THE REALITY OF RATE RISES IN THE NEW CONSTRUCTION INDUSTRY
Mortgage interest rate rises are the hot topic in real estate media today, but this is not the defining story of what’s going on. The real story is the lack of supply and the breakage on the supply chain.
Interestingly, increases in the Bank of Canada rate have little effect on buyers of new construction homes and condominiums. As much as some things have changed, demand is as strong as ever – and with the immigration plan announced in February by Canada’s Minister of Immigration, Refugees and Citizenship to raise the number of newcomers welcomed from this year to 2024 (https://bit.ly/36yVepI), that demand will increase yet again. With the exception of refugees, most of these immigrants will be well-paid professionals coming here with the wherewithal to buy. Others will be renters – and providing rental stock in Toronto and the GTA is the backbone of the condominium industry.
Whether they are end-users or investors, they will not take possession for several years. They obtain pre-approval for mortgages rather than asking financial institutions to issue them in the usual 60 or 90 days for resale. Investors are typically well-heeled players whose principal residences are taken care of, and they are buying to rent out.
I grant you that first-time buyers usually struggle with finances, but since the pandemic, we have all learned to live differently and to not spend as much money. Take for example a $300,000+ mortgage, which works out to approximately $1,400+ a month. Even if variable interest rates were to increase 1.5 per cent, that monthly payment would rise to approximately $1,700+. I venture to say that it will not be a deal-breaker for first-time buyers. And if the rates go up 2 points over the next couple years, the same will hold true, plus salaries will likely have gone up as well.
Consider, too, that pre-construction buyers have three or so years to prepare, save and plan. I reiterate that what is driving the real estate industry right now is demand outpacing supply, not interest rates. Even if rates inch up, today’s home buyers still enjoy relatively low interest payments compared to their parents and grandparents. In fact, today’s rates are lower than they were pre-pandemic. Regardless of economic cycles, real estate is historically a wise financial investment.