It’s no secret that as rising interest rates take their toll, the new home market has slowed to a crawl; hefty borrowing costs, combined with a softening economy, have slashed consumer demand and led to a historically slow fall.
However, this insight hasn’t made the September numbers any less jarring; the latest data combined by the Building Industry and Land Development Association in partnership with Altus Group found it was a “very slow” month, with condo and single-family home sales plunging by 89% and 96%, respectively, retreating deeply below the 10-year average.
Additional data from Altus shows that year-to-date condo sales are down -20.8%, with the low-rise segment taking the brunt at a decline of 67.9%. There are also far fewer high rise project completions this year, down -39.5% compared to the first nine months of 2021. Meanwhile, a separate data set from Urbanation recorded a 79% decline in sales for the third quarter, with just 1,748 new condo transactions. That marks the second-lowest quarter since Q1 2009, when only 887 units traded hands amid the financial crisis.
Edward Jegg, Research Manager at Altus Group, tells STOREYS the last time year-to-date new homes sales dropped this severely was in 2018, as the market grappled with a round of tighter mortgage regulations, development charges, foreign buyer taxes, and rent controls.
“That was a situation where there were certain shocks in the market, just as there are now, that’s driving a lot of this,” he says.
And, while rising interest rates are certainly a “catalyst” behind today’s softer demand, overall unaffordability and negative buyer psychology are main contributors.
“We’ve had a longstanding affordability crisis here in Toronto that we’ve never gotten past and now you add the rising inflation rates… but also playing on buyers’ minds is the uncertainty with where the economy is going in all this,” he says. “We’ve started to see some job losses from StatCan employment data, and we know if people don’t have jobs, they’re not going to buy houses, fridges, or large items. I think there’s a bit of a wait-and-see feeling coming to the market now, based on the last two to three months where everyone wants to see where we’re going to land before they jump in.”
But that’s not to say there isn’t a bit of life left in today’s pre-con market. A little creativity -- and deep pockets -- are proving effective in drawing the serious buyers back out of the woodwork.
Inventive perks, such as gifted luxury handbags with a unit purchase, became more prevalent over the summer. These days, though, developers are even willing to take a financial hit if it means keeping their pipelines alive.
For example, developer giant Mattamy Homes featured aggressive pricing and lower-than-typical deposit requirements in two projects launched last week: a 13-storey tower at Bloor and High Park, as well as a mid-rise and townhome complex in Milton. Both projects require only a 10% deposit, with the latter featuring prices as low as $958 psf.
The tactic follows a previously successful Milton townhouse launch, which -- priced at 2021 levels -- sold out all 85 available homes over the course of a weekend, says Elliot Taube, President and Broker at EMT Consulting Inc.
“What it has done is it has shown that the right price and the right deposit structure can generate deals in what’s been basically a dead market,” he says. “Some of the big [developers] are going to say, ‘Is it going to be better in 2023, or is it going to be worse? We know where we’re at today so let’s take a shot at it.’”
However, Taube doesn’t anticipate seeing these tactics play out on a broad scale -- it takes a certain type of well-capitalized entity to eat the price difference.
“There [are] a couple of companies that really operate at a different level than everybody else, just because of their size, their machine that they need to feed, their ability to finance the money, and prices,” he says. “It did show us a price that will generate deals, and get the market kind of moving, but not at a ferocious pace.”
Jegg agrees that he’s seeing more out-of-the-box thinking from large builders, though most are holding firm on their pricing structures.
“A couple of builders are trying different things to help, you’re going to see more of it,” he says. “We have been seeing some developers lowering deposits, where often it’s around 20%, going down to 10 and 15% range… We know of one developer that is actually going to do a spec build, where they’ll build it and finance it themselves. But it’s only the largest builders that have the capacity to do that.”
In addition to stoking customer demand, keeping their pipelines well stocked and flowing serves another purpose, says Jegg -- developers can hang on to their trades, which are at a historical low in terms of supply, contributing to soaring construction costs.
“We’re more or less operating at capacity the way it is, and this is with spiking construction costs for materials and labour, various material shortages,” he says.
Recently proposed legislation from the Ontario government looks to alleviate such challenges for developers, including reduced development charges and eased inclusionary zoning requirements. However, it remains unclear whether the developer-friendly measures will effectively offset today's rate pain, and spur further building.
"It may take some time for those to start to flow through," says Jegg. "Developers that are market-first, that are marketing projects that have already gone to market for their capital, or they’ve got their plan set up, so this is more for setting the stage for the next six to nine months and forward, and that it helps to stimulate construction.”
One thing is certain: for the buyers that are still active in today’s market, this all spells a decent time to be on the hunt, says Taube.
“For developers who have existing inventory and sites, it is a good time for people in the market to look because there’s an incentive-rich climate out there, like zero closing costs on new construction, no caps from DCs -- there’s an amazing amount of opportunities, so that’s an important factor, for people who are really serious and looking, this is a great time.”