The first few months of a new year aren’t when you’d anticipate the real estate market to be going crazy. In a wintery, post-holiday season, you might expect things to take a break before ramping up for the spring.
But early 2022, it feels like a different story.
“It’s been off the hook,” said Nasma Ali, founder and broker of Re/Max Hallmark Realty’s One Group. “The problem is that a lot of people realized that resale is out of reach right now.”
For buyers who are facing climbing resale prices and little supply, Ali explains that pre-construction homes and assignments are becoming a last resort in some cases, one aspect that is fueling the early 2022 new home market.
Coupled with new condo launches, a tight resale market, looming interest rate hikes and low unsold inventory, current conditions are spurring some pre-construction buyers into action. Several factors are pushing projects to sell out quickly and prompting developers to kick off sales.
“Supply is really, really low in unsold inventory,” said Pauline Lierman, Zonda Urban’s vice-president of market research for Ontario and Quebec. “There’s high demand. Price point gains have been massive in the last year-and-a-half, so prices have gone up, as well as talking about regulatory and cost changes upcoming that we’ve talked about in terms of the inclusionary [zoning]. I think it’s a complex of a number of things.”
More sales launch while purchaser sentiments improve
Ralph Fox, broker of record and founder of Fox Marin Associates, notes that many people are very interested in pre-construction right now as a way to invest in the market. Fox, who primarily works in central and downtown Toronto, explains that the brokerage’s typical pre-construction investor clients are professionals who own their own property and are looking to take advantage of the market.
“They’re seeing the price of their own principal residence go up,” said Fox. “Generally, they’re far outperforming their mutual funds and RRSP investments, and so they’re looking to find other ways to leverage the market passively, and pre-construction is a great way to do that.”
Psychologically, Fox has noticed more optimism in the market that wasn’t present at the same time last year. As people return to offices and reopening plans roll out, purchaser sentiments are positive.
“I think with that optimism comes the ability to see a little further into the future more clearly and feel a little more comfortable with investing their savings back into real estate,” said Fox.
For Ali personally, she has been seeing more interest in pre-construction outside of downtown Toronto than inside of it. Interest for new condos in areas like Oakville, Mississauga and Etobicoke is higher than before. Inside and on the outskirts of the Greater Toronto Area, projects that offer detached, semi-detached or townhouse product are also selling out.
“I remember a time when they were just kind of sitting there and you’d take your time and you’d see what they’d have left. Now, there’s no such thing as what they have left,” said Ali. “Now it’s sold out. It’s the same frenzy that we used to have for downtown condos.”
From a numbers perspective, Lierman said that “it’s been flying,” out of the gate with new launches. In January, there were 10 condo launches, equal to a little over 3,800 units. This includes the first phase of VuPoint, XO2, Concord Sky, Kingsley Square and 252 Church, the first Toronto condo launch of 2022. By comparison, just one condo project kicked off sales in January 2021 — MODO 51 in Bowmanville.
“It is a very confident level of launch activity on the part of the industry this year,” said Lierman.
The urge to act now grows alongside resale frustrations
With the resale market struggling with growing prices and chronically-low supply, buyers are putting their money into pre-construction.
Although new construction prices tend to come at a higher premium compared to resale, Ali points out that rents are not proportional to current purchase prices for investors who are paying more to cover expenses than pre-pandemic. This is attracting more buyers to pre-construction over resale, who expect that years down the line, rental prices will rise enough to break even.
In light of super tight market conditions, Fox explains that people who are looking to make investments on the resale side of the sector are getting frustrated with the lack of inventory. In January, active listings totalled 4,140 homes in the GTA, down 44 per cent to the lowest level in more than two decades, according to the Toronto Regional Real Estate Board (TRREB). As a result, purchasers are starting to look for other ways to get into the market long-term, which is attracting them to pre-construction.
Local rules and economic trends are also playing a role. Toronto’s inclusionary zoning policy, which will require some developments to set aside a portion of units for affordable housing, is expected to come into effect later this year, Fox said. The costs for affordable housing could, as a result, get passed on to end purchasers. Fox sees that there is an anticipation from pre-construction buyers who might be on the fence to act now.
“I think it’s on the back of people’s minds that when you have things like this new policy that’s going to be enacted, and in conjunction with inflation, that buying sooner rather than later is going to be in their best investment interests because prices for pre-construction are going to rise as the cost to build rises and as a lot of these development charges start trickling down to the buyers,” he said.
More launches and units coming in Q1-2022
Springtime is around the corner, and with that, we could continue to see the market evolve.
The Bank of Canada is scheduled to make its next overnight rate target announcement in early March, which could bring about the first increase to the mortgage-influencing overnight rate for the first time since 2018. With the uncertainty of where interest rates will go and how many hikes there will be, Ali suspects that this may have an impact on pre-construction purchaser decisions.
“If they increase interest rates and now it’s two or three consecutive increases, I feel like that might put the brakes on pre-con buyers because they [might think], ‘Wait a minute, at this pace, where are interest rates going to be in four years?’” said Ali. “They’re worried, because right now, we don’t see an end in sight to interest rates. With these rates, in five years, anything could happen.”
In Q1-2021, 14 buildings launched sales for a total of 3,931 units, according to Lierman. This quarter, she predicts that the Toronto market is on track to surpass 5,000 units coming to market, with 4,718 units having already come online without the remaining launches slated throughout the rest of February and March.
With a very strong Q1-2022 in sight, Leirman thinks that this strength is going to continue throughout the year, with some potential normalization come the summer.
“In the last couple of years, we’ve had this really, really busy Q3 because summer opened up and everyone can open up, but if we’re open up the whole time, there might be more of ‘Let’s breathe during July,’ which used to be the case before,” she said. “That’s kind of like a normalization on that front.”
