Toronto developers are expected to delay the launch of 10,000 condo units this year as sales of construction condominiums plummet amid higher borrowing costs.
This is a sign that the broader real estate slowdown has spread to the pre-construction market, where purchases are seen as bets on future homes as buyers wait years for their property to be built.
At the start of the year, as home prices soared, developers planned to launch 35,000 new condo units in the Toronto area, according to data from research group Urbanation Inc.
But after a tumultuous five months in which the Bank of Canada raised interest rates from 0.25 percent to 2.5 percent in an effort to contain inflation, developers have scaled back plans.
Urbanation estimates that fewer than 10,000 units are expected to be launched in the next six months. In the first half of the year, approximately 16,000 units were put on the market. That means there are about 10,000 pieces on the shelf.
Front-end buyers, the majority of whom are investors, are shocked by the rise in interest rates, even though they don’t need a mortgage right away when they buy front-end apartments. Typically, a 20 percent deposit is required to secure a pre-construction unit. The buyer pays the rest after the apartment is built.
“The expectation of future rate hikes and their impact on prices has a profound effect on presale buyer confidence,” Urbanation said in a report.
During the second quarter, there were 6,792 construction sales. That was 18 percent less than in the first quarter, when the housing market flourished. Over the same period, developers increased the number of new launches by 63 percent to 9,924 new apartments, flooding the market with products as buyers began to waver.
Demand is expected to decline further as high prices and higher borrowing costs prevent investors from using the revenue from renting out their condominiums to cover the cost of their mortgages and other property-related expenses.
Urbanation estimates that in the second half of this year, buyers of newly completed apartments trying to recoup their expenses through rental income will face an average monthly deficit of $1.06 per square foot, or the equivalent of nearly $700. per month on a 650 square meter-foot unit. Urbanation predicts that by 2026, that deficit, or negative cash flow, will be $1.87 per square foot.
“The implication of this is that investors are selling more than in the past, especially if the returns generated by price increases are lower,” the report said. Urbanation added that this is a likely scenario given the higher interest rates.
Urbanation also predicts developers could cancel construction of up to 5,000 condo units due to higher interest rates and construction costs.
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