The Toronto real estate market has seen a significant shift as many investors grapple with dwindling returns on preconstruction condos. A striking example of this trend comes from Jacqueline and Leo Francis, who enjoyed remarkable success with their first condo investment in 2013, purchasing a unit for $300,000 and selling it nine years later for a staggering $800,000. However, their recent ventures into preconstruction properties have yielded less favorable outcomes.

The couple's latest investment near a bustling shopping mall in North Toronto has turned into a financial burden. After closing on a condo priced at $528,000 in January this year—following a deposit made in 2018—the Francises are now facing an 8.3% mortgage rate on a $410,000 loan. Monthly costs, including mortgage payments, condo fees, taxes, and other expenses, total around $4,200, yet they can only secure a rent of $2,400 per month.

Furthermore, their next preconstruction condo, located near Toronto's Beaches neighborhood and bought in partnership with another couple for $840,000, is similarly hemorrhaging cash. With two mortgages on the unit and total monthly expenses nearing $6,700, they are currently only bringing in $3,650—boosted by a one-year rental guarantee.

These experiences have led the Francises to reconsider their investment strategy. “I would not buy today. It ties up your money for too long, and you can put your money into something else,” Ms. Francis remarked.

The decline in the preconstruction condo market is alarming. Once a thriving sector for investors—who comprised at least 70% of buyers in Toronto—now faces a staggering 73% drop in sales from the previous year, with only 764 preconstruction units sold in the third quarter of this year, according to Altus Group. Other cities, like Calgary, saw a 61% decrease, while Vancouver and Montreal recorded drops of 27% and 40%, respectively.

Industry experts are voicing concern that the market's current condition may not be a temporary downturn but could represent a structural shift. The combination of high-interest rates, rising construction costs, and stagnant income levels is creating an environment where many investors are hesitant to re-enter the market.

Aled Ab Iorwerth, deputy chief economist with the Canada Mortgage and Housing Corporation, expressed serious concerns, stating, “With high costs of construction and limited increases in incomes, the ability of renters to afford higher rents remains low.” To bring investors back, there will need to be a significant decline in prices, a drop in interest rates, and an increase in rent, but achieving this seems like a formidable challenge given the current economic landscape.

The costs associated with preconstruction condos have surged over the past decade, driven by developers needing to cover increased construction expenses and municipal fees. This has resulted in an average asking price of $1,338 per square foot in the Toronto region as of Q3 2023, up from $552 in 2014. The trend is similar in other cities, with Vancouver's prices ticking up to $1,250 per square foot, Calgary at $558, and Montreal at $764.

Raymond Wong from Altus highlighted the challenging math for investors. Despite some alleviation in construction costs, ongoing infrastructure projects are still draining resources necessary for condo construction, keeping prices high.

Some developers are responding by reducing the size of the condos to manage construction expenses, a move that may make the units less appealing to potential renters desiring more space.

Even if favorable conditions were to arise, such as a drop in construction costs and mortgage rates falling to about 3%, rebuilding investor confidence in preconstruction condos may still take time. Real estate investor Stephanie Pineyro, who has investments in both Toronto and Vancouver, articulated that buying further into the preconstruction market doesn’t fit her current portfolio. “If you want to make money now, it’s not going to give you cash flow and it’s not going to appreciate,” she stated.

The Francises are actively looking to sell their two preconstruction condos, with the north Toronto unit currently listed at $624,000—well below the initial expected sales price of $800,000. While they plan to continue investing in real estate, they are directing their focus away from preconstruction condos, illustrating a broader investor trend amidst a fluctuating market. The big question remains: Can the once-booming preconstruction condo market recover, or has it entered a phase of permanent decline?