Project marketers say rate hikes are prompting a growing number of developers to halt or postpone the launch of residential projects until the rate environment stabilizes.
“Many of the developers who were gearing up for launches in the late summer, early fall, have decided to hold off,” said Jacky Chan, president of project marketing firm BakerWest Real Estate Inc. in Vancouver. “Anywhere from 50 to 75 per cent of the active, on-the-go developments have been affected one way or another.”
The Bank of Canada’s policy rate has increased by leaps and bounds since March, rising from 0.25 per cent at the beginning of March to 2.5 per cent today.
With another rate hike in the cards for September 7, Chan says many developers are holding their breath. a 50-basis point hike would be tolerable, but anything greater would have significant ramifications.
“They’re waiting to see what happens September 7, and the magnitude,” he said. “If this time it’s more reasonable, then I feel a lot of developers will be more comfortable moving forward. But if it’s even higher than [50 basis points], then people would really have to redo their numbers.”
This being said, Chan is confident that his firm will be able proceed later this year with the sales launch of Curv, a 60-storey tower planned by Montreal’s Brivia Group on Nelson Street near Thurlow.
“Everything is still on schedule, and we have prepared for the changing of the market,” he said.
Earlier this year, Brivia chief investment and development officer Vincent Kou told Western Investor that he expected Curv construction costs to be 16 to 20 per cent higher than conventional Vancouver luxury condo tower construction, which Altus Group pegged at $605 per square foot for 2022.
Given land costs of approximately $3,900 a square foot, final Curv prices are on track to be double those of the most expensive new condo prices now being seen in Vancouver.
Kou noted that construction on Curv won’t start until pre-sales prove out demand for the units.
Projects are also preparing to launch outside the core.
Jamie Squires, president of Fifth Avenue Real Estate Marketing Ltd. in Surrey, is preparing to launch the final phase of Aldergrove Town Centre this fall.
“The interest has been pretty good – lots of inquiries,” she said. “We’re pretty confident that one is going to go well.”
While the sudden, sharp rise in interest rates may have complicated matters and spooked some buyers, she said presale purchasers are generally insulated from the immediate impacts of interest rate increases as buyers can lock in rates to give them certainty over what they’ll be paying at completion.
“You’re pretty much protected and know what your costs are going to be at completion,” she said.
Regardless, she says interest rates remain at historical lows. The biggest issue with the increases is how they were handled.
“The Bank of Canada sat on its butt all last year not doing its job, so had to rush and play catch-up this year,” she said, saying a more gradual series of increases would have had a more limited impact on the market.
“We probably wouldn’t have even noticed and still be at the interest rate we are today,” she said.
It’s not just consumer confidence that’s been hit. Builders are also on edge, which in turn stands to limit new supply and keep housing prices high.
“Just trying to make the proforma work based on current revenues, current costs – I can’t make any of it work,” said Hani Lammam, vice-president, development and acquisitions with Cressey Development Corp. “You add another rate hike and it just puts the brakes on it. There’s not much we can do.”