Rising interest rates and other headwinds in the construction industry have caused builders in some Canadian markets to shelve condominium projects, while others say condominium demand will continue , as supply remains tight.
Real estate advisory firm Urbanation released a report this week showing that builders in the Greater Toronto Area (GTA) are dramatically reducing the number of condominium units they plan to launch this year.
Based on developer contributions earlier in the year, Urbanation projected that 35,000 condo units would be available for pre-sale through 2022. In its second quarter report, it said that while some 16,000 units actually had went on sale in the first half of the year, it now expects another 10,000 units to launch before 2023.
Urbanation expects approximately 10,000 planned units to be delayed or canceled.
Although the GTA is currently at an all-time high of around 123,654 condo units currently in presale or under construction, Urbanization President Shaun Hildebrand told Global News that the slowdown in launches reflects declining buyer confidence. in “the future of the housing market”.
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The bleak outlook is not limited to Toronto. The Canadian Home Builders’ Association (CHBA) said in its latest Housing Market Index (HMI) that there was a sharp decline in developer confidence during the first half of 2022.
The HMI measures Canadian homebuilder confidence on a 100-point scale. While the index posted all-time highs near 90 for single-family and multi-family home construction in the first quarter of 2022, the second-quarter report released in mid-July showed steep declines to 65.7 for homes. individual and even lower at 59.9. multifamily, which includes condos.
The ACCH pointed to labor shortages and rising interest rates to undermine confidence, but noted that the Bank of Canada’s latest 100 basis point hike has yet to be taken. taken into account in the data.
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Besides interest rates, other costs are rising rapidly for home builders, whether due to rising material prices or rising development costs.
Hildebrand says that as a result, condo builders are unable to lower their pre-sale prices to meet what buyers can afford and instead put units on the shelf that they don’t believe will be able to sell in the near future.
Investors, who make up the majority of pre-construction condo buyers, are especially discouraged in high interest rate environments, Hildebrand notes.
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“With the slowdown in sales we’ve seen and the more general buyer hesitation in the market, it’s difficult for condo projects to get going and pass on the cost increases they’re experiencing,” he says.
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Adverse conditions are also slowing construction activity in Canada’s most expensive housing market.
“Basically, yes, there has been a marked downturn,” says Ron Rapp, president of the Vancouver Homebuilders Association.
Ongoing supply chain issues and other inflationary pressures are driving up material costs, Rapp notes.
Builders often have tight windows and deadlines to secure financing and approvals and get ground breaking; if they lack confidence in the costs and viability of a project, they are more likely to wait and innovate later when market conditions clear up, he says.
“Hopefully these supply chain challenges will start to lessen over the next few moments as things come back online. But right now it is causing significant issues for the building community and the development community” , says Rapp.
Demand slows, but not gone, in major cities
Not all observers are gloomy about the pre-construction condominium market.
Marc Lefort is Associate Vice-President at McGill Real Estate, which specializes in the Montreal pre-construction condo market. He says he’s seen a slowdown in demand this summer, but attributes it to a “post-COVID holiday” as potential buyers focus on travel rather than house hunting.
“We’re feeling a slowdown this summer, but based on our analysis, it’s not really the interest rate (the hikes),” he told Global News, adding that he expects demand resumes after Labor Day.
Lefort says the developers McGill Real Estate works with have faced the same labor and cost pressures as builders outside of Quebec, but says the company hasn’t seen any condos canceled or delayed. , with “several projects” expected to launch in the fall.
He believes the strong demand for new construction stems from the continued shortage of supply in the Canadian housing market. And while rising interest rates may dampen purchasing power, as rental rates rise alongside it, tenants find no compelling reason to wait on the sidelines, he argues.
Montreal could be an exception, Lefort notes, as the city hasn’t experienced the same price pressures as Toronto or Vancouver in recent years.
“I know affordable is a big word, but we’re still smaller than most major cities in North America. »
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While Hildebrand says Toronto has a good flow of housing units under construction today, the downturns ahead could mean the market is caught off guard when demand picks up.
“It certainly creates problems in the supply pipeline. So when demand eventually recovers, as we expect, supply will not increase to the same extent as it normally would,” he says.
Rapp says that while rising interest rates have “softened the frenzy that was prevalent before,” robust immigration and interprovincial migration have kept pressure on Vancouver’s existing supply issues.
Failure to maintain a steady flow of new housing into the pipeline could then “exacerbate” the affordability issues already plaguing the city.
Rapp says builders are looking for policy measures that can encourage faster approval and addition of new homes, even during the downturn in the market, to ensure the city’s housing inventory is not even more late.
“There has to be some sort of balance found there. We don’t know exactly how this will play out just yet.
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