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Is buying pre-construction worth the risk?

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Is buying pre-construction worth the risk?

Who doesn’t love the word new? It’s one with many possibilities: I just got the new iPhone, I just started a new relationship, I’m excited about the new school year. You know you’re lying if you say you don’t love that new car smell.

The thought of owning a new home is extremely enticing and exciting. However, the market for new condominiums in the GTA is extremely competitive, and suites sell very fast. To purchase your dream home or ideal investment unit, you need to move fast, and that means purchasing off plans without physically walking through the unit, and waiting three to five years or more to take possession.

The desire to own something new is offset by the trepidation that comes with buying real estate from a brochure, and not knowing when (or even if) the building will complete. The development industry is a risky business, with the requirement for a significant number of the units to be sold to qualify for construction financing, and the unknowns that come with selling in one market and building in another. Just like many of the items you’re shopping for today, construction costs are going up, too.

Ultimately, it comes down to the question: Is it worth the risk? Unfortunately, there is no one-size fits-all response. A purchaser needs to consider the experience of the developer, the value proposition of the new building to a recently completed condo nearby, the expected occupancy date, the condo fee, parking cost, ceiling heights, interior finishes, common building amenities, balcony size, proximity to transit, future development plans nearby, other infrastructure investments on the way and more.

A pandemic has thrown another monkey wrench into the equation, as many GTA residents are reconsidering their housing needs. Interest in Toronto new home properties has declined, while interest in new developments in areas such as Whitby, Vaughan, Richmond Hill and Oakville has increased. Figures from rentals.ca and Bullpen Research & Consulting show that asking rents for downtown condos have declined by 15 per cent year-over-year. How does one forecast prices and rent in 2024 and 2025, when we can’t even forecast what those levels will be in the fall of 2020?

The resale housing market dropped significantly in April and May of this year during the COVID lockdown, but just recently set a record high for average pricing to the surprise of just about everyone. New condominium prices have increased for 25 consecutive years, including the 2008-09 global financial crisis, and the 2017 Toronto housing bubble and correction, and so far prices have survived the COVID-19 pandemic. All to the chagrin of many pundits and housing bears who predicted the demise of the industry for more than 15 years.

The truth is house prices can and will go down, the new condo project you buy into could get cancelled, and based off reasonable projections, the likelihood of renting a new downtown condominium that is cash flow positive from day one is pretty low. However, Canada is one of the most desirable countries in the world, and the tech sector in Toronto is blowing up. And when our borders open back up, expect a flood of new immigrants, and the return of the short-term rental market, specifically Airbnb. It’s unlikely a 25-year-old wants to live alone in a single-family home in Woodstock; they want to be where the action is in downtown Toronto.

Having followed the Toronto market for nearly 20 years, I do not believe supply can keep up with demand over the long term. However, I expect Toronto prices to continue to grow at a pace above-inflation on average over the next 10 years. There will be short-term fluctuations, and there will be price declines. But if someone purchases with a long-term hold mindset, does the research, and surrounds themselves with an experienced team (realtor and mortgage broker), buying a new home can be worth the risk.

Ben Myers is President of Bullpen Consulting, a boutique residential real estate advisory firm specializing in condominium and rental apartment market studies, forecasts and valuations for developers, lenders and land owners. bullpenconsulting.ca Twitter@benmyers29

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