Developers turn to incentives to attract homebuyers
Builders offer reduced deposits, mortgage aid as demand for preconstruction units down 75%
Developers are scrambling to sell units by offering reduced deposits and mortgage assistance as demand for preconstruction units plummets in a high-interest-rate environment.
In Toronto since mid-2022, 11,595 units over 29 projects have been delayed as interest rates remain high and confidence in the market weakens, according to a recent report from real estate research firm Urbanation. Developers drastically reduced the number of new launches in the first quarter of 2024, with just four projects brought to market.
To attract more sales, developers are using a broad range of offers to both buyers and brokers, such as reduced or free parking; reduced or no development levies; reduced deposits of less than 15 per cent; five per cent or higher broker commissions; interest on deposits; and mortgage assistance programs, Urbanation reported.
“These incentives have become a key driver to help sell,” said Simeon Papailias, managing partner of Royal LePage’s REC Canada. Developers have always offered incentives but it’s becoming more commonplace as there’s currently little demand for preconstruction units, he added.
“People can’t expect consumers to be taking on all of the risk when there are such high interest rates,” he said.
For a limited time, Toronto developer Camrost Felcorp offered to pay two years of the mortgage cost to a maximum of $90,000 for units priced at less than $1 million. Emblem Developments offered a reduced down payment of 10 per cent to be paid over two years, instead of the standard 15 to 20 per cent deposit upfront, to help buyers afford the unit sooner, Papailias said.
“You’re also seeing developers offer increased commissions where they beef up the commission as high as 10 per cent to the buyer agent and then the agent distributes part of it to the buyer,” said Daniel Foch, a Toronto-based realtor and director of economic research with RARE Real Estate. “It almost acts as a de facto cashback system.”
Not all developers are offering buying incentives, but those who
need to sell a final 10 per cent of their units to get the construction financed are being more aggressive with their incentives, he said.
“They don’t want to lower the value of the unit because that would devalue the product,” Foch added. “So this offers them another alternative to try to sell the unit.”
Developers need to get creative because there’s been a 75 per cent reduction in demand resulting in a buyers’ market, he said, where developers are forced to compete for buyers’ attention.
Yair (Ryan) Rabinovich, founder of Rare Real Estate, says he’s experienced four downturns in real estate and the current market is the slowest he’s seen.
“Developers have major obligations to their ownership group, investors and to Toronto to deliver much-needed housing,” he said. “Developers find themselves in a shallow buyer pool and need to make these sales to deliver on their commitments to various stakeholders.”
Since the Bank of Canada began raising the key overnight rate in March 2022, the market began slowing, placing the future of new builds in a worrying position. It takes highrise buildings typically five years to be built, meaning that in 2027 and 2028 there will be “very few” units coming to market, said Tim Syrianos, principal broker and owner of Re/Max Ultimate Realty.
“There’s going to be a real supply challenge in the coming years,” he said. “So how can housing get more affordable when there is even less supply than what we have now?”