Here’s how high interest rates affect apartment demand in Canada

Rising interest rates and other headwinds in the construction industry have prompted builders in some Canadian markets to delay condominium projects, while others say apartment demand will hold up as supply continues.

Real estate consultancy Urbanation released a report this week showing that builders in the Greater Toronto Area (GTA) are reducing the number of housing units they were expecting to release this year.

Based on input from developers at the beginning of the year, Urbanation expected 35,000 units to be available for sale before 2022. In its second quarter report, it said that while about 16,000 units had already been put up for sale in the first half of this year, it now only expects to launch an additional 10,000 units. before 2023.

Urbanization expects that about 10,000 projected units will be delayed or canceled.

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Although the GTA is now seeing an all-time high of about 123,654 housing units currently in pre-sale or under construction, Urbanation President Shaun Hildebrand told Global News that the slowdown in launches reflects waning buyer confidence in the “future of the housing market.” .


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High costs make some projects less viable

The harsh outlook is not limited to Toronto. The Canadian Home Builders Association (CHBA) said in its latest Housing Market Index (HMI) that there was a sharp drop in developer confidence during the first half of 2022.

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HMI measures the confidence of Canadian homebuilders on a 100-point scale. While the index hit all-time highs near 90 for both single and multiple home construction in the first quarter of 2022, the second quarter report released in mid-July showed a sharp drop to 65.7 for single homes and even below 59.9 for multifamily, which includes apartments.

The CHBA cited labor shortages and higher interest rates to dampen confidence, but noted that the Bank of Canada’s recent 100 basis point increase had not yet been factored into the data.

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In addition to interest rates, other costs are rising rapidly for homebuilders, whether it’s due to higher material prices or higher development fees.

As a result, Hildebrand says, apartment builders aren’t able to drop pre-sale prices to meet what buyers can afford and instead, they don’t think they will be able to sell them in the near future.

Hildebrand notes that investors, who make up the majority of pre-construction apartment buyers, are particularly held back in higher interest rate environments.

“With the slowdown in sales we’ve seen and more general hesitation in the marketplace from buyers, it’s hard for condominium projects to start and pass on the cost increases they face,” he says.

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Adverse conditions are also reducing construction activity in Canada’s most expensive housing market.

“Basically, yes, there has been a noticeable slowdown,” says Ron Raab, president of the Vancouver Home Builders Association.

Raab notes that persistent supply chain issues and other inflationary pressures are driving up material costs.

Builders often have tight windows and schedules for securing financing, approvals, and getting shovels into the dirt; If they don’t feel confident about the project’s costs and viability, they are more likely to delay and start working later when market conditions clear, he says.

“Hopefully these supply chain challenges will start to diminish over the next few period as things get back online. But right now, it is causing major problems for the construction community and development community,” says Raab.

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Demand is slowing, but it hasn’t gone away, in major cities

Not all observers are sad about the pre-construction apartment market.

Marc Lefort is associate vice president of McGill Real Estate, which specializes in the market for pre-construction apartments in Montreal. He says he’s seen a slowdown in demand this summer, but he attributes it to a “post-COVID vacation,” where potential buyers focus on travel rather than house hunting.

“We’re feeling a slowdown this summer, but in our analysis it’s not really about interest rates going up,” he told Global News, adding that he expects demand to pick up again after Labor Day.

Lefort says developers working with McGill Real Estate have experienced the same labor and cost pressures as builders outside Quebec, but he says the company has not seen any apartments canceled or delayed, with “many projects” due to launch in the fall.

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He believes that the strong demand for new buildings comes from the ongoing supply crunch facing the Canadian housing market. And while higher interest rates can erode purchasing power, with rents rising in parallel, renters don’t find compelling reasons to wait on the sidelines, he argues.

Lefort notes that Montreal may be out of the ordinary, as the city hasn’t experienced the same price pressures as Toronto or Vancouver in recent years.

“I know affordability is a big word, but we’re still less than most major cities in North America.”

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While Hildebrand says Toronto has a good flow of condominiums in the works today, the upcoming slowdown could mean the market is surprised when demand picks up again.

“It certainly creates some hiccups in the supply pipeline. So when demand eventually recovers, as we expect it to happen, supply will not grow as much as it normally does.”

Raab says that while rising interest rates “has removed the shine from the madness that was going on before,” strong immigration and inter-provincial immigration have kept pressure on Vancouver’s current supply challenges.

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Thus, the inability to maintain a steady flow of new housing in the pipeline could “exacerbate” the affordability challenges already hitting the city.

Raab says builders are looking for policy measures that can encourage faster approval and the addition of new housing, even during a market downturn, to ensure the city’s housing stock is not delayed.

“There has to be some sort of balance there. We are not quite sure how that will happen yet.”


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