By By Promit Mukherjee
OTTAWA – Canada’s home ownership crisis is likely to worsen over the next few years as proposed project sales languish at historically low levels, stalling the funding needed for construction, half a dozen economists and realtors told Reuters.
The sale of these proposed projects, comprising an array of one- or two-bedroom condominiums in major hubs like Toronto, is commonly called pre-construction sales, and a bulk of these properties are usually bought by investors to rent out.
Many Canadians have been priced out of home ownership since interest rates started rising two years ago, and even with falling rates and relaxed mortgage rules more recently non-investor buyers have struggled.
“If you think moms and dads with strollers are lining up at condo projects to buy 500 square foot condominiums, they are not,” said John Pasalis, president of Realosophy Realty, a Toronto-based real estate brokerage.
There is no official data on pre-construction sales and it is largely sourced by realtors and economists from market transactions.
Until now, investors had fueled a construction boom in major cities. But economists and realtors said they were largely staying away from the market for a host of reasons: high mortgage costs, lower prospect of capital appreciation, slower increases in rent and looming uncertainty in the housing market over how much interest rates will fall and if government measures will help.
Once a threshold of between 50% and 70% of a property is sold, a lender agrees to fund builders to start construction.
Canada’s home ownership crisis is one of the primary factors that has tanked Prime Minister Justin Trudeau’s approval ratings.
Trudeau’s Liberal party introduced a raft of measures in its efforts to fix the crisis but it has failed to encourage builders to build more homes, government data showed.
A drop in pre-sales indicates the start of construction of projects will fall in the coming months, crimping supply over the years desperately needed to absorb a rising demand, said Robert Hogue, housing economist at RBC.
“We are not going to balance the market for ownership in the next four or five years,” he said, adding this could exacerbate the ongoing demand-supply mismatch responsible for the housing crisis in Canada.
Earlier this month, the government changed one of its rules on mortgage payments, allowing first-time buyers or people purchasing a newly built home to take loans with 30-year amortizations, instead of 25 years.
But critics say it might not encourage builders to start construction as investors would still stay away from the market as the cheapest mortgage rate – a five-year fixed rate – may not change much despite four rounds of rate cuts.
Besides that, increasing supply in the market, especially in the Toronto region, dampened investors’ hopes of future capital appreciation.
Despite a government push to keep population growth in check by clamping down on immigration, Hogue said the growth rate will still be too strong and demand will continue.
According to federal housing agency CMHC’s Housing Supply Report from last month where it cites an independent study, new condominium sales were down more than half in the first six months of 2024 than in the same period a year ago.
Aled ab Iorwerth, deputy chief economist at CMHC, who co-authored the report said there are many developers who need money to start planned condo projects.
“Building these large condominium structures is quite difficult these days,” he said.