Demand for new homes in the Lower Mainland began the year on a high note before petering out, but the decline has taken more time to unfold than it did in Metro Vancouver’s resale housing market for a couple key reasons.
This is one of the takeaways from a Livabl interview with Patrick Lanigan of industry observer MLA Advisory, the market-tracking department of real estate marketing firm MLA Canada.
Lanigan spoke with Livabl this week providing an overview of how the new-home market in the Lower Mainland, or the area roughly from West Vancouver to Abbotsford, performed in 2018.
“I think it did lag a little bit behind… what was happening on the resale market. There was still pretty strong confidence in the market from all types of buyers,” he tells Livabl, noting that was especially the case in the presale market, where a buyer enters into an agreement with a developer to purchase a yet-to-be completed unit at some point in the future.
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One of the factors that has somewhat insulated the new home market from the broader real estate cooldown is the fact that in many cases, the buyer is only paying a deposit up front and won’t have to shoulder the full cost of ownership for years.
Lanigan provides the example of a unit in a large, master-planned development. “You have five years for that unit to appreciate in value and that market to come up again, which is a pretty long time in a real estate cycle — so it’s a bit of a safer bet.”
There is also the matter of supply. While Vancouver’s inventory of existing condos has surged 72 percent annually, Lanigan says there is a relatively limited availability of new product in major Lower Mainland markets.
“We still have very limited amount of projects coming out in these markets,” he says. “Most of the major markets are only seeing 2,000 units come out a year, at most.” Burnaby has 6,000 newcomers a year, he points out.
Nonetheless, the market is weaker today than it was at the start of the year. The rate at which buyers are snapping up pre-sale units continues to decline, while fewer investors are active.
Lanigan says about 85 percent of the pre-sale units developers released in the first quarter were purchased at the time, whereas in the fourth quarter MLA Advisory pegs the quarterly absorption rate at 45 percent. For the whole year, MLA Advisory says 65 percent, or 11,000, of the 17,000 pre-sale units put on the market this year in the Lower Mainland have sold.
These units include homes in concrete and wood-frame buildings as well as townhomes.
Typically, developers need to sell 60 to 65 percent of the pre-sale units in a development in order to qualify for construction financing, Lanigan says. “That kind of gives you an indication that most of these projects are in a really good place financially already… and they can start construction now,” he explains.
To date, MLA hasn’t observed any big projects that have opened for sales end up closing their doors, something that has played out in Toronto in recent years. But Lanigan does say developers who purchased land in the past year or so may have challenges making the numbers work moving forward.
Rising interest rates, higher taxes on foreign-homebuyers and speculators, construction costs, and expanded stress testing for mortgage applicants are weighing on the new-home market.
“We just came through the most sales that our market had ever seen by a long shot,” says Lanigan. “With these new regulations, taxes — there’s also interest rates are rising — I think people are just taking a step back and just taking a breather after that hyperactive activity that we saw.”