This is how high interest rates affect the demand for condos in Canada

Rising interest rates and other construction headwinds have prompted builders in some Canadian markets to suspend condominium projects, while others say demand for condominiums will hold up as supply remains tight.

Real estate consultancy Urbanation released a report this week showing builders in the Greater Toronto Area (GTA) are reducing the number of condo units they are expected to launch this year.

Based on input from developers at the start of the year, Urbanation had forecast that 35,000 apartments would be available for presale by 2022. of the year, it now expects just 10,000 additional units for 2023.

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

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While the GTA is currently hitting an all-time high of about 123,654 condo units currently on presale or under construction, Urbanation president Shaun Hildebrand tells Global News that the delay in launches is waning buyers’ confidence in the “future of the housing market”.

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High costs making some projects less viable

The stern outlook is not limited to Toronto. The Canadian Home Builders’ Association (CHBA) said in its latest Housing Market Index (HMI) that developer confidence fell sharply in the first half of 2022.

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The HMI measures Canadian home builders’ confidence on a 100-point scale. While the index hit a record high of nearly 90 for both single-family and multi-family homes in the first quarter of 2022, the second-quarter report released in mid-July showed sharp declines to 65.7 for single-family homes and even lower to 59.9. in multi-family homes, including apartments.

The CHBA pointed to labor shortages and rising interest rates to dampen confidence, but noted that the Bank of Canada’s latest 100 basis point increase would not have been factored into the data yet.

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In addition to interest rates, other costs for homebuilders are also rising rapidly, whether it be higher material prices or increases in development costs.

Hildebrand says that as a result, condo builders are unable to lower their presale prices to meet what buyers can afford, and instead are racking up places they don’t think they will be able to sell in the near future.

Investors, who make up the majority of buyers of pre-construction condominiums, are especially turned off in high-interest-rate environments, notes Hildebrand.

“With the slowdown in sales we’ve seen and just more general hesitation in the buyers’ market, it’s been difficult for condo projects to launch 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.

“In principle, there is indeed a clear slowdown,” said Ron Rapp, president of the Homebuilders Association Vancouver.

Ongoing supply chain problems and other inflationary pressures are driving up materials costs, notes Rapp.

Builders often have tight windows and timelines to secure funding and approvals and get kicks in the dirt; if they’re not confident in a project’s cost and viability, they’re more likely to wait and break through later when market conditions clarify, he says.

“Hopefully those supply chain challenges will ease in the near future as things come back online. But right now, it’s causing significant problems for the construction and development community,” Rapp said.

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Demand slows, but not away, in major cities

Not all observers are gloomy about the pre-construction condo market.

Marc Lefort is associate vice president at McGill Real Estate, which specializes in the pre-construction condo market in Montreal. He says he’s seen a slowdown in demand this summer, but attributes it to a “post-COVID vacation” as potential buyers focus on travel rather than house hunting.

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

Lefort says the developers McGill Real Estate is working with have experienced the same labor and cost pressures as builders outside of Quebec, but says the company has not canceled or delayed any apartments, with “several projects” set to start in the fall.

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He believes the strong demand for new construction stems from the ongoing supply crisis facing the Canadian housing market. And while rising interest rates may dampen purchasing power, as rental rates rise in parallel, renters aren’t finding compelling reasons to wait on the sidelines, he says.

Montreal could be an outlier, Lefort notes, as the city has not experienced the same price pressures as Toronto or Vancouver in recent years.

“I know affordable is a big word, but we’re still less than most major cities in North America.”

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While Hildebrand says Toronto has a good flow of housing in the works today, the upcoming delays could mean the market will be caught off guard when demand picks up again.

“It certainly creates some hiccups in the supply pipeline. So if demand eventually recovers, as we expect, supply will not grow at the same rate as normal,” he says.

Rapp says that while rising interest rates have “wiped the shine off the frenzy that went on before,” robust immigration and interprovincial migration have kept the pressure on Vancouver’s existing supply problems.

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The inability to keep a steady stream of new housing in the pipeline could “exacerbate” the affordability problems already plaguing the city.

Rapp says builders are looking for policies that can encourage faster approvals and additions of new homes, even during the off-market period, to ensure the city’s housing stock doesn’t fall further behind.

“A kind of balance has to be found. We don’t know exactly how that will play out yet.”

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