It was just six weeks ago when we shared our 2023 recap and predictions for 2024, and we thought you’d appreciate knowing how the first month of the year shaped up.
It's been only a few weeks since December CPI data came out and reported an unpopular — but expected — increase. And we’re just shy of two weeks since the Bank of Canada held the overnight rate at 5%, presenting their first indication of decreases to come.
In line with BoC commentary for the last year, it is becoming evident that inflation will be stubborn, likely throughout 2024. This remains true for real estate as well, as the cost to build, buy, finance, and rent a home continues to rise.
New Home Prices
Despite regional drops, inflation realities on the market at large continue to play out when it comes to new home prices; through our system, average national home prices rose almost $100K last year, reaching just under $1M. In addition, we can see that the price band continues to be flattened — suburban markets are up while downtown markets remain flat or down, resulting in the price from the bottom to the top of the market being much more narrow than you would typically expect. As the volume is at the button of the price band, we see the average prices rising.
To illustrate this challenge, I’ll use an example from BC. The suburban market of Port Coquitlam is selling newly-launched projects at the +/- $1,100 PSF mark, when not long ago it was sub-$1,000 PSF. The neighbouring municipality of Coquitlam is stable, and increasing at $1,200+ PSF, while Burnaby is flat or down around $1,300 - $1350 PSF as you move closer to Vancouver; this can move inventory in volume up to $1,600 PSF, when the top of that market used to fetch $2,000 PSF or higher.
The result is a range of just $1,100 - $1,600 PSF across a one-hour distance, which used to vary from sub-$1,000 PSF to $2,000 PSF+.
A similar story — but with slightly lower numbers — could be told about Ontario, when looking at the suburban markets of Hamilton/Burlington, or North/East GTA vs. Toronto proper.
This means that the market has reset its bottom to a higher level, and when volumes pick up again this year, you’ll see the top expand to new heights. This is contrary to what the TikTok trolls expected when they predicted massive market crashes. Instead, the net result will be higher prices across the board.
On the sales side, with a late holiday this year and most people back to school and work January 8th, the first week of the month was slow. The second week was a “gear-up week,” so was also slow, while the third saw a marginal pickup.
We also recorded zero project launches this month, which is especially low, despite there typically not being many. The net result? January new home sales are down YoY because of this factor, but we don’t believe this is indicative of the demand that is out there — instead, it has more to do with timing of the holidays. This theory will be tested as early as this weekend, as some of the first projects of the year are launching.
Despite what I mentioned above with regards to zero launches moving through our system in January, the market is already anticipating a rate drop in the coming months and is preparing supply. We started the year with 27 projects actively being worked on by our customer care set-up team, with another 27 listed as “upcoming,” with dates as early as March 1, 2024.
In total, we can see almost 10,000 homes in our set-up funnel already for the first half of the year. Some will delay, and many new projects will be added. In fact, our sales team is reporting a very busy month on the horizon, as excitement among the development community mounts.
In line with the January shortfall, I expect we will be lucky to see 60% of these developments come to market on time though. Reason being, we are already hearing about the resource challenges our clients are facing as they try to gear up, and the vendor community has faced team shrinkage over the last two years. There are not enough lawyers to complete disclosures and contract docs, not enough labour to put up signs, and everyone in between is maxed, unable to staff up until they see money coming through the door again.
Finally, I want to cover a topic on the closing side, where there have been some — dare I say — irresponsible journalists contributing nonsense in the media. The moderate increase in closing risk is not a signal for a wave of collapses out there. Period. There are a few issues to tackle here: contracted presale prices vs. current values, the ability for a buyer to get financed, and the various tools available before a buyer finds themselves in breach and “loses their deposit”.
First — with the exception of very luxury product in downtown markets, niche areas, or low-density product types with a short build time — almost everyone who purchased a presale they have yet to close on has either still made money, or is flat. For the most part, presales closing today were purchased in 2020 or 2021, and the market has seen growth since then, almost across the board. The bigger issue we are seeing with financing has to do with stricter borrowing criteria, and the cost of borrowing.
It is true that more people are struggling to get financed by traditional methods, but most of those people are able to get financing at higher rates by second-tier or private lenders, regardless of if they want to. For many, this will make carrying difficult or even impossible, so we will see more people immediately reselling their homes after closing. But as already mentioned, most will be even or ahead by then, and all have up to 20% prepaid deposits to take any losses without losing their home or forcing bankruptcy, trying to find cash they don’t have.
And finally, yes, there are more assignments, as people A) don’t want to take on the new mortgage obligations, or B) look to recoup their deposits and any equity growth to cover other investments or opportunities, rather than closing. Developers almost always reserve the right to deny an assignment, which helps control their supply, which further protects values for presales purchasers. From our view of the data in this under-supplied market, the number of assignments is not out of the ordinary, nor at numbers that should cause alarm.
So, by all accounts, although a more challenging environment than previous, we don’t see any significant closing risk to be sensational about in the new home market.
In summary, January starts 2024 with flat rates and stronger indication of an impending drop, sticky inflation and new home prices going up, and developers preparing supply with expectation that steady sales will pick up. Despite some continued challenging times for purchasers weathering the increases, it appears there never was — and won’t be — a bursting bubble in Canada. In fact, quite the opposite is more likely over the next 12 months.
It doesn’t take an expert to consider that falling rates, increasing prices, low controlled supply, and increasing demand smells like a buying opportunity in our midst.
We stand by our prediction that Q2 will see everything pick up, in lock step with the first rate cut, as the market continues to bump along the bottom with lackluster results throughout Q1.
This article is authored by Ben Smith, President of AVESDO: a Canadian software company harnessing the power of data to help real estate professionals make better, faster, and more informed sales decisions.
This article was produced in partnership with STOREYS Custom Studio.