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“It’s actually much simpler than what we do here,” the president of Toronto-based real estate developer Devron told the Star. “Almost everything in NYC is built first before the units are sold, meaning they don’t rely on preconstruction sales.”ÌýDevron Developments has about 1,100 units across four projects in the works, one of those being purpose-built rental.

In the GTA, around 70 to 80 per cent of condos are pre-sold to help secure financing for the project, with the remainder covered by lenders and the builders’ own capital. That means people are buying units years before they’re built — a model that’s attracted investors betting on price appreciation, instead of end-users buying themselves long-term homes.

Safapour argues pc28¹ÙÍøshould shift how it finances condos and follow in the footsteps of New York City, and many other cities in the world such as London, Copenhagen, Berlin, Barcelona, Tokyo, Paris, Zurich and more — especially now as a glut of inventory sits on the market with no buyers in sight.

“Developers are pre-selling most of their suites before the shovel hits the ground and it’s created this separation between the product and user,” he said.

“Condos have been sold on speculation over the last 20 years, and it creates a huge domino effect. It’s a unique problem in Canada; this is a predominantly Canadian model to pre-sell condos.”

Toronto’s condo market is facing a significant correction, with prices droppingÌýalmost 20 per cent since the February 2022 peak. Sales, meanwhile, fellÌý30 per cent year over year in AprilÌý— the lowest April sales since 2010 (except for April 2020 after the pandemic lockdowns began).

That’s in large part becauseÌýthe wrong supply has been built.Ìý

Investors are the main buyer of preconstruction units, and they preferÌýsmall condos because they offer better cash flow. But over the last year, as a record-number of new condos that were pre-sold in the hot pandemic real estate marketÌýwere completed,Ìýinvestors haveÌýtried toÌýoff-loadÌýtheir unitsÌýas values dropped and interest rates climbed.

End-users, however, generallyÌýdon’t want shoebox condos, leaving a glut of this supply on the market. At the same time,Ìýmany preconstruction buyers are also now unable to close on their units, jeopardizing the value of entire condo buildings.

Yet, despite the glut of inventory, a condo shortage is on the horizon as a lack of preconstruction buyers has led developers to pause new housing projects. Experts have said theÌýimminent condo shortage will lead to a supply crisis.Ìý

Safapour says for pc28¹ÙÍøto get the right kind of supply, and help with the housing shortage, developers need to change their mindset on how projects are funded.Ìý

If the units are only sold once built, he said, it ensures the developer is more connected to what an end-user wants, and therefore the quality of the product is more “high value” because the supply is dictated by people who want to live in the unit, not rent it out.Ìý

But this financing system has its drawbacks, said TD economist Rishi Sondhi.Ìý

“This principle to build and sell later adds an element of risk because it’s sensitive to the state of the economy,” Sondhi said. “What happens if the units don’t sell? It could exacerbate the downturn, adding inherent risk.”Ìý

If the builder is unable to sell the units once built, it can be difficult to pay back the lenders, and developers don’t want to default on their loans. A 2019 analysis by The New York TimesÌýfound that approximately 25 per cent of new condos built in New York City since 2013 remained unsold.

There’s also no guarantee that developers would build the right kind of supply with this alternative financing model, which is why there must be a variety of different new-builds, such as purpose-built rental, affordable housing, and bigger units for families, Sondhi added.

While Safapour acknowledges the risk of condos not selling, the financing model requires the developer and lender to be prudent in their assumptions going into construction.

In the Canadian financing model, the buyer or investor, is taking a risk on a project at the time of construction, and in the New York City model, it’s the bank or developer taking on the risk, he said.Ìý

“We should ask ourselves: who is better suited to make prudent assessments and assumptions on the product, pricing and market? Sophisticated banks and developers, or mom and pop investors?” he added.Ìý

“I would suggest the former. Essentially, in our Canadian model, the risk and benefit (profits) has been off-loaded onto investor and speculating buyers. I believe a model of building first, then selling, the risk and benefit is shouldered by us developers, and the banks, which is better for the whole ecosystem, and we will end up with high-value and quality, end-user homes. It is a win-win for public and industry.”