Toronto's crashing condo market like nothing seen since global financial crisis

Toronto's pre-construction condo market is finally bottoming out after over a decade and a half of frenzied construction that has reshaped the city's skyline while also contributing to a runaway increase in housing costs.

But after years of doom-and-gloom predictions, a new RBC report makes it pretty clear that the developers and investors running the show are no longer able to rake in the immense profits that drove the local building boom to sky-scraping heights (and costs).

The report released on Tuesday, titled "Navigating Toronto's frozen pre-construction condo market," outlines the steep decline in sales in pre-construction developments, a nosedive characterized as a "deep freeze" of "plummeting" sales at levels "not seen since the global financial crisis."

RBC

It may seem like they're stating the obvious at this point, but experts are pointing to the reality of investor demand driving the local pre-construction condo market as a reason for the drop-off. 

Noting that investor activity "has largely evaporated, driven by a sobering reassessment of investment fundamentals," the report underscores the severity of the situation and warns that it could have lasting impacts.

"The dramatic downturn represents more than a cyclical adjustment—it could reshape Toronto's housing landscape for years to come," reads the report, adding that "The stark reality facing developers today is vanishing demand and steep costs."

While the report attributes some of the decline to cooling rental demand impacting cash flow prospects, developers in the Greater Toronto Area are increasingly turning to purpose-built rental developments that essentially cut out investors and market units directly to end-users.

In addition to renter demand, the report notes that high costs for development and construction, rather than developers' and investors' desire to maximize profits, have impacted affordability beyond the means of buyers.

Another factor noted is the ever-rising inventory of existing condos, which are not subject to long waits for construction and, in many cases, offer better prices due to their lower construction costs.

It's a reversal of the buying patterns established during the pandemic, where new investors flooded the market due to fears of missing out on the money-making frenzy.

Compounding these issues, RBC experts raise alarms that the spike in inventory "creates a self-reinforcing cycle" that replaces frenzied urgency with patience and aggressive negotiation, resulting in fewer developers launching projects and buyers increasingly turning to resale condos.

And despite new policy measures introduced to combat these declines like GST rebates for first-time homebuyers, RBC warns that these moves are "unlikely to unlock the broader new condo market." Instead, the report argues that "the fundamental challenge lies in addressing the substantial disconnect between what buyers are willing to pay and what developers can viably offer."

While RBC believes that economic recovery and a boost in market confidence will "eventually" bring back Toronto's condo market, the report notes that "the path back to higher pre-construction sales is likely longer and more complex."

Such a road would involve balancing out the current condo inventory to levels where pre-construction condo sales become a more attractive option. Based on market conditions from the mid-2010s, experts believe inventory may need to decline by 25 per cent to move the needle.

"Buyers will naturally gravitate toward existing inventory first, drawn by immediate availability and competitive pricing before considering new projects with inherent risk of delays and premium pricing," says RBC.

So, how long can we expect this downturn to last?

According to RBC's analysis, "the complexity of multiple factors makes timing Toronto's new condo market recovery very challenging." With that said, the report predicts that inventory could begin to decline in early 2026, paving the way for a resurgence in preconstruction sales into 2027.

RBC

Of course, these trends are notoriously difficult to predict, and RBC notes that several factors could impact this recovery timeline. Some of the possible roadblocks ahead include the possibility of a softer-than-expected economy, a spike in new listings, as well as differences in developers' cost requirements and buyers' price expectations.