Toronto developers are expected to delay the launch of 10,000 condo units this year as pre-construction condo sales tumble due to rising borrowing costs.
It’s a sign that the broader housing downturn has spread to the pre-construction market, where purchases are seen as bets on future homes as buyers wait years for their properties to be built.
Earlier this year, as resale home prices soared, developers had planned to launch 35,000 new condo units in the Toronto area, according to data from condo research group Urbanation Inc.
But after five tumultuous months in which the Bank of Canada raised interest rates from 0.25% to 2.5% in an effort to contain inflation, promoters have scaled back their plans.
Urbanation estimates that less than 10,000 units should now launch over the next six months. During the first half of the year, approximately 16,000 units were released. This means that approximately 10,000 units have been set aside.
Preconstruction buyers, the majority of whom are investors, have been spooked by soaring interest rates, even though they don’t immediately need mortgages when buying preconstruction condos. Typically, a 20% down payment is required to secure a pre-construction unit. The buyer pays the rest after the condo is built.
“The expectation of future rate increases and their impact on pricing has a profound effect on pre-sale buyer confidence,” Urbanation said in a report.
During the second quarter, there were 6,792 preconstruction sales. This is down 18% from the first quarter, when the housing market was booming. During the same period, developers increased the number of new launches by 63% to 9,924 new condo units, flooding the market with product as buyers began to hesitate.
Demand is expected to decline further as high prices and increased borrowing expenses cause investors to lose the ability to use rental income from their condos to cover mortgage costs and other housing-related expenses. property.
Urbanation estimates that, in the second half of this year, buyers of newly completed condos trying to recoup their expenses through rental income will face an average monthly shortfall of $1.06 per square foot, the equivalent close to $700 per month on a 650-space lot. -foot unit. By 2026, Urbanation projects the lost revenue, or negative cash flow, will be $1.87 per square foot.
“This implies that investors are selling more than in the past, particularly if the returns generated by price appreciation are lower,” the report said. Urbanation added that this was a likely scenario given higher interest rates.
Urbanation also predicts that developers could cancel construction of up to 5,000 condo units, due to rising interest rates and construction costs.
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