Investor sentiment has begun to cool off for new apartments in Toronto, the latest sign that a sharp rise in borrowing costs is slowing the country’s overheated property market.
Brokers are seeing a pullback among retail apartment investors as they await the fallout from the next round of interest rate hikes from the Bank of Canada. The two central bank increases this year have made mortgages more expensive. At the same time, the jump in new apartment prices has helped dampen investor interest, according to apartment research group Urbanation Inc. , which expects market activity to decline significantly.
“We expect new condo launch and sales activity to slow significantly in the second half of the year,” said Urbanation President, Shaun Hildebrand. “Buyers will not be willing to absorb higher prices due to dwindling earnings expectations and rents that do not cover expenses,” he said.
The cost of a pre-construction apartment has reached a record high near $1,400 per square foot, making it difficult for investors to cover the monthly mortgage, apartment fees and other housing expenses with rent from tenants.
Apartment builders are also dealing with a shortage of construction workers and high building materials costs, which means developers are likely to delay project launch while the market reassesss.
Although home resales started to slow after the first rate hike in March, activity in the new or pre-construction home market remained robust. Pre-construction homes are those that have not yet opened or are under construction, and sales of these projects are often seen as a bet on the future, as buyers wait years for their units.
But like the resale market, pre-construction home buyers are beginning to put their purchases on hold amid uncertain economic conditions.
Ryan Coyle, managing director of Connect Asset Management Corp. , which helps retail real estate investors buy and manage ready-to-build apartments: “They’re sitting on the sidelines because they’re not in a rush, they want to see what’s going on.” in the Toronto area. His company works with about 400 investors each year. “There has certainly been downward pressure on demand because of people waiting,” he said.
Pre-construction apartments have become a sought-after asset for individual investors looking to build their fortunes. Urbanization estimates that these investors make up about 70 percent of pre-construction buyers.
“As pre-construction buyers see the resale market is starting to slow and inventories are rising, they are becoming more cautious as expectations about future growth have softened,” said Mr. Hildebrand. “Developers are very skilled at recognizing these shifts, and will cut new launches accordingly,” he said, adding that high construction costs render some projects unfeasible.
So far in April and May, the number of apartment project launches has exceeded the first quarter of this year. There were 23 confirmed launches for a total of 7,064 units. That compares with the first-quarter volume of 29 launches with 6,070 units, according to Urbanation.
Simeon Papilias, senior partner at real estate brokerage REC Canada, which specializes in apartment sales, said seasoned investors see buying opportunities and ask him questions about how to continue investing.
But he said retail investors are concerned about interest rates and the federal government’s plans to crack down on property speculators with a tax on pre-construction apartment sales. In addition, the so-called end users, or those who intend to use the apartment as their primary residence, are on hold and watch.
“You have both camps waiting for your shoes to drop. It’s just fear now,” he said.
Editor’s note: The comparison period for the number of apartment projects launched in April and May has been corrected in the online version of this story.
Your time is precious. Get our top business headlines newsletter easily delivered to your inbox in the morning or evening. Register today.