Toronto developers have delayed launching almost 14,000 condo units this year, as demand has waned because of higher borrowing costs and economic uncertainty.
Sales of preconstruction condos have slowed significantly this year as interest rates have climbed, pushing up costs for both buyers and builders.
Developers had been expected to launch at least 27,000 units in the Toronto region, according to industry research firm Urbanation Inc. But as of the end of September, they had only launched about 13,000, leading to the weakest sales activity in a decade so far this year.
“Sales are slow,” said Yousaf Iqbal, the head of Canadian operations for IQI Global Real Estate, a firm that caters to Asian buyers.
Mr. Iqbal said it is not just borrowing costs that are weighing on buyers: Now that some developers have had to cancel projects or have been taken over by a court-appointed receiver, some buyers are leery about committing to preconstruction condos that are years away from completion.
Preconstruction condo sales began declining last year, when the Bank of Canada started hiking interest rates to get high inflation under control. Although there was a spurt of activity in the spring when the bank took a break from raising rates, it only lasted a few months. The central bank has since raised its benchmark rate twice and has repeatedly said it is prepared to continue doing so if inflation remains elevated.
That has contributed to the slow sales. So far this year, there were 9,568 preconstruction sales, according to Urbanation. That marked the lowest volume in 10 years.
In the third quarter, 42 per cent of the condo units launched were sold, according to Urbanation. Although that was similar to levels seen over the past 12 months, it is well below the 70-per-cent level achieved in that period before interest rates started rising in March, 2022.
“Elevated interest rates and heightened market uncertainty continued to grip the new condominium sector,” Urbanation president Shaun Hildebrand said in a news release announcing the third-quarter numbers.
Higher borrowing costs are not only affecting buyers; they have become a problem for developers, who are also dealing with a spike in construction expenses. Residential building costs have risen 55 per cent since the start of the pandemic because of material and labour shortages. But developers can only push up prices so far.
“Many projects have been unable to make an economic case for proceeding in the current market,” said Mr. Hildebrand, adding that developers have shelved projects because of their “inability to sell at required price to earn an acceptable profit.”
The third quarter’s average selling price was $1,638 per square foot in Toronto and $1,112 in the city’s suburbs. That translates to $820,000 for a 500-square-foot condo in the city and $550,000 for a same-sized unit outside the core.
Many potential homebuyers do not want to spend that much on a small space. And investors, who make up the bulk of preconstruction condo buyers, are worried they will not be able to charge enough rent to cover their monthly expenses, which include much higher mortgage payments.
Mr. Hildebrand said it is unlikely that developers will launch the remaining condo units before year end. In addition to this year’s delays, there is a backlog of projects from 2022. Urbanation estimates there are 83 projects comprising 28,428 units that have not been launched over the past two years.