Here’s how high interest rates are affecting Canada’s condo demand.

Rising interest rates and other headwinds in the construction industry have forced builders in some Canadian markets to shelve condominium projects, while others say demand for condos will remain as supply remains tight.

Real estate consulting firm Urbanization continues A report for this week It’s showing that builders in the Greater Toronto Area (GTA) are cutting back on the number of condo units they’re starting this year.

Based on inputs from developers at the beginning of the year, Urbanization predicted that 35,000 condo units would be available for pre-sales by 2022. In its Q2 report, it said around 16,000 units were offered for sale in the first half. Of the year, it now expects to launch 10,000 more units before 2023 alone.

Urbanization expects about 10,000 projected units to be delayed or canceled.

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Although the GTA is currently experiencing an all-time high of about 123,654 condo units that are currently pre-sales or under construction, Urbanization President Sean Hildebrand told OlxPraca that the slowdown in launches is a “future of the housing market” for buyers. Reflects a reduction in confidence.


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High costs make some projects less viable

Door Outlook isn’t limited to Toronto. The Canadian Home Builders Association (CHBA) said in its latest Housing Market Index (HMI) that developer confidence declined markedly in the first half of 2022.

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The HMI measures the confidence of Canadian residential builders on a 100-point scale. While the index posted all-time highs near 90 for both single- and multifamily home building in the first quarter of 2022, the second-quarter report released in mid-July showed 65.7 and lower for single-family homes. A drop to 59.9 was shown. In multi-family, including condos.

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

Read more:

Canada needs to build new homes, but the construction industry is headed for the retirement wall.

Apart from interest rates, other costs for home builders are rising rapidly, whether due to higher material costs or increased development charges.

As a result, Hildebrand says, condo developers are unable to lower their pre-sale prices to meet buyers’ affordability and are instead hoarding units they don’t believe will be affordable. They will be able to sell in the near future.

Hildebrand notes that investors, who make up the majority of pre-construction condo buyers, are especially locked out in a high-interest-rate environment.

“With the slowdown in sales that we’ve seen and more general market reluctance on the part of buyers, it’s difficult to get condo projects off the ground and offset the cost increases they’re facing,” he says. .

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

“Basically, yes, there’s been a definite slowdown,” says Ron Rapp, president of the Home Builders Association of Vancouver.

Ongoing supply chain issues and other inflationary pressures are driving up material prices, Rep notes.

Builders often have tight windows and timelines to secure financing and approvals and get shovels in the dirt. If they don’t feel confident about a project’s cost and viability, they’re more likely to hold off and break ground later when market conditions become clear, he says.

“Hopefully these supply chain challenges will start to ease over the next little while as things come back online. But right now, it’s causing significant problems for the building and development community,” says Rapp. .

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Demand in major cities is slowing, but not dead.

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

Mark Lefort is an Associate Vice President of McGill Real Estate, specializing in Montreal’s pre-construction condo market. He says he’s seen a drop in demand this summer, but attributes that to the “post-COVID holiday,” as buyers focus on traveling rather than house hunting.

“We see a slowdown this summer, but in our analysis it’s not really interest rates (increasing),” he tells OlxPraca, adding that he expects demand to pick up after Labor Day. Will increase again.

Lefort says developers working with McGill Real Estate have experienced the same labor and cost pressures as builders outside Quebec, but says the company hasn’t seen any condo cancellations or delays. , with “multiple projects” slated to begin in the fall.

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He believes the strong demand for new construction comes from the ongoing supply crunch facing Canada’s housing market. And while rising interest rates may reduce purchasing power, as rental rates rise in parallel, renters aren’t finding compelling reasons to wait for an opportunity.

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

“I know affordability is a big word, but we’re still below the big cities in North America.”

Read more:

Montreal home sales down 18 per cent from last July: Quebec Real Estate Association

While Hildebrand says Toronto has a very good flow of housing units today, the coming slowdown could mean the market will drop cautiously when demand picks up again.

“It certainly creates some hiccups in the supply pipeline. So when demand eventually recovers, as we expect it will, supply won’t expand as much as it normally would. ,” they say.

Rapp says that while rising interest rates have “put an end to the earlier frenzy,” strong immigration and interprovincial migration have kept pressure on Vancouver’s existing supply challenges.

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Failure to maintain a steady flow of new housing in the pipeline, then, could “exacerbate” the affordability challenges the city already faces.

Rapp says builders are looking for policy measures that can encourage early approvals and additions of new housing, even during market downturns, to ensure the city’s housing inventory doesn’t fall further behind. .

“There has to be some kind of balance. We’re not really sure how that’s going yet.


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