By Nichola Saminather
TORONTO (Reuters) - Demand for pre-construction condominiums across Toronto has started to soften with rising interest rates, but market- watchers say developers are unlikely to cut prices with margins already under pressure, choosing to delay projects instead.
Pre-construction condos are seen as attractive, particularly for investors, as their prices are generally expected to appreciate by the time they are completed.
But developers have been facing challenges for months, with margins squeezed by rising costs after inflation hit a three-decade high of 6.8% in April. A strike by Ontario construction workers last month has compounded existing delays caused by a shortage of workers, just as demand softens.
"Margins are incredibly tight," said Jordon Scrinko, founder of pre-construction condominium brokerage Precondo. "So I don't think you're going to see pre-construction projects launch at lower prices than they are currently," he said. Instead, developers will choose to delay releases of new units, he said.
Runaway growth in home prices during the pandemic has become a hot-button issue in Canada. The surge in home prices has strained affordability in major cities, and Canadians are already among the most heavily indebted people in the world.
The Bank of Canada's 1.25 percentage points of interest rate increases since March have rapidly cooled the resale market, and economists expect further rate hikes could drive prices down by as much as 20% in some areas.
Federal and provincial governments have also stepped in with measures to boost supply and discourage speculation. Canada's Liberal-led government last month took aim at pre-construction investors, adding sales taxes to any profit made on units flipped before completion.
There were nearly 7% fewer pre-construction units for sale across Toronto in March and April this year compared with a year earlier, according to Altus Group data. Inventories rose 14% from the prior two months, versus numbers that more than tripled last year.
Meanwhile, pre-construction condo prices increased nearly 2% in April from February, when the broader market peaked, according to Altus. But shifting buyer sentiment and shrinking affordability are hitting housing demand.
Construction costs have risen about 7% this year, and are likely to be up 10% by year-end from 2021, said Jim Ritchie, chief operating officer of Tridel, one of Canada's biggest developers.
"The economics have to work," Ritchie said, adding that the company has some project launches planned for the second half of 2022. "If they don't work, we'll look at other strategies, and one of those could be delaying going to the marketplace."
Costs are rising so rapidly that many contractors are willing to commit to prices for only seven days, Adi Development Group's chief executive officer, Tariq Adi, said.
The company, in turn, has raised prices on new projects and, on one complicated development already under construction, went back to buyers asking for higher prices after costs jumped.
Firm prices mean the premium for pre-construction condos over resale homes is now about 20%, from 10% historically, said Shaun Hildebrand, president of real-estate research firm Urbanation.
While this means buyers can find better deals in resale homes, shrinking inventory as developers hold back is likely to keep a floor under prices, he said.
Despite the slowdown, demand for pre-construction units is unlikely to wane significantly as buyers bet the current economic headwinds will have ebbed, and prices will rise, by completion, market-watchers said.
"The pre-construction market is a 'future'," said Simon Mass, CEO of The Condo Store Realty. "The slower traction isn’t going to last long as the alternatives for investors that love the property markets is limited."
(Reporting by Nichola Saminather in Toronto; Additional reporting by Julie Gordon in Toronto; Editing by Denny Thomas and Matthew Lewis)