Why Canada’s micro-apartments are losing appeal

Maggie Hildebrand’s first Toronto apartment features a kitchen, dining table, workspace and bed – all in the same 300-square-foot room.

At first it was a decent home, close enough to her job in the city center and with all the daily necessities.

But it wasn’t long before the 28-year-old felt trapped. “It was so isolating to be in that small space,” she told the BBC. “It definitely feels like a place where worker bees are kept at night.”

Ms. Hildebrand lives in a micro-apartment in the city, once a rare sight in Canadian real estate but which have become ubiquitous in the past decade thanks to the rapid growth of high-rise development in major cities such as Toronto and Vancouver.

But as the Canadian condo market hits lows not seen in decades due to a series of market pressures, the value of these micro-apartments is falling faster than any other apartment.

The condo market is experiencing a downturn not seen since the 1980s, with thousands of move-in-ready apartments sitting vacant and unsold in Toronto and its surrounding areas. Last year, the city canceled an unprecedented 18 apartment projects, and experts expect that number to increase as demand continues to decline.

The economic downturn has reignited debate over whether developers are catering to real estate investors by building smaller, more affordable units that minimize square footage to keep prices low in areas with higher land values ​​and that are often designed to be rented out or flipped for profit.

Investors own the majority of Toronto condos under 600 square feet, according to Statistics Canada’s national database. Construction of these smaller apartments surged in 2016 and now account for 38% of new apartments built in the city, up from just 7.7% previously.

These units haven’t exploded in the same way in the U.S., where they have a very small market share, though “their penetration has roughly doubled over the past decade,” said Nadia Evangelou, senior economist at the National Association of Realtors.

With so much inventory on the Canadian market, some micro-apartments that sold for $500,000 a few years ago are now resale for $300,000 Canadian ($217,000; £163,000) or less—a price that would have been unthinkable these days in downtown Toronto, often considered one of the world’s most unaffordable cities.

“The sales of these things are a race to the bottom,” said Shaun Hildebrand, president of Urbanation, which has tracked Toronto’s high-rise market for decades. (Sean Hildebrand is not related to Ms. Hildebrand.)

The condo downturn is not unique to Toronto, with Vancouver experiencing a similar (albeit smaller) downturn since 2024.

Experts told the BBC there are several reasons for this.

The first is oversupply. Hildebrand said thousands of apartments have been built over the past two years in part to meet demand from an unprecedented surge in Canada’s population driven largely by immigration.

But as Canada’s immigration policy shifted, in part to address the housing crunch, the number of new immigrants fell sharply. one Bank of Montreal report released in December Canada’s population is set to fall by 2025 at its largest rate on record since the 1940s (excluding the 2020 COVID-19 pandemic), driven largely by new immigration caps.

It’s an unforeseen shift by developers that has resulted in more than 60,000 new units being completed in recent years to meet demand that no longer exists.

In short, Hildebrand said, “the market got too far ahead of itself.”

The second reason is pricing.

The Bank of Canada has lowered interest rates to stimulate the economy during the pandemic, while investors are looking to buy into a housing market that has seemed solid for decades, believing prices will only continue to rise.

For a while, Hildebrand said, they did exactly that and soared to “meaningless levels.”

The Bank of Canada then began raising interest rates to combat post-pandemic inflation. Add to that a supply glut, and that sure bet becomes less certain.

Now, some investors are having trouble buying pre-construction units at such high prices. Many people are forced to try to sell them at huge losses. Others are too scared to enter the market or are waiting for prices to drop further, Hildebrand said.

There is some speculation that Canada freezes foreign home buyers in 2022Introduced to help address the housing affordability crisis, it also plays a role. The data shows they make up only a small portion of owners — about 2 to 6 per cent — but Mr. Hildebrand said it may have sent a signal that Canada is pausing.

One clear winner in the apartment downturn are renters like Ms. Hildebrand, who now have more options thanks to increased supply and slightly better rental deals.

Ms. Hildebrand pays C$2,200 a month for her microapartment. She has since moved into a larger, 700-square-foot one-bedroom apartment in an older building with a tree-lined backyard for just $200. She credits the move with a huge improvement in her quality of life.

“It’s my birthday tomorrow and I’m having a party for 25 people,” she told the BBC in December. “A year ago, this would have been impossible.”

Hildebrand said the recession could change who developers see as their main customers, from short-term investors looking for quick profits to long-term investors and people who plan to settle in the apartments they buy.

“We learned our lesson here,” he said. He noted that the units will not be completely phased out as there is still a demand for affordability, “but we have gone too far”.

Some buyers also benefited. Alex Cruz, a Toronto-based real estate agent with Ari Zadegan Group Realty, told the BBC that those looking for bargains are buying smaller units.

“If it’s a good price per square foot, people will buy it,” Cruz said, adding that it gives some people “an opportunity to get into the market.”

The recession comes as Canada grapples with a housing crisis that has become a central political issue at all levels of government. Prime Minister Mark Carney has pledged to double the rate of new home construction over the next decade.

With the construction of thousands of apartments put on hold or canceled, fewer apartments will hit the market by the end of the decade. Hildebrand said this could exacerbate Canada’s housing crunch, as major cities rely heavily on apartments to increase supply.

Mr. Hildebrand and others warned that the low prices would be short-lived.

“The question now is how long are we going to be here and what impact will this have on housing supply over the next decade?” Mr Hildebrand said.