In recent months, a growing number of condo investors in Toronto have found themselves in serious financial distress. Some are being sued because they are unable to close on units they agreed to purchase years ago.
WATCH NOW: Toronto’s Condo Reckoning: The Bubble Everyone Saw Coming
Even investors who are managing to close are not necessarily in strong financial positions. A number of recent reports describe owners who are carrying significant monthly losses because the rent they are earning does not cover their mortgage payments, maintenance fees, and property taxes.
What initially appeared to be a straightforward wealth-building strategy has, for some, turned into a prolonged cash-flow strain or, worse, a financial disaster.
This raises an important question. Were these outcomes simply the result of unfortunate timing? Or were the underlying risks visible well before the market turned?
The Assumption That Supported the Market
Toronto’s pre-construction condo market in the years leading up to its peak was largely supported by a single assumption: that prices would continue rising at a rapid pace.
That expectation became deeply embedded in investor conversations, media coverage, developer marketing materials, and political rhetoric. As long as price growth remained strong, the structure held together. Once appreciation slowed, the vulnerability of that structure became apparent.
Understanding what happened requires revisiting the broader belief system that shaped investor behavior during the boom.
The Culture of “Easy Money”
In 2019, Toronto Life published a feature titled “Who’s Winning the Toronto Condo Market?” The article profiled an investor who had been purchasing pre-construction units since 2009 and had achieved considerable gains. One quote captured the mood of the time:
“It was such easy money that Tony put a deposit on a third pre-construction condo.”
This was not an isolated perspective. Pre-construction investing had become widely regarded as a reliable path to wealth accumulation.
By 2021, research highlighted in the Toronto Star showed that newly completed condos were, on average, selling for roughly 40% more than their pre-construction purchase prices. Simplified, an investor who placed $100,000 down on a $500,000 unit that appreciated to $700,000 upon completion effectively tripled their equity in a few years.
Returns of that magnitude reshape expectations. When appreciation appears consistent and substantial, skepticism naturally diminishes.
Price data reflected this exuberance. According to Altus Group, new condo benchmark prices remained relatively stable around $400,000 prior to 2016. After that point, prices accelerated sharply, reaching approximately $800,000 by 2020 and peaking above $1.2 million in 2022. Pre-construction prices began rising faster than resale prices, and the gap between the two widened considerably.
Importantly, these prices represented what investors were willing to pay, not necessarily what underlying fundamentals justified.
During this period, rapid price growth was frequently explained through a structural supply lens. Political leaders across party lines emphasized housing shortages as the primary driver of escalating prices. That explanation became increasingly institutionalized in public discourse.
Alongside the supply narrative was another widely accepted belief: that pre-construction condos represented a prudent, relatively low-risk investment strategy. These two narratives reinforced one another and contributed to a broader sense of inevitability around continued appreciation.
The Risks That Were Present
In February 2020, before the pandemic-era surge intensified, I published an article outlining concerns about investing in pre-construction condos. Those concerns focused on three areas: pricing, rental viability, and downside risk.
Pricing Premiums
Pre-construction units were often selling at premiums of 30% to 40% compared to comparable resale condos. Investors were effectively paying a substantial markup for the opportunity to purchase early.
In one instance, I spoke with an investor who intended to pay $1,000 per square foot for a pre-construction condo in Hamilton. Comparable resale properties in central Toronto were available at similar price points. The justification centered on convenience: deposits could be staggered over time, mortgage qualification was deferred, and tenant management would not be required immediately.
While convenience can have value, paying a significant premium for it increases exposure to downside risk if market conditions change.
Rental Viability
At peak pricing, many pre-construction purchases required projected one-bedroom rents approaching $4,000 per month in order to generate sustainable returns.
Rents, however, are constrained by tenant income. Unlike asset prices, which can surge due to leverage and expectations, rental growth is limited by wage growth and affordability. Even at the time, it appeared unlikely that rents would increase quickly enough to justify prevailing purchase prices.
The current cash-flow pressures many investors are experiencing were foreseeable given these constraints.
Downside Risk at Completion
Pre-construction carries a unique structural risk. If resale values decline, an owner can often hold the property, assuming they can manage the carrying costs. With pre-construction, however, financing is typically based on appraised value at completion, not the original contract price.
If the market value at completion falls below the purchase price, the buyer must cover the difference. Failure to do so can result in the inability to close and potential legal action from the developer.
This risk was not theoretical. Similar situations occurred in 2017 with detached homes in parts of the Greater Toronto Area when market values softened before completion.
I did not advise clients that prices were about to collapse, nor did I claim to know the precise timing of any downturn.
My position was more measured: the potential upside, which depended heavily on continued rapid appreciation, did not sufficiently compensate for the downside risks.
Most investors decided not to proceed. Others sought out advisors who shared their optimism. That dynamic reflects broader human tendencies rather than isolated decision-making errors.
Why Was Public Dissent Limited?
Housing commentator Daniel Foch recently described the pre-construction market as structurally dependent on ever-rising prices. In discussing the broader environment, he observed:
“All the market participants in the economy had gotten together and decided this was a good idea, even though the writing was on the wall that it was a horrible idea during that period of time. Who’s going to be the guy at the party who's going to be like hey, maybe we should sober up and not do this. Right. Total buzz kill”
His comment speaks to a broader dynamic. Many participants could see elements of risk. Public dissent, however, was limited.
The explanation lies less in individual malice and more in systemic incentives.
Industry Incentives
Developers benefited from strong investor demand and rising prices. It is unrealistic to expect an individual builder to discourage buyers from purchasing their product. However, at the industry level, there was scope to advocate for guardrails that could have moderated speculative excess, such as measures limiting assignment speculation or reducing purely investor-driven demand surges.
That advocacy did not emerge in a meaningful way.
Narrative Reinforcement
Once the supply narrative became embedded in political and media discourse, it shaped how market developments were interpreted. Repetition across institutions reinforced its legitimacy and reduced the visibility of alternative explanations.
Social and Financial Pressures Within the Industry
Among real estate agents and mortgage brokers, perspectives varied. Some genuinely believed in the investment thesis. Others recognized the risks but were reluctant to challenge the broader narrative publicly.
Two forces contributed to this reluctance.
First, social risk. Questioning pre-construction investing meant challenging both the supply-based explanation for price growth and the prevailing belief that these investments were financially prudent. Public dissent can carry reputational costs.
Second, financial incentives. Pre-construction transactions often carry higher commissions than resale properties. Financial incentives do not typically manifest as conscious ethical compromises. Instead, they reinforce prevailing narratives. When income aligns with optimism, optimistic interpretations can feel more plausible.
Even well-informed professionals can begin to filter information through a dominant framework. This dynamic reflects cognitive bias layered on top of institutional alignment.
The Speculative Pattern
These dynamics are not unique to Toronto’s condo market. They are common in speculative cycles more broadly.
During the U.S. financial crisis, as later documented in The Big Short, many participants in the mortgage and banking system could see elements of risk. Some analysts understood that underwriting standards had deteriorated. Others recognized that housing prices had detached from fundamentals. Yet public dissent remained limited.
The system continued to function because the incentives were aligned. Mortgage originators earned fees by issuing loans. Investment banks packaged and sold securities. Rating agencies were paid by the institutions whose products they rated. Rising home prices masked underlying fragility. As long as prices continued to rise, the structure held.
Very few participants were willing to disrupt that momentum in a meaningful way. Challenging the system carried professional and financial costs.
The pattern is familiar.
Speculative cycles do not require secrecy or explicit coordination. They require incentives that reward optimism, narratives that justify rising prices, and social dynamics that discourage dissent.
When those elements align, momentum can carry markets further than fundamentals justify.
The deeper lesson is not simply about assigning blame after the fact. It is about awareness.
If you are an investor, are you prepared to question a dominant narrative when returns appear effortless?
If you are an industry participant, are you willing to advocate for stability even when it slows short-term revenue?
History suggests that most bubbles form in environments where many participants recognize fragments of risk, but few are willing to challenge the system publicly.
Recognizing that pattern while it is forming is far more difficult — and far more important — than diagnosing it afterward.
John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here: https://www.movesmartly.com/meetjohn
February 24, 2026
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