Keaton Bessey: unsold high-rise condos in Burnaby
Investor demand isn't infinite
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Keaton Bessey, a property manager, reports that there’s a ton of unsold high-rise condos near Metrotown. He went to check out a building which had been selling since May 2023: as of June 2024, they still had entire floors full of unsold condos.
For them to be priced so high as to remain empty boggles my mind.
I think what's happened is that projects are started years in advance - when interest rates were considerably lower. Now the Bank of Canada has raised interest rates sharply to cool down the economy, which means that both homeowners and investors can't pay as much.
So the market-clearing price (what buyers are willing to pay) is way down. But if the developer tries to sell at the current price, they'll lose a ton of money. Instead they're holding on, hoping that interest rates will come down further, and maybe every once in a while a price-insensitive buyer will come along.
The bigger problem is that new condo projects are stalled. With current costs (what it costs to build them, including municipal development charges) and prices (what they can sell them for), they don't make sense. Purpose-built rental projects are less affected, at least for now - the federal government provides low-cost loans and tax incentives for new purpose-built rental housing.
Investor demand isn’t infinite
Property is one of the most stable, long term investments you can make and adding a surcharge on transactions that already involve millions of dollars moving around probably doesn't change that much.
Thing is, the guy who made the video actually dug into it, by going to one of these high-rises, asking to see one of the apartments, and discovering that almost all of the apartments in the building haven't been sold, after more than a year.
Turns out that instead of a giant wave of overseas money being parked in empty condos, it's more like all these condos are sitting empty on a shelf because nobody wants to buy them.
It's almost the opposite of the "rich overseas buyer" explanation. Turns out that in fact there isn't an unlimited number of ultra-rich people who want Vancouver real estate at any price. If there were, they'd all be purchased by now, and the developer would be on to their next project.
Instead, the developer has a stack of unsold condos and is trying to figure out if they should wait for another price-insensitive buyer to come along, cut their prices, wait for the next interest-rate cut, or what.
May 2017: what a condo boom looks like
Inside the flipping frenzy at Toronto's X2 condo building. Jill Mahoney and Matthew McClearn, Globe and Mail, May 2017. Prices were rising so fast that according to Teranet, 8.5% of condo sales in Toronto were by sellers who had owned the property for less than two years. And then stories about rising prices attracted more people willing to bet that prices would keep going up.
The condo building that’s the focus of the story is 50 storeys, with 560 apartments. In the two years since the building opened for occupancy, 21% of the units had been resold. 60% of the units were owned by investors and rented out.
"There's a lot of opportunity within real estate," said Susan Tavana, a 34-year-old mortgage broker who owns a two-bedroom, two-bathroom corner suite that she rents out for $2,500 a month. "I've done quite well."
Ms. Tavana is now selling her unit for $699,000 and is hoping for a six-figure profit. The suite, which she bought in 2013, was her fourth in a total of eight downtown condo purchases. In all, she now owns four units, two of which are for sale; she has also bought two others that haven't been built yet. "It was always good, in my experience, to have at least one or two rental properties that you're going to hold over the long run."
Though there's mounting evidence that speculators and investors are playing an outsized role in the city's condo scene, it is important to note that many buildings would not have even been built were it not for their deep pockets and early purchases. “They're the biggest segment that's driving the preconstruction” market, said John Pasalis, president of brokerage Realosophy Realty Inc.
Developers typically offer their lowest prices early in a project to spur sales, given that they need to sell the majority of units before they can secure financing to begin construction. But it can take five or more years for a building to be ready for occupancy, too long for many first-time home buyers to wait. Investors have filled that gap and helped grow the housing supply in a city with seemingly endless demand.
But on the flip side, an investor is also more willing than a homebuyer to walk away from their deposit, instead of completing the purchase, if their resulting loss would be greater. Lawsuit by buyer at pricey Vancouver tower a sign of uncertain times for condo market. Dan Fumano, Vancouver Sun, November 2023. “I had a client at Vancouver House (a downtown condo tower) that walked on pretty much a million-dollar deposit there. For the buyer, walking on their deposit is actually less damage to them than actually completing on a condo that’s worth considerably less than what they paid for it, and then layering on the financing piece.”
What happens next?
In Vancouver, there’s a number of projects that started as condos and switched to purpose-built rental. Some examples from Kenneth Chan at Daily Hive:
Future tower project on Davie Street pivots from condos to rental housing, April 2024.
West End twin towers with 1,100 homes approved by Vancouver City Council, May 2023.
Developers are asking governments at all levels to help unjam condo projects currently on hold, by lowering taxes on new housing. There’s a coalition of Ontario developers that’s pledging to pass on 100% of savings to purchasers.
Conditions will slowly improve as interest rates decline and buyers can pay more. Pessimistically, if housing supply doesn’t improve, that’ll also drive up prices.
Perhaps the mortgage stress test, instituted when interest rates were ultra-low (in the wake of the 2008 financial crisis) to make sure that borrowers could handle a 2% increase in interest rates, is no longer needed.
More
We’re in a housing crisis. Why are so many builds going bust? Andrew Chang, About That, August 2024. A video focusing on the slump in Ontario condo sales.