Developers are expected to delay construction of 10,000 new condominium units as preconstruction sales plunge amid interest rate hikes, straining potential buyers and tenants.
By early 2022, approximately 35,000 new condominium units were expected to launch in the GTA. Nearly 16,000 units hit the market at the start of the year, but with less than 10,000 units expected for the rest of 2022, at least 10,000 units will hit the shelves, according to a report released Tuesday by the company. Urbanation market research.
“The new condo market is expected to continue to slow in the near term from last year’s record highs as pre-sale buyers move cautiously and developers delay new openings, with a focus on finishing projects already ongoing,” Shaun Hildebrand, President of Urbanation, said in the report.
“However, prices are expected to remain firm amid low inventory and high development costs. The strong rental market and shifting demand for more affordable ownership options should support condominium activity as the market is feeling the effects of higher interest rates.
Royal Bank of Canada economist Robert Hogue said construction costs and higher interest rates pose a challenge for builders who can no longer complete the full number of units promised by the end of the year. ‘year.
But the rental market remains strong, and those who have invested in a rental condo will continue to see strong returns, Hogue said. However, those who have decided to flip the property or keep it to sell for a higher price will have to sell, perhaps for less than they expected.
“It’s unclear how many investors will have to offload, which will drive prices down,” Hogue said. “But hopefully by early to mid-2023 a price correction will help affordability.”
However, sales in the condominium market are falling faster than prices.
In the GTA, new condo sales fell 19% from the first quarter of this year to the second, and fell another 24% year over year.
The number of unsold new condominiums rose 36% from the 18-quarter low in the first quarter of 2022, but fell 6% per year and remained 20% below the 10-year average.
In addition, since resale prices for condominiums have only decreased by 4.9% quarter over quarter, with inventory levels still low, there is not enough pressure for prices to drop more for new units. Instead, developers are canceling or delaying their launch plans, the report says.
“As developers grapple with rapidly rising construction costs, labor shortages, significant increases in development fees, higher interest rates and long approval times, there appears to be little to no room for new condo prices to adjust downward in the current environment,” the report states.
In the GTA, a record 123,654 new condominiums were either for sale before construction or under construction in the second quarter.
Phil Soper, CEO of Royal LePage, said the slowdown is due to inflationary pressure on construction costs, but demand for condos remains high, as evidenced by record pre-construction sales.
“Condos are the strongest sector of the housing market right now,” Soper said. “If you look at the condo market, about a quarter to a third are sold to contractors who help the rental stock and their returns increase as rents skyrocket.”
He added that the value gap between single-detached homes and condos is narrowing. Because single-detached home prices have risen faster during the pandemic, prices have fallen further as demand for condos soars with people returning to downtown areas.
Single-detached home prices fell 9.5% in the second quarter, while condominium prices fell 3.9%, Soper said.
Over the next few months, the main concern is the tightening of housing supply, which will put upward pressure on prices.
“We have a severe housing shortage and any slowdown in the supply of new homes to accommodate the growing population is disappointing,” Soper said. “In the medium term, this puts uncomfortably high pressure on housing prices and affordability.”