Developers are shying away from projects due to mounting material costs and a lack of skilled labour
Project cancellations will contribute to deteriorating housing affordability across Canada, according to Benjamin Tal of CIBC Capital Markets.
“The significant and rapid increase in interest rates, along with surging construction costs and a lack of available labour make projects that only yesterday looked promising, totally uneconomical,” Tal said.
Of the estimated 30,000 condo units that were slated for launch this year in the Greater Toronto Area (GTA) alone, at least 10,000 have been cancelled or put on ice.
“We are in the midst of a project delay/cancellation wave, with developers choosing to sit on their hands, rather than engaging in a money-losing proposition,” Tal said. “So when the fog clears, the units that were supposed to be built now will not be available – making a tight market even tighter. And that’s the opposite direction of where we should be heading.”
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The trend will likely complicate the ongoing market correction.
“The meteoric ascent in home prices during [the pandemic] was simply a result of front-loading activity,” Tal said. “The asymmetrical nature of the crisis meant that home buyers received the benefit of a recession via ultra-low interest rates, without the cost of a recession via a broadly-based increase in the unemployment rate. The housing market has never seen such a combination.”
Nearly three-quarters of the 14% decline in the average national home price since the February peak was due to the shift in market activity from more expensive low-rise units to less expensive high-rise units.
“This is a similar but much more painful version of the trajectory that we saw in the 2017-18 price adjustment,” Tal explained. “What’s more, the sales-to-new listing ratio, at around 50%, is now where it was for most of the past 15 years – still indicating balanced market conditions.”
