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Year-to-date sales from January to May 2024 were 39% below those in the same period in 2009
Published Jul 19, 2024 • 7 minute read
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In May 2024, the number of new home sales in the Greater Toronto Area (GTA) plummeted to its lowest since the early days of the pandemic. Photo by Shutterstock
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These are challenging times for condo developers. Sales are down, supply is stagnant, new construction has ground to a halt. In an effort to move unsold inventory, developers are taking the “gift with purchase” strategy up a notch, offering an array of tantalizing perks — free parking, dream vacations, new cars.
Now the government is stepping in with an incentive of its own — the insured 30-year amortized mortgage — to tempt first-time homebuyers into the market. It’s not quite as sexy as what’s on offer from condo marketers, but it’s a welcome policy nonetheless, from both a real estate and housing affordability standpoint.
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Riz Dhanji, founder and president of Toronto-based pre-construction marketing firm, RAD, explains that “sticker shock” and elevated interest rates have brought sales to a screeching halt.
“Obviously the pricing is quite high. In the pre-construction phase, pricing has a lot to do with government taxes, new regulations, development charges, and rising construction costs. Builders are trying to make a thin margin, yet the price is still high,” Dhanji said.
He is skeptical that a mere 25 basis point drop won’t spark a rush back into real estate. He believes it will take more substantial rate cuts to lure back buyers and reignite the market.
Earlier this year, the Canadian Home Builders’ Association (CHBA) revealed a growing unease among developers. In 2023, 64 per cent reported reduced home construction due to high interest rates, while 30 per cent had to cancel ongoing projects due to economic headwinds.
By May 2024, the number of new home sales in the Greater Toronto Area (GTA) plummeted to its lowest since the early days of the pandemic, in May of 2020. A Building Industry and Land Development Association (BILD) report, released on June 26, revealed only 936 new home sales in May — down a staggering 71 per cent from May 2023 and 71 per cent below the 10-year average.
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Year-to-date sales from January to May 2024 were 39 per cent below those in the same period in 2009, despite a 20 per cent rise in Toronto’s population.
Interest rates could help inventory
In June, just after the Bank of Canada dropped its overnight rate, Dream Unlimited Corp. chief executive Michael Cooper explained that when inventory is slow to move, it directly hampers the construction of new homes.
“Now that interest rates seem to be on the decline, the initial step will be for people to absorb existing inventory, whether through resales or properties held by developers. This absorption is a crucial precursor to any significant increase in new housing construction activity.”
According to BILD, new home inventory totalled 20,427 units in May, comprising 16,845 condominiums and 3,582 single-family homes. This equates to 14.5 months of supply based on sales averages over the past year, continuing the high inventory trend that has hovered near the 20,000-mark since last fall.
With developers needing to sell at least 70 per cent of a project to secure bank funding, buyers’ reluctance to enter the new home market is widening a critical gap in an already undersupplied pipeline.
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BILD’s senior vice president of communications and stakeholder relations, Justin Sherwood, voiced his concerns about the upcoming years.
“The continuing record lows in new home sales is a flashing check engine light on the dashboard. Today’s sales are tomorrow’s starts. It is inevitable that we are entering further tight supply conditions in the next two to three years,” Sherwood said. “Not only are high interest rates keeping buyers on the sidelines, but higher rates are making financing for new projects more difficult and expensive… the new home industry in the GTA is slowing down precipitously and supply in the 2025-2027 time period will reflect this.”
In the report, Sherwood urges all levels of government, the Canadian Mortgage and Housing Corporation (CMHC) and industry leaders to come together and forge collaborative solutions that will empower those looking to make the GTA their home.
The solution Sherwood is hoping for could become a reality in just a month, with the introduction of the CMHC’s 30-year amortizations exclusively for first-time homebuyers.
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Starting August 1, first-time buyers purchasing a new build can secure insured mortgages with 30-year amortizations, up from the previous 25-year limit. This decision was among several housing initiatives announced in the federal government’s 2024 budget. In June, the feds finally unfurled guidelines for the new policy.
Will this policy change help developers sell more units and meet the urgent demand for homes across the country? Its impact hinges on whether it significantly improves opportunities for first-time buyers trying to get a foothold in the market.
“It all depends,” says mortgage broker and realtor, Victor Tran of rates.ca.
“In cities with average property prices above $1 million, such as Toronto and Vancouver, it’s not going to give first-time homebuyers much more leverage. The majority of new builds will be above the million-dollar mark, which means that mortgages taken out for those properties will be uninsured. In markets with lower average home prices and a solid supply of new builds, this could help some get on the property ladder.”
Tran explains that along with the new 30-year amortization policy, there will be an additional 20-basis-point insurance surcharge starting August 1, which somewhat offsets the impact of the extended mortgage term. For instance, for a first-time homebuyer earning an annual gross income of $100,000* and obtaining a five-year fixed-rate mortgage at five per cent, the maximum purchase price would be $405,000, resulting in a monthly payment of $2,327. Extending the amortization to 30 years would increase the purchase price to $428,000 — an additional $23,000 — with $7,116 in extra interest over the five-year mortgage term, and a monthly payment of $2,261.
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Alex Leduc, chief executive of Perch, a Toronto based digital mortgage advisory, says the new 30-year policy raises the max purchase price a buyer can qualify for by around five per cent. “This is very valuable to first-time homebuyers, since it gives them a bit more of a buffer for a higher price point,” Leduc said.
Dhanji, whose team handles marketing for some of the most high-profile residential projects in the GTA, is notably less optimistic about the new policy’s potential to significantly impact developers, who rely on absorption of housing supply to launch new projects.
“It’ll attract a wider range of buyers, perhaps those who aren’t quite able to afford the million-dollar property right now. I just don’t think that the amortization for pre-construction is going to be a game changer since that still depends on a buyer’s ability to close in maybe four years.”
Help for new project deposits?
He explained that when buying pre-construction, consumers are buying today for four to five years later, when the building is completed.
“So people are not really thinking, in four years, ‘Oh, my God, I’m going to be able to get a longer amortization, and that will help me spread my payments. We don’t see people coming in and saying, ‘We hear that there’s going to be a new change in the amortization period, and we’re really interested.’ I don’t think that’s moving the dial,” Dhanji said.
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Instead, he suggests that the government should focus on assisting first-time homebuyers with their deposits for pre-construction homes. According to Dhanji, buyers are struggling with deposits, and a no or low-interest loan until closing, repayable upon sale, would be more beneficial and supportive for the market.
Barry Fenton, chief executive of Lanterra Developments, shares Dhanji’s view that the government could find ways to reduce monthly payments for buyers. However, he views the latest mortgage policy as a positive step forward.
“I think it’s going to help,” Fenton said. “I think anything that the banks can do to offset the increase in interest rates helps.”
Pre-sale markets differ from new builds, where many developers are currently stuck with unsold inventory. Fenton believes this new policy could help shift that stagnant inventory. While the immediate impact on the pre-construction market is uncertain, he envisions this policy significantly boosting demand in the pre-sale market within a few years.
“Most people that buy pre-sales, they put deposits down over three or four years, and they close four years thereafter. I think four years from now, it’s going to be a completely different market because there’ll be more demand for supply. The issue is not going to get fixed in the next three, four years.”
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In the meantime, the supply gap is widening, and Canada is drifting further from its goal of building 3.87 million new homes by 2031. To achieve this target, the country needs to construct an average of 483,740 new residences each year for the next eight years. However, from 2000 to 2023, the annual average was just 208,939. The pressure is mounting, and the clock is ticking.
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Despite the amortization extension, Dhanji doubts the housing target will be met. He expects some of the lowest housing starts in history over the next year or two, leading to fewer completions in the following three to four years amid increasing immigration. As interest rates drop, there will be a rush to buy condos and homes, but limited supply will drive prices up, resulting in a significant shortage.
“It’s a self-fulfilling prophecy,” Dhanji said. “I’m just worried that in the next, you know, two, three years, what’s going to happen as supply really dwindles down and demand goes through the roof.”
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