Nichola Sainather

TORONTO, (Reuters) – Demand for condominiums in Toronto’s pre-construction phase has begun to ease with the rising interest rate. However, market observers say that prices will likely not be cut as margins are already stressed. They may opt to defer projects and instead choose to increase their costs.

Investors will find pre-construction condos attractive because they have a higher expected value.

Developers have faced challenges for many months. Margins are being squeezed due to rising costs. Inflation hit an unprecedented 6.8% level in April, a record high three decades ago. Last month’s strike of Ontario construction workers has added to delays already caused by a lack of workers. This is just as the demand slows.

Jordon Skrinko, the founder and CEO of Precondo pre-construction condominium brokerage said that margins are extremely tight. His statement was that pre-construction projects won’t be priced lower than currently. He said that instead, developers may choose to hold off on releasing new units.

Canada’s pandemic caused a runaway increase in home prices. This has been a major topic. Canadians already rank amongst the most highly indebted in the world, due to an increase in home prices.

Since March, the Bank of Canada has increased interest rates by 1.25 percent. This rapid cooling of the resale marketplace has slowed down other areas. Economists believe that further rate hikes may drive prices down as high as 20%.

The federal government and the provincial governments also intervened to reduce speculation and increase supply. Canada’s Liberal-led government took on pre-construction investors last month by increasing sales taxes for any profits made from units that were flipped prior to completion.

Altus Group data showed that in Toronto, there were less units under construction than usual last year. In comparison to last year’s more than tripled numbers, inventories rose by 14%.

Altus estimates that condo prices in preconstruction rose by nearly 2% between February and April, the peak of the larger market. However, shifting buyer sentiment is affecting housing demand.

The cost of construction has risen by about 7% over the year. They are expected to rise 10% in 2021 according to Jim Ritchie chief operating officer for Tridel, Canada’s most prominent developers.

Ritchie stated that “the economics must work,” and added that Ritchie has several project launches in the second half 2022. If they do not work we will look for other strategies. Ritchie mentioned that one strategy could be to delay going on the market.

Tariq Adi (Adi Development Group chief executive officer) stated that costs are increasing so quickly that contractors will only commit to pricing for seven days.

This has led to the company raising prices on all new projects. One complex project, however, was already being built and it returned to buyers asking for increased prices.

According to Shaun Hildebrand of Urbanation, the firm’s president, pre-construction condos are now worth 20% more than resale properties. This is compared with 10% in the past.

Although this is good news for buyers, it also means they can get better deals on resale houses. However, the inventories that developers have trimmed will likely keep prices low.

Market-watchers stated that despite the slowdown in demand, pre-construction unit sales are unlikely to decline significantly because buyers believe the economic headwinds of the present will recede and prices will increase upon completion.

Simon Mass, The Condo Store Realty CEO stated that the pre-construction market was a “future”. “The slower traction isn’t going to last long as the alternatives for investors that love the property markets is limited.”