Toronto developers are expected to delay the launch of 10,000 units this year, as pre-construction apartment sales slump amid rising borrowing costs.
This is a sign that the broader downturn in the real estate sector has extended into the pre-construction market, where purchases are seen as bets on future housing as buyers wait years for their properties to be built.
At the start of the year, when home resale prices soared, developers planned to launch 35,000 new housing units in the Toronto area, according to data from apartment research group Urbanation Inc.
But after five turbulent months in which the Bank of Canada raised interest rates to 2.5 per cent from 0.25 per cent in an effort to rein in inflation, developers have scaled back their plans.
Urbanation estimates that fewer than 10,000 units are now expected to be launched over the next six months. In the first half of the year, about 16,000 units were put on the market. This means that about 10,000 units have been suspended.
Pre-construction buyers, mostly investors, have been spooked by the jump in interest rates even though they don’t immediately need mortgages when they buy pre-constructed apartments. Usually, a 20 percent down payment is required to secure a pre-construction unit. The buyer pays the rest after the apartment is built.
“Expecting future price increases and their impact on prices has a profound impact on pre-sale buyer confidence,” Urbanation said in a report.
During the second quarter, there were 6,792 pre-construction sales. That was 18 percent less than in the first quarter, when the housing market was rising. During the same period, developers increased the number of new launches by 63 percent to 9,924 new housing units, flooding the market with the product as buyers began to hesitate.
Demand is expected to decline further as higher prices and increased borrowing expenses cause investors to lose the ability to use revenue from renting their apartments to cover mortgage costs and other property-related expenses.
Urbanation estimates that in the second half of this year, buyers of newly completed apartments trying to make up for their expenses with rental income will face an average monthly shortfall of $1.06 per square foot, or roughly $700 per month for a 650-square-meter area. Foot unit. By 2026, Urbanation expects the deficit, or negative cash flow, to reach $1.87 per square foot.
“The implication of this is that investor sales will increase more than in the past, especially if the returns from higher prices are lower,” the report said. Urbanation added that this is a likely scenario given higher interest rates.
Urbanation also anticipates that developers can cancel construction of up to 5,000 housing units, due to higher interest rates and construction costs.
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