Pre-construction in Toronto todayFebruary 28, 2023 | Buying
The real estate market in Toronto has spun around in all directions over the past few years with supply and demand issues, swiftly changing mortgage interest rates, and new regulations for purchasers, many of which stem from the ongoing impacts of the pandemic. As volatile as it has been, the area of real estate that may possibly have taken the biggest hit most recently is pre-construction condo sales in downtown Toronto.
For years in the central Toronto core, pre-construction sales were unquestioned money-making bets for investors who banked on quick appreciation in a seemingly endless rising market. To some, it felt like a lottery win if you could beat out the buyer competition to secure a contract to purchase your desired floor plan in a coveted pre-construction condo project. Those days were good for developers when it was just a matter of whispering plans of a pre-construction condo launch before buyers and agents would be banging at the door to slap down a deposit. This is far from reality these days.
The landscape looks very different now for many reasons. For one thing, the federal two-year foreign buyer ban that took effect in January 2023 dropped a number of buyers from the pre-construction market. In certain pockets of the downtown core, non-residents of Canada made up a notable portion of real estate investors. That void is surely being felt by developers today. The drastically higher mortgage interest rates also play a part here too, even if pre-construction purchasers don’t need to fund a mortgage at the moment they sign a pre-sale agreement. That’s because builders (or perhaps more importantly the lenders financing the builders) need the security of a mortgage pre-approval from a Schedule I bank from the time of contract signing, meaning at today’s mortgage interest rates that could be an impossible ask of a purchaser. To provide a mortgage commitment letter, banks can’t always factor in all of your financial plans and sources in the many years between contract signing, building construction and ultimate building completion, whether that’s the sale of other assets you might have, or funds you know will be arriving from work or family, for instance. You would need to qualify today, as is, with all of the current factors in play, instead of how your financial situation may later be in a few years time after the project has been built. For some people, again, this is a deal-breaker with today’s significantly higher interest rates and mortgage stress-test requirements.
On the flip side, developers are also getting more savvy about how they structure condo projects and their purchase contracts. Just as buyers are feeling the uncertainty of costs due to inflation, builders are equally concerned. In fact, in one contract I recently reviewed, the builder’s lawyer included the ability for the developer to increase the originally negotiated purchase price by the rate of the Toronto CPI (Construction Price Index) from contract signing to final building registration. In today’s inflationary period, that could have steep financial ramifications! Further, condo projects where builders retain a portion of commercial or residential units within a completed complex seems to be occurring more often. It’s not just about a builder constructing a project and handing it all off to owners, but rather keeping some skin in the game with commercial or residential tenants in units they continue to control and use to generate income.
With the right buyer and the right project, good pre-construction matches can still be made in Toronto, but it does take careful thought, research and planning to ensure it’s a solid purchase. Developers are eager to work with buyers, and it’s easier than ever to negotiate incentives and contract amendments. With information, insight, and a skilled Realtor navigating at your side, there may well be some great pre-construction real estate deals to secure in the city. Reach out here to Larissa at anytime to discuss more.