Home buyers, builders face same issues, different risks
Lower interest rates add to ever-changing equation with intensification policy
Interest rates have an impact on the GTA housing market in more ways than many people may realize.
In a normal environment, when all other factors remain static, a drop in interest rates usually results in a rise in home prices.
The concern with record-low interest rates and record-high home prices — such as they are today — is that we’re setting ourselves up for a painful correction in the market when interest rates reverse and move higher.
But the GTA is not a normal market.
While it is not immune to cycles, the region’s housing market has been undergoing a fundamental shift as a result of a pro-intensification growth plan that pushes for development to grow up and not out. And this makes everything more complicated.
Intensification is pushing homebuilders to look to existing — and usually already developed — properties as land for future growth. That typically involves a range of commercial real estate, retail plazas in particular. But using commercial real estate properties as land for mixed-use development is expensive, and that means that the end cost of the homes will also be more expensive.
As well, any drop in interest rates will spur, a corresponding increase in the value of the commercial real estate assets, and therefore the cost of that future residential land.
GTA developers take on a multitude of risks in creating new housing stock. Since many new highdensity projects can take five to 10 years to fully complete, builders are often buying land in one economic environment, selling homes in another, building in another and closing in another.
Buyers of new homes face a different kind of risk when it comes to interest rates, one that has a lot to do with timing. Typical new-home purchases involve a significant lag between the signing of the binding agreement of purchase and sale and the actual closing of the sale: a reflection of the time it takes to build that new home.
That risk is less of a factor in traditional, detached homes under construction. But for folks buying new condominiums in pre-construction, the price today is reflecting a future closing price that could be three, four or perhaps five years from now.
Mortgage rates, as well, may not necessarily be the same a few years down the road as they are today. While that has played in most people’s favour in recent years — mortgage interest rates at time of closing have been lower than rates at the time of pre-sale — this trend will not continue forever. So a prudent preconstruction buyer should be doing their affordability math with this in mind and having that conversation with their realtor.
With 26 per cent of Canadians living in the Greater Golden Horseshoe area, and the region continuing to grow according to intensification policies, making the right decisions will be tricky.
But it’s vital that all of us — from buyers to builders to bankers, as well as our elected officials — do make the right choices. Because when it comes to the success of the region’s housing market, all of us are in this together. George Carras is the president of RealNet Canada Inc. His column appears in New in Homes & Condos once a month. For more information, visit realnet.ca or Twitter at @realnet_canada.