As pre-construction condo sales flatline - what factor is really to blame?
Pre-construction condo sales are falling off a cliff and will likely remain near historic lows for quite some time.
As housing experts scramble to explain why pre-construction condo sales have crashed and what needs to be done to drive more sales, they have zeroed in on one thing - the taxes and fees levied on new home sales and developers are now the reason nobody can afford to buy a new condo, according to this clamour.
And there is some truth to that. Municipalities eager to get a bigger piece of the housing boom have significantly increased development charges while federal and provincial governments have not adjusted the GST/HST rebate despite surging home prices. Every level of government should lower the taxes on new housing.
But taxes on new housing are not a new phenomenon. The same pundits blaming high taxes for the lack of new condo sales today were not very concerned about taxes when investors lined up to pay any price for a pre-construction condo in 2021.
The fact is that for years, Toronto’s pre-construction condo market has been driven by investors. When a housing market is disproportionately driven by investors rather than end-users, it always runs the risk that, at some point, irrational exuberance will take over. When that happens, house prices grow rapidly as investors are willing to pay almost any price for a condo because they believe prices will keep going up forever.
This is what happened in Toronto. No rational buyer will pay $1M for a 600 square foot pre-construction condo when they can buy an existing unit of the same size and quality for $700,000. And yet, this is exactly what pre-construction investors were doing.
Pre-construction sales aren’t tanking because of high taxes. They are tanking because, for years, prices were fueled by irrational exuberance rather than fundamentals pushing prices to a level that rational buyers are unwilling to pay. Now that the bubble has burst, Toronto is experiencing what typically happens after a bubble bursts - new home sales plummet.
This doesn’t mean governments shouldn’t lower taxes on new homes. They should! But pretending high taxes are the cause for the lack of new condo sales today is highly misleading.
For years, most housing experts advocated for a housing market driven by investors, which means they also tacitly advocated for what Toronto got - a speculative condo bubble. I say that because it doesn’t matter which bubble expert you read, Shiller, Kindleberger or Mackay, bubbles are fueled by the exuberance of investors, not the housing needs of moms and dads with strollers.
And now that the bubble has burst, instead of revisiting their misguided advocacy that put the financial interest of investors ahead of the needs of end users, which helped to fuel the bubble - they are blaming taxes for high condo prices.
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November 13, 2024
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