Fewer condominium pre-sales threaten future construction
Canada’s already strained housing market is facing further challenges as sales of pre-construction condominium projects fall to historic lows, jeopardizing funding for new construction and worsening the homeownership crisis.
Economists and realtors told Reuters that with fewer sales of proposed one- and two-bedroom condos, particularly in major cities like Toronto, the flow of financing needed to kickstart new projects is stalling.
These pre-construction sales have traditionally been driven by investors purchasing units to rent out. However, a combination of high mortgage costs, reduced expectations for capital appreciation, slower rent increases, and overall market uncertainty has kept many investors out of the market.
John Pasalis, president of Toronto-based real estate brokerage Realosophy Realty, pointed out that typical homebuyers aren’t flocking to invest in small condo units.
"If you think moms and dads with strollers are lining up at condo projects to buy 500-square-foot condominiums, they are not," he said in an interview with Reuters.
Until recently, investor activity fuelled a construction boom in major urban centres. But high mortgage costs, limited potential for capital gains, slower rent growth, and economic uncertainty are keeping investors on the sidelines.
Normally there must be a threshold of 50% to 70% of units sold before lenders agree to finance projects. Without hitting these benchmarks, projects could be delayed or cancelled, limiting future supply.
Robert Hogue, a housing economist at RBC, noted that a decrease in pre-sales will likely mean fewer construction starts in the coming months.
“We are not going to balance the market for ownership in the next four or five years,” Hogue said, warning that the supply-demand gap could widen as a result.
The Trudeau government has implemented policies aimed at easing the housing crisis, including allowing first-time buyers and those purchasing newly built homes to extend mortgage amortizations to 30 years instead of 25.
Yet, critics argued that these measures do little to stimulate new construction or attract investors, who remain cautious due to uncertain returns. Despite four rounds of rate cuts, the five-year fixed mortgage rate, the most affordable option, hasn’t dropped enough to make a significant impact.
Even a push to manage population growth through stricter immigration policies may not alleviate demand sufficiently, according to Hogue, who noted that the growth rate will likely still be strong.
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The Canada Mortgage and Housing Corporation (CMHC) reported last month that new condominium sales were down by more than half in the first six months of 2024 compared to the same period in 2023. This sharp decline is a concern for developers relying on pre-sales for project funding.
“Building these large condominium structures is quite difficult these days,” said Aled ab Iorwerth, CMHC’s deputy chief economist and co-author of the report.
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