this year, up from about 12,000 during the same seven-month period in 2023 and 10,000 the year before.

The pace suggests this year could see “record high” condo completions in the GTA, said Brendon Cowans, a sales representative for Toronto-based brokerages Property.ca.

“You can just imagine all of this supply coming in a high interest rate environment. It’s not a lovely combination,” he said.

Active condo listings across the GTA were up 63.9% in July from the same month last year, growing from 5,416 to 8,879, according to data from real estate firm Zoocasa. The City of Toronto has seen a similar jump, with active condo listings increasing year-over-year by 61.5% in the same period.

What’s happening in other major cities?

Although the GTA leads the country in active listings gains, the trend is in line with other major cities across Canada. Year-over-year active condo listings rose more than 40% in London, Hamilton-Burlington, Mississauga and Ottawa in Ontario, as well as Vancouver. Montreal and Calgary each saw growth of about 23%.

Zoocasa said that as interest rates have increased over the past three years, the cost of holding onto investment properties, like condos, has also increased.

“Some of the carrying costs for these properties, especially people who bought within the last five years and were on variable rates, they saw the carrying costs shoot through the roof,” said Cowans.

The impact on condo prices in the GTA

For buyers, however, the influx of supply has meant more favourable prices. Condo prices fell 2% year-over-year in July across the GTA, according to Zoocasa, compared with a 1% decrease for townhouses and a 0.1% decrease for detached properties.

Condo prices in the region have also declined by around 5% since the third quarter of last year, said Sondhi, who predicted a “gradual recovery” for sales as supply and demand become more balanced.

He forecasts that condo resale prices could decline by mid-to-high single-digits through the early part of next year.

“There are risks to the near-term condo price outlook on both sides,” he noted in the report.

“On the downside, the wave of condos slated for completion will continue to add to supply. On the upside, condo sales could react more aggressively to falling rates than what we’ve assumed, or investors could yank their properties off the market, tightening conditions at a faster-than-anticipated rate.”

What role will interest rates play?

Earlier this month, the Bank of Canada cut its key lending rate by a quarter-percentage point to 4.25%. While that marked the bank’s third straight cut, governor Tiff Macklem cautioned it may adjust the pace of those reductions this year as conditions warrant.

Sondhi said interest rates will likely remain “relatively elevated” into 2025 amid continued affordability challenges, thus holding back activity.

Others are more optimistic things could turn around sooner.

Debbie Cosic, founder and CEO of In2ition Realty, said she believes oversupply conditions are temporary.

“We’re expecting next year to be a very strong year because we believe interest rates will continue downward,” she said.

For buyers, she said now is the time to lock in a purchase and take advantage of incentives being offered.

“We believe the oversupply is coming from the public just standing back to see when the market hits rock bottom,” said Cosic.

“We believe it’s hit rock bottom.”

Here is the current state of interest rates on mortgages in Canada right now:

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What the future holds for the GTA condo market

Cowans said the number of rate cuts by the Bank of Canada over the next year and a half will be key to the equation.

He said with condo completions projected to slow over the next few years, sales could rebound over the longer term.

“I do see things picking back up in the future. I don’t expect it to be super fast,” he said.

“I can anticipate increases as more rate cuts continue to happen … and in 2027 I just think it’s going to be madness. If people can hold on for the next two years, even three, it’s going to be a drastically different story.”

Read more about buying a home:

• Is this a good time to buy a home in Canada?
• Mortgage payments going up at renewal? Here’s what to do
• How much income do I need to qualify for a mortgage in Canada?
• Can you use the FHSA and HBP together?

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