In the 30 years or so since it became the most popular way of selling condos and townhomes, the purchase of a pre-construction unit -- or a presale, as it’s known in Vancouver -- is one of the more affordable ways for a first-time buyer to enter the housing market. It has also long been a hot investment market for buyers looking to flip or, more commonly, rent homes out as long-term assets.
If the unit becomes a primary residence, then the owner doesn’t have to pay the capital gains tax once it’s sold. For some investors, that tax break is incentive to move on instead of staying in the built unit, says one realtor.
“I’ve known quite a few older clients who are not working anymore, but their job is to move into the new place they bought and sell it within a year or a year and a half later,” says Vancouver realtor Hao Li. “They just live there, then sell it, and in the meantime they buy more presales, because it takes longer [to complete]. So they have time to move from one to another property, and as one completes, they move into that one. So they are using this method to flip the house basically.
“I remember visiting a client who always had all her belongings in boxes. She was 78. She enjoyed it, living in Kerrisdale, downtown, the Burnaby area.”
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The presale market has slowed, so the ones flipping units might have to wait longer for decent returns. But there are pockets around the Lower Mainland where projects are still selling strong, mostly to end-users who intend to live in the units, according to marketers.
It’s not a frenzied market like last year, but buyers haven’t backed away because of the rising interest rate, which is expected to climb even higher before the year is out.
For example, the Coquitlam presale market is hanging in there, with Strand Development selling 132 units at the Alina in Coquitlam over a two-week period. Marcon sold 100 units in less than 10 days in the Elmwood, also in Coquitlam.
That doesn’t mean prices are going soft just yet, although there are opportunities to negotiate for a discount. But overall, construction costs are going to stay high and developers aren’t feeling the pressure to lower prices yet. That’s because anyone who was in the market a decade ago knows that a 4.5% fixed-term rate or a 3.8% variable rate is still low.
“I don’t think any developer has adjusted prices, or seen the need to do that,” says Lisa McDonald, vice president of sales and marketing for Strand Development.
“It’s largely because people have seen this adjustment to a more balanced market.”
A good share of the demographic purchasing presales is in their thirties and already in the market, looking to upsize, or buy their first investment property. Older buyers are looking at “future use” properties as McDonald calls it, a unit to rent out until their kids are grown up and ready to occupy it.
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Presales are appealing to some buyers because it buys them time. For a highrise unit, a buyer might pay around 10% deposit, followed by a couple more payments over the next two years. Buyers have time to save up until completion.
“When buying presale, you are thinking longer term,” says McDonald. “At today’s prices, you’ve got time to make payments and time to plan. People know that construction costs are not going to come down. So if they want to get into a new home and they’re waiting until interest rates go lower, how many years will that be? And what will be the construction and land cost to build by then? That part won’t come down ever. So regardless of interest rates, it’s probably better to buy a presale today.”
Another driver of the presale market is rent increases. Metro Vancouver has seen rental prices soar this month, with the average monthly rate now at $2,176 for a one-bedroom apartment, according to Liv.rent.
“For first-time buyers, the monthly rent is increasing exponentially and making it less desirable to stay in that rental home, even with interest rates a little higher,” says McDonald. “Paying into something you own is always going to serve you well in the long term, whereas paying higher rent is not. So even though we all want that 1.5% interest rate again, it’s better to get into a home.”
The lag in sales feels more like a typical return to August than the overheated market of last August, when even the summer months kept realtors busy, says Jamie Squires, president of Fifth Avenue Real Estate Marketing, which specializes in presales throughout the region.
“We had an unprecedented market leading up to this, and we’ve had so many interest rate increases, and so close together that it has slowed the market down. “That being said, it’s still a low rate at a historical level. Before, people were getting variable mortgages at prime plus or minus one. There was only one way for it to go -- unless the banks were going to start paying you to have a mortgage,” she says, laughing.
Fifth Avenue brokers are recommending clients look at projects that offer “blanket appraisals,” in which the lender appraises the entire project upfront and holds the rate for 24 to 36 months, depending on how long it takes for the project to complete. Not every project offers such financing, and if they do, the buyer must use a specific lender.
“It’s a slightly higher rate for blanket, but it’s locked in… so at least you know it’s held at that rate at completion. Right now, as a sales and marketing brokerage of presales, we have recommended it to all our clients.”
In a more balanced market, buyers have more negotiating power. They can ask for optional features to be thrown in, and even a possible discount right now, she says.
“The other thing to remember is, developers are releasing a certain amount of inventory and holding some back closer to completion, assuming the market will go back up again. So if you can get in, it’s good, especially if they’re holding inventory back, which means you are already making money.”
