We’ve heard that the real estate market has been slow a multiple times since the beginning of this year. What does that mean for pre-construction? That sector of the market has seen a real slow down throughout 2023 and this year, 2024. Presales are down, the buyers on the sidelines and the developers are simply pushing off the launches for better times.

Interest Rates

First up, let's talk about interest rates. Since March 2022, the Bank of Canada has been steadily increasing interest rates to combat inflation. This move aimed to bring inflation down to a target of 2%, and initially, it seemed to be working. Inflation dropped from a peak of 8.1% in June 2022. However, in April 2023, the Consumer Price Index, or CPI, rose by 4.4%, the first uptick since the peak. This led to further rate hikes, with the policy interest rate reaching 4.75% in June 2023 and then 5% in July, where it had stayed until this spring. Since then we have had two quarter-percent cuts as of this writing.

These high interest rates make borrowing money for mortgages more expensive. For many potential buyers, especially those looking at new constructions that often require larger mortgages, this is a major deterrent. When borrowing costs are high, fewer people are willing or able to commit to a new home. Even the two rate cuts haven't moved the needle much.

Source: Bank of Canada https://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/

Developer Caution

Developers look at the market trends and they currently see a sluggish market. Many developers in the Greater Toronto Area are hesitant to launch new pre-construction projects. Why? Well, developers usually need to secure a certain number of pre-sales before they can get financing to start construction. Think of it as a kind of safety net. If they can't sell enough units upfront, they can't get the loans they need to build. It's a risky situation.

Imagine you're a developer. You’ve got the land, you’ve got the plans, but you need those pre-sales to kickstart everything. With fewer buyers willing to commit because of high interest rates and economic uncertainties, reaching that pre-sale target becomes challenging. This creates a catch-22: without pre-sales, no financing; without financing, no construction; and without new projects, the market remains slow.

Economic Uncertainty

Speaking of the broader economic uncertainty: when people sense that the economy might be headed for a downturn, they naturally become more cautious about making big financial decisions, like buying a new home. Today’s economic uncertainty is driven by various factors including geopolitical events, changes in government policies, and global economic trends.

This uncertainty has made potential buyers wary. They're concerned about job security, future income stability, and overall financial health. In such times, the idea of taking on a significant financial commitment like a new home, especially one that won't be ready for a few years, can seem too risky. This cautious approach contributes to the slowdown in the pre-construction market.

Increased Inventory of Unsold Units

Adding to the mix is the issue of increased inventory. With fewer sales, there are more unsold pre-construction units on the market. This increased inventory can create a perception problem. Potential buyers might see the glut of unsold units and think, ‘if so many homes are unsold, maybe there's something wrong with the market or these properties specifically.’

Buyers might also worry about future property values. If there are a lot of unsold units now, they might fear that prices could drop further, leading them to hold off on making a purchase. This hesitation can create a cycle where increased inventory leads to more buyer hesitation, which in turn leads to even higher inventory levels.

Developers, seeing their units unsold, might also slow down on new projects to avoid adding to the inventory glut. This slowdown in new project launches further contributes to the overall sluggishness in the pre-construction market.

Market Dynamics

The Canadian housing market, particularly in the GTA, is experiencing its most significant challenge since the 1991 recession. The GTA's housing market is divided into two distinct segments. The low-rise market is relatively stable, with limited inventories and improved sentiment due to recent mortgage rate trends. In contrast, the condo market is in a recession, facing conditions not seen in decades. Investors, who account for up to 70% of presale buyers, add to the complexity of the situation.

From a macro perspective, the significant slowdown in condo activity has substantial implications. Typically, each construction crane symbolizes around 500 jobs. Since 2022, the number of condo projects under construction in the GTA has dropped by at least 75, affecting nearly 40,000 jobs. Official statistics show that as of June this year, construction employment in Ontario decreased by at least 7.5% year-over-year. Except for the COVID-19 recession, this is the weakest performance since the 2008 recession.

The ripple effects of this slowdown are profound. As construction projects stall, job losses increase, affecting not only the housing market but also the broader economy. This creates a feedback loop, where economic uncertainty further depresses housing demand, leading to even more pronounced market stagnation.

So, what's the takeaway here? The pre-construction market might be slow right now, but it's important to remember that markets are cyclical. These trends we're seeing today won't last forever. Interest rates, developer confidence, economic conditions: they all fluctuate. Staying informed and being prepared to act when the market shifts can position you well for the future.

If you're considering a pre-construction purchase, now might be a good time to start doing your research, so you're ready to move when the market picks up. And as always, I'm here to help you navigate these changes and find the perfect property that fits your needs.

Call 647-834-9928 or email [email protected]

Cheers!