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How High Interest Rates Are Affecting Canadian Condo Demand

Rising interest rates and other headwinds to the construction industry have forced builders to shelve condominium projects in some Canadian markets, but demand for condos should hold up given tight supply. There is also

Real estate consultancy Urbanation released a report this week showing that builders in the Greater Toronto Area (GTA) are slashing the number of condominiums scheduled to go on sale this year.

Based on information from developers earlier in the year, Urbanation predicted 35,000 condos could be pre-sold by 2022. The second quarter report said about 16,000 units were actually put up for sale in the first half. An additional 10,000 units are expected to be launched by 2023.

Urbanation expects about 10,000 expected units to be delayed or canceled.

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GTA now hits a record high of approximately 123,654 condos currently in presale or under construction, but Shawn Hildebrand, president of Urbanation, told Global News that the slowdown in launches is “a sign of a slowdown in the housing market. It reflects a decline in buyers’ confidence in the future.


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High cost, making some projects less viable

The bleak outlook is not unique to Toronto. The Canadian Association of Home Builders (CHBA) said in its latest Home Market Index (HMI) that developer confidence dropped significantly in the first half of 2022.

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HMI measures the reliability of Canadian homebuilders out of 100. The index hit an all-time high of nearly 90 for both single-family and multi-family home construction in the first quarter of 2022, but single-family homes were up at 65.7 in the second quarter report released in mid-July. to 59.9 and then dropped further to 59.9. Multi-family housing including condominiums.

The CHBA said labor shortages and rising interest rates were dampening confidence, but noted that the Bank of Canada’s recent 100 basis point rise was not yet priced into the data.

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In addition to interest rates, other costs are rising rapidly for homebuilders, whether due to higher material prices or higher development costs.

As a result, Hildebrand said, condo builders have been unable to lower pre-sale prices to match what buyers can afford, instead shelving units that they don’t think they can sell in the near future. doing.

Investors, who make up the bulk of pre-construction condo buyers, are reluctant, especially in a high-interest-rate environment, Hildebrand notes.

“The slowdown in sales we have seen and the more general market hesitation from buyers makes it difficult for condo projects to start and pass on the increased costs they are experiencing,” he said. say.

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Adverse conditions are also depressing construction activity in Canada’s most expensive housing market.

“Basically, yes, we’re seeing a significant slowdown,” says Ron Rapp, president of the Home Builders Association Vancouver.

Rapp notes that ongoing supply chain issues and other inflationary pressures are driving up material costs.

Builders often have tight windows and timelines to secure funding and approvals and get their shovels in the dirt. If they are unsure about the cost and viability of a project, they are more likely to postpone it and break ground at a later stage when market conditions become clearer, he said.

“Hopefully these supply chain challenges will start to diminish for a little while as things get back online. says Mr.

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Demand is slowing in big cities, but not disappearing

Not all observers feel bleak about the pre-construction condo market.

Marc Lefort is Vice President of McGill Real Estate, which specializes in the pre-construction condominium market in Montreal. He says he’s seen a slowdown in demand this summer, but he attributes it to the “post-Corona holidays.”

“We’ve been feeling a slowdown this summer, but in our analysis, it’s not really interest rates (rising),” he told Global News, adding that he expects demand to pick up again after Labor Day. Added.

Lefort said the developers McGill Real Estate works with have experienced the same labor and cost pressures as non-Quebec builders, but with “several projects” lined up to start in the fall. We have never had a condo canceled or delayed.

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He believes the strong demand for new construction comes from the ongoing supply crisis facing the Canadian housing market. And while rising interest rates may reduce purchasing power, rents will also rise at the same time, so renters have found no compelling reason to sit back, he argues.

Montreal may be an outlier because it hasn’t experienced as much price pressure as Toronto or Vancouver in recent years, Lefort said.

“I think affordability is an exaggeration, but it still falls short of the big cities in North America.”

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Hildebrand said Toronto is currently experiencing a healthy flow of residential units, but a further slowdown could mean the market will be caught off guard when demand picks up again. I have.

“It certainly creates some problems in the supply pipeline, so when demand eventually picks up, supply won’t increase as much as it normally would, as expected,” he says.

Rapp said higher interest rates “stripped the luster from the frenzy that was going on before” while strong immigration and interstate immigration continue to put pressure on Vancouver’s existing supply challenges. .

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The pipeline’s inability to sustain a steady flow of new housing could “exacerbate” the affordability challenges already hitting the city.

Builders are looking for policy measures that can expedite approvals and additions of new homes, even during market downturns, to keep the city’s housing inventory from further falling behind, Rapp said. It says.

“There has to be some kind of balance there. I don’t know exactly how that will play out yet.”


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How High Interest Rates Are Affecting Canadian Condo Demand

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