Front Burner - Why are so many Toronto condos sitting empty?

Episode Date: August 8, 2024

The condo market in Greater Toronto, whether it’s resale or new, is struggling.According to a recent CIBC Economics study, sales have “have dived off a cliff” to their lowest level since the late 1990s. Some condos in Toronto are now sitting empty for six to seven months, despite an ongoing housing crisis in the country.John Pasalis has been looking into why this is happening. He’s the president of Realosophy, a realty brokerage in Toronto. He’ll talk to us about the road that led to this point…and what can be done about it.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. So I just want to read you a few recent headlines about the Toronto condo market. Here's one from the Toronto Star.

Toronto condo market in recessionary territory. And the Globe and Mail. Just over 80% of new condo investors in Toronto are losing money. Here's the National Post. Has the great Toronto condo boom finally hit a wall? It probably seems really counterintuitive to be hearing so much about condos sitting empty and struggling to sell in Canada's biggest city, while we are in the midst of a housing crisis. to sell in Canada's biggest city. But we are in the midst of a housing crisis. And yet, it's happening. So how come? John Pesalis, president of Realosophy, a realty brokerage in Toronto, is with me today to help explain. We actually started off the interview by looking online at some units that have been sitting near the CBC's downtown office in Toronto.

downtown office in Toronto. Let's start with this one at 55 Mercer Street, which is right downtown. And John, what do you see? I mean, this is just a, you know, studio condo, micro-sized. I think it's under 400 square feet, 370 square feet for, you know, $600,000, which is, you know, of course, an unbelievably high price. I mean, if you're a first-time buyer and thinking my budget is 600,000, you know, how many first-time buyers are looking to buy a studio? So a studio just has no bedrooms. It's just one room. Yeah, I was going to say, I see no bed.

I see only just a couch. The bathroom looks like it takes up, I don't know, half this apartment basically. Exactly, yeah. So I mean, with these types of places, of course, you'd have to have some sort of Murphy bed or a sofa that doubles as a bed. So not ideal living. And just tell me a little bit about the history here. Do we know how long it's been up for sale for? Yeah, so this building actually just recently completed. So it's a relatively new building. It kind of completed basically this year.

It's been on the market, I believe, since February multiple times. Let's take a look at another one. So this one is at 88 Blue Jays Way. This is also right by the Sky Dome or the Rogers Center, I should say. It's up for sale for $475,000. Yeah, I mean, and this is a very good example because this is kind of what I'm talking about. This is around the corner. This is a slightly older building. I mean, it's not an old building, but it was built before that other one was pre-selling. And it's selling for significantly less, $475,000 for roughly the same size unit. And just, again, we've got a pull-out couch here, real bowling alley kind of vibe. Very small, very small.

And I see that they tried to sell, that this sold in 2019, right? Sold for $476. They're basically selling for what they paid for it. So that's basically five years of zero appreciation. And this is why a lot of people are exiting the market right now. Yeah. You could just get more money in a high interest savings account. Exactly.

Okay. So now that we have messed around on Cosigma a little bit, let's get to the interview. John, let's start here. How slow is the market for condos in Toronto right now? How many units are currently sitting like the ones that we just looked at? Just give me a big picture here. So right now, the city of Toronto, I mean, the greater Toronto area in general, is I'd say the slowest it's ever been. I mean, we have a record number of condominiums for sale

and a record for any month in any given year. When we think about how quickly the market's moving, you know, we look at this metric called the months of inventory, which is, well, how long would it take all the existing units to sell if nothing else kind of hit the market? And we're roughly about, you know, close to six to seven months, which is very high. You know, we're closer to usually around three or four months. So a lot of inventory, and that's just driven by a lot of people selling and not a lot of people buying right now. And so some people might be listening to this, and they might be surprised to hear that, considering literally all that we have heard for the last many, many years is that there is not enough housing being built for people to buy and people to live in. So explain to me what's going on here.

Well, what's happening right now is, you know, of course, we have a lot of supply on the resale market, but it's supply that a lot of people just don't want to buy at today's prices. You know, and a lot of it was, you know, a lot of different factors, but generally, I mean, affordability is kind of the big factor. Interest rates have kind of made it more difficult to buy both houses and condominiums. And this is partly why we're seeing this big, big increase in listings. And a lot of investors are selling their units, which is contributing to this glut of supply that we're seeing. Just, you know, do a bit of math for me. Like, you know, what one of these units might have cost somebody

per month a couple of years ago versus now? Well, I mean, if you think about you're getting a $600,000 unit, you know, if you have a 20% down payment, that's about $120,000. So you have just under $500,000 in mortgage balance owing. So today, you know, the mortgage payment on about half a million dollars roughly is close to about $3,000 a month. You know, if we rewind maybe two, three years ago when rates were at record low, that mortgage payment probably would have been in the low $2,000 a month, right? So this extra, you know, $800 a month on your mortgage payment is really biting into sort of the cash flow of

investors. Investors were already losing money each month. So condominiums were having cash flow negative for years. But the math has gotten way worse now because of high interest rates. And on top of that, prices aren't going up. So investors were fine losing $700, $800 a month on their cash flow because their unit was going up $6,000 a month. Like a ton. Yeah, exactly. 10% per year, right? So, and that was the rationale of the investors.

Who cares if I'm losing 700 bucks a month? My unit's going to go up 100 grand this year or 70 grand this year. But when you take out the appreciation and home prices, well, no one wants to be an investor anymore, right? And that's the big difference is that, you know, when we think about big corporations that buy rental properties, they don't just automatically sell them if prices stop rising, right? But when you have an investor-driven market by mom and pop investors, the second prices stop rising, many of them just want to get out. Explain to me a little bit more about who these investors are and why they're the ones that have been buying these condos versus people like me, like millennials, Gen Zers that just, you know, want to get into the market and find a place to live. So, yeah, I mean, and it's, this isn't, so this has been a progression. You know, when I got into this business, however many, I mean, 15 plus years ago, 20 years ago, you know, investors were active in the pre-construction market, not as active

today as they are today, right? Today, they're probably like 80% of buyers. You know, back then, maybe it was like 30 or 40%. And what has happened is the market has adjusted to what investors are willing to pay. And investors are willing to pay more than end users are, partly because they have more capital, partly because they're driven by expectations and speculation. And this has kind of been the big shift over the past five-plus years. know, five plus years, you know, when pre-construction units have been selling over the past five years, the sale prices were 30 to 40% more than existing resale prices. So you, as to your question, as an end user, why are you paying 30, 40% more for a brand new unit than an existing unit? You know, you're not.

So fewer end users were buying. So the question is, well, why were investors doing that? And investors were doing that because they could leverage more, meaning they didn't need the money up front. Many of them thought that they could just buy it and then flip it on completion. So they're not actually investing. They're kind of speculating on the growth. And it's this speculation that kind of fueled it, this expectation that prices would keep growing up forever. And so now that we're seeing these condos be finished and, you know, the math not working for a lot of these people who invested, like what's happening to the prices? Are we seeing big drops?

Are we seeing people taking huge, like, losses? Are they losing their shirts here? So, I mean, that's a great question. So we haven't seen much decline yet in prices. So in the pre-construction market, we're probably not going to see much decline because, you know, investors, the builders kind of bought the land, kind of set up the project, assuming a certain sale price. And if they can't achieve that, sometimes it's not even feasible to sell. So typically builders don't reduce their prices very much. In the resale market, so where we're seeing all these condos for sale, my instinct is we'll probably start to see some pressure on prices, especially if inventory continues to build. We say like in the real estate industry,

the prices are kind of sticky on the way down, meaning that sellers are stubborn. You know, they usually want to wait out as long as they can to get their price before they eventually give in, right? And once one or two start kind of giving in and reducing the price, that sets the new price. So we might start to see some pressure on prices in the months ahead. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some

startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. You know, some people might be listening to that and they might think, great, maybe now is my opportunity to go buy a home that I want to live in. But there's another problem here, and that is the type of condos that we're talking about, right? Certainly.

I mean, and certainly I'd say it's smaller units that are sitting in the market longer that have more inventory. You know, bigger, you know, if you want to call it family size condos, I mean, they're sluggish as well, kind of like houses are, but definitely not as slow as the small units, right? So it's the really the four, five, six, 700, you know, five to 600 square foot units that have the most inventory right now. Because if you want to have a family, like, obviously you're not thinking to yourself, I could grow into this with some good shelving or storage. Yeah. Or even actually if you probably want to have a partner. It's also very hard. Yeah, for two people, absolutely.

Like five, six hundred square feet is generally a pretty tight space for two people. Is this a problem that's unique to Toronto or are we seeing it elsewhere in the country too? Well, I mean, it's not a problem that is unique to Toronto. I mean, probably the West Coast, Vancouver, has had similar dynamics. And other housing markets historically have had similar dynamics. You know, what happens when you have a housing market? And again, you know, going back to one of your earlier questions about why we have this. market. And again, going back to one of your earlier questions about why we have this,

I mean, part of the reason we have so many mom and pops buying small condos is because our government didn't prioritize building permanent rental housing, right? Purpose-built rental housing. So this gap has been filled by mom and pop investors. And when we look at other markets historically that have been driven by mom and pop investors, what happens is two things. Number one, it's generally fueled by optimism. And prices, when you have a ton of investors buying, prices just get ahead of where they should be. And that's kind of where we are right now in pre-construction. They're too high. It can't be justified.

And then the other negative side effect, and we've seen in other historical markets markets is that when that happens, builders stop building, right? So these trends, I'd say, are just a natural side effect of a housing market that has been fueled by the optimism of investors. And then it's really the foundation is rising prices. Once prices stop increasing, investors pull out. And I think everything that we're seeing, it's somewhat predictable, I'd say. It's this culture, right, that we've seen in this country of how housing is talked about incessantly as a financial asset and not as a place for people to live. Yeah, 100%. And so, you know, if this is where we are right now, like, what do you think that we're going to see from here? Like, is it possible that there's going to be moves towards trying to build more purpose-built rentals?

Will that become easier and more advantageous for developers? I know it's already something the government's trying to do. When we removed the tax from new purpose-built rentals in this country, we saw a number of provinces join forces with us. And in most of those provinces have seen a positive impact when it comes to starts this year

as compared to last year. Are we going to see like more units being built that are not, you know, 300 square feet? Like what would it? I mean, I think it's a couple, a combination of a couple of things.

Certainly, we're starting to see more permanent rental housing being built in Canada. I mean, the federal government's putting initiatives forward to encourage that, and that is working. But, of course, that is a slow process. So that's not going to solve our housing crisis on our own. You know, I think what concerns me right now is that, you know, what's going to happen with all of these new units? I mean, condominiums, even low-rise that no one's buying. And my instinct is what's going to end up happening is you're

going to have sort of housing experts and policymakers kind of using this as an excuse to try to encourage more investment. So to encourage like real estate income trusts, like big corporations, to basically buy up the housing stock that families and first-time buyers can't. And the excuse is, well, you know, they don't want to buy it, so you might as well sell it to some big corporation because they can afford it and then lease them back to families, basically. And just what are we worried about? Well, again, I think,. And just what are we worried about? Well, again, I think, you know, what are we worried about?

I mean, it comes back to how we view and value housing. I mean, if we want, you know, we're shifting away from, you know, having, you know, single family homes as a financial asset for families to fund their future retirement. It's a very different type of investment 20 years ago. It wasn't an investment for corporations, you know. So do we want this underlying growth in house prices to benefit the many or to benefit the few? And this shift that our government's moving towards in housing max worth is that it should be an asset that benefits the few, the richest. And, you know, I think that's just a shift that I don't agree with. And I think it should be, you know, single family homes, again, owner occupied homes, you know, purpose-built rentals are different, but if it's a single family home, we should have, you know, these in the hands

of families, obviously, because it should be an asset that funds their retirement rather than, you know, wealthy individuals or corporations just kind of buying up blocks of them. What would you like to see happen with all of these units? Like, what do you think should happen now? Because we're here, you know? You know, I think the challenge is, I mean, you know, the market needs to kind of unfold the way it should naturally unfold. And if that means downward pressure on prices, it means downward pressure on prices.

What's happening right now is that governments are actually kind of propping up the market. Many of these units that are being completed right now aren't worth what the investors paid for them, right? And what happens is if you try to get a mortgage on a property that you paid a million for and the bank says it's only worth 800 grand, you have to basically come up with an extra $200,000 to cover that difference, right? And what's happening today with new condos, the banks are kind of closing their eyes and saying, well, you know what, we're going to pretend that unit is actually worth what you paid for it, right? And these are called blanket appraisals. So, and this is a way for kind of the banks and sort of the policymakers to kind of prevent prices from falling. They're basically turning a blind eye

and effectively propping the market up. And I think that's problematic. And, you know, not that I want to see investors default, but at the end of the day, if you're making an investment decision, you're responsible for your decision. You know, I don't think we should have policymakers in their corner propping up their bad investment decisions. And that's kind of where we are right now. So I think the chips should fall as they may. And, and, you know, and if, and if that means a slight dip in prices, that's fine. Can I ask you a question? And I, I don't want this to show that I'm completely naive to engineering at all, but is there a scenario in which some of these walls can start, uh, being knocked down between these units so that actual homes where, you know, people can

grow exist in the city, like where more of them exist? Like, is that a scenario that? In theory, I mean, it depends on the building. I mean, it's in theory possible. Like, again, the issue with walls coming down a lot of times are there shared amenities like, you know, water lines or things like that going up between them. here's the thing it makes no sense to do that right and i'll say it makes no sense to do that the reason it makes no sense to do that is because if you actually combine you know two whatever 600 square foot units into one 1200 square foot unit you know especially these new units that are built at these very high prices that are selling for, you know, fifteen hundred dollars a square foot.

So the question becomes, are you going to pay one point seven or one point eight million for this twelve hundred square foot condo? You can just buy a house downtown in Lesleyville for one point three and have a basement and parking and a backyard. Yeah. foot basis, like houses are actually cheaper. And this is why we don't build a lot of larger units because on a per square foot basis, it's just more expensive to buy that unit. Just before we go today, what would you like to see from all levels of government moving forward here? Oh man, how much time do we have?

Oh, we have a little bit of time. I mean, listen, I think housing is a very complex problem. I don't think it's going to be solved anytime soon. I think that that's the one unfortunate thing we need to keep in mind. Certainly, I think, you know, the one challenge federally is, you know, we can't have a country that's growing by 1.2 or 1.3 million people per year and only building 200,000 homes. It's just, you know, it's just driving up rents and it's driving home prices. So federal policymakers, governments need to be able to sync up our population growth with our ability to build housing. And certainly governments need to do more to encourage different types of housing. And we're starting to see that, you know, higher density housing in existing neighborhoods, rather than just on 80-story condo towers that are, you know, 400 square foot units. So we need more high-density housing in our existing neighborhoods.

And so I think it's a combination of both demand and supply-side policies. But again, these are all going to take time, unfortunately. Okay. John Basalis, thank you very much. Thanks for having me. All right. That's all for today. I'm Jamie Poisson. Thanks so much for listening. We'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.