As we enter 2022’s final quarter, we at AVESDO are digging into the data our system – which handles thousands of national transactions annually – has processed this year.
On the heels of a frothy fall in 2021, one that saw a third of the year's sales absorbed in its final quarter, Q1 2022 started with a bang. Developers brought thousands of new homes to market; we saw a +250% increase in new units made available in our system QoQ and YoY. They showcased the highest absorption rates seen in Canada, absorbing, on average, +67% of their inventory within 30 days of release (compared to a typical pre-sale requirement of 60% within 9-12 months.) Their success was unprecedented.
We also saw older inventory from past launches – the expensive and the less desirable – sucked up in the high-absorption frenzy.
Inflation was quickly climbing by Q4 of 2021 and would surge in Q1 of 2022, closing the quarter at 6.7% – a full 2% higher than the fall market. The Bank of Canada would not raise interest rates from their historically-low 0.25% overnight rate until March, and then would only inch it up. Our system recorded double-digit price escalation from Q4 to Q1, and a full 20% increase YoY.
This was the market’s peak.
With inflation steam-rolling; two interest rate hikes within the first two weeks of the quarter; the ongoing Russia/Ukraine war; and a full-scale attack on the market declared by the Bank of Canada and the media, the new-home industry flipped to retraction mode by Q2 2022.
April sales volumes were only moderately down in our system month to month and YoY. Launches remained consistent with 2021, though substantially cooled from Q1’s pace. Absorption rates quickly cooled, and of all the projects launched through our system nationwide since May 1, only a handful are sitting at more than 60% sold – a stark (but normal) contrast from Q1.
Summer saw the typical project-launch trickle hit less than half of 2021’s sales, and developers played “wait and see” with more than 28 projects delayed or pushed to fall (or 2023).
Now a month into fall’s market, only one-third of projects have kept to their launch dates, resulting in 50% fewer homes brought to market YoY. Backlogged inventory is mounting, with 4x as many units ready to launch this October than in 2021… and we’ll see how many actually release. This doesn’t include the 5,000 already pushed to next year.
Price elasticity varies by region, but YoY prices are neutral in most markets with the gains from Q3 2021-Q1 2022 all but erased. Notably, prices are relatively flat across regions – the difference between cities within a 45-minute drive from downtown Vancouver or Toronto has compressed, with the average sale price through our system being over $1000psf now (averaging sales in a continuum from ~$900-1600psf, vs. $700-2000 psf two years ago).
I expect this number reflects both sustained demand for housing further from the core, and that costs of building a new multi-family unit are rising so dramatically, and equally, that the price difference is just marginally offset by regional land prices.
Further, the majority of our system’s inventory is pre-sale; when searching prices of homes sold three or more years ago (typical construction time) that haven’t yet closed, the same areas in most regions are trading up to $300psf higher. It’s unlikely we’ll see much closing risk, even with price declines. In a tightened mortgage market, most buyers’ Loan to Value (LTV) calculations will benefit from equity gained post-purchase, in addition to rental income declarations (which have risen – a lot.)
WHAT DOES IT MEAN?
The data shows that despite any moderate price declines from April 2022, the cost of a mortgaged home purchase is pricier – not without irony, given rampant affordability issues. But the question remains of whether they really softened demand.
Buyer data shows Baby Boomers continue downsizing, millennials continue buying their first homes and upsizing, and surprisingly, investors continue putting money into assets, backed by the strength of rising rents. When offered at “good” market value, the data shows present demand and brisk absorptions – clearly different from when there is no (or curbed) demand.
Immigration has been throttle-down, and demand for rental housing through the roof. So is demand for housing really curbed? I’d argue housing demand is as high as it’s ever been, and home lookers will flip from rental to ownership based on value and ability alone. As rents rise (Toronto’s have risen 43% YoY, per Bullpen Research) to meet new inflated mortgages, ownership will be desirable again. Unfortunately for Canadians, the net result is rental and ownership costs both being higher following this “crash.”
On the supply side, developers have quickly delayed launches to curb supply in line with existing purchase demand. Given most inventory launched in Q4 2021, and Q1 2022 is all but absorbed, we factually do not have an oversupply problem in Canada. In fact, the opposite is still true: we continue to have not nearly enough supply to meet demand.
The same is true for rentals. Much condo supply is purchased by investors for renting purposes; if developers restrict condo supply, rental stock is hit. And with inflated mortgages, many would-be purchasers must rent, resulting in additional supply pressure.
SO, WHAT HAVE WE DONE?
We have not curbed housing demand. In my opinion, we’ve shifted it, short-term, from ownership to rental. As we have not increased (nor could we, quickly enough) the supply of rental housing to match this demand, we created more shortage alongside rising prices. We fuelled the fire with increased immigration, and shut off more new-home supply. We’re left with thousands fewer units, according to our data – and increased costs across the board.
Looking ahead, the quickest accessible supply is the backlog of developer units awaiting a suitable market. Even if rental unit planning began today, developers could not deliver them quickly enough. This market will flip when rents rise enough to justify a more expensive mortgage, or interest rates drop, bringing ownership costs in line with rents. Then, the floodgates will open with both supply and demand surging in new home sales.
With the key triggers now stabilizing: inflation on the decline two months in a row; interest rate increases expected to slow down (or stop); and supply still low with fall absorption rates increasing, it is our belief the new home market could reasonably rebound within the first half of 2023 -- if not sooner.
MAKING DATA-DRIVEN DECISIONS
To think about everything data can accomplish now, and what it will enable in the near future of real estate, is fascinating. Here at AVESDO, we’re already putting data to use to help our clients understand the market, so they can better streamline their sales and contracting processes from lead through to close.
Sign up for a custom demo here, or speak to an advisor about how to ensure success in this (or any) market.
This article was produced in partnership with STOREYS Custom Studio.