Workers build new residential homes in the Riverside South neighbourhood of Ottawa on Aug. 30.PATRICK DOYLE/The Canadian Press
Housing developers say the federal government’s new mortgage policies will do little to kick-start demand for new homes.
With sales of preconstruction homes slumping, builders have been hoping that the federal government would introduce policies to make it cheaper for them to build and easier for buyers to get into the market.
But recent changes announced in mid-September to loosen mortgage rules are not expected to make much difference for builders of new homes, especially with prices for preconstruction homes surpassing the price of existing homes and the cost of borrowing relatively high.
The high purchase price of a preconstruction home, along with relatively expensive mortgages, have turned buyers away. The lack of interest will soon lead to fewer homes being built, industry experts predict, and the federal government is trying to entice more buyers to purchase a preconstruction property by allowing them to take out a 30-year insured mortgage.
But the real estate industry does not think the extended amortization period will stimulate a wave of buying given the higher prices.
“It will have a minimal impact,” said Stephen Diamond, the founder and chief executive of Toronto condo developer DiamondCorp. “It’s just not a big enough relief package to make a dramatic change,” he said.
In August, the federal government changed the rules to allow first-time homebuyers to purchase a new build with an insured mortgage with a 30-year amortization, up from 25 years. By Dec. 15, Ottawa will expand that rule to another tranche of buyers who are not first-time homebuyers. Purchasers will be allowed to take out a 30-year insured mortgage for a new build if they plan to live in the unit themselves or are purchasing the unit for a close relative, such as a parent or child.
Stretching the amortization out to 30 years reduces the homeowner’s monthly mortgage payments because they will have longer to pay off the loan. But it also means the homeowner will become more indebted and pay more interest. (A buyer must buy mortgage insurance if they make a down payment that is less than 20 per cent of the property’s purchase price.)
First-time homebuyers fear Ottawa’s new mortgage rules will drive up prices
“It’s not going to put a big dent into the cast-iron pot, but it’s going to do something,” said Barry Fenton, chief executive of Lanterra Developments, which has built more than 16,000 condo units in the Toronto region over the past 25 years.
Mr. Fenton said Ottawa should have gone further and allowed preconstruction buyers to get an insured mortgage with an amortization period longer than 30 years.
Elliott Taube, who works directly with developers to sell their units, agreed. “I don’t think it is going to help tremendously,” said Mr. Taube, principal with Pivot Real Estate Group, who has worked in preconstruction sales for three decades.
One reason the new policy will not have a significant impact is that many developers, including DiamondCorp, already require buyers to put down 20 per cent of the property’s purchase price. And lenders typically allow borrowers with a 20-per-cent down payment to get a mortgage with a 30-year amortization.
Another reason is that the vast majority of preconstruction homebuyers are investors, and most investors are not eligible for an insured mortgage with a 30-year amortization. If an investor is purchasing a condo or a preconstruction home to use as a rental unit, they are not eligible for the 30-year insured mortgage under the new rules announced by the federal government in September.
As well, the longer amortization does not bring down the price of a preconstruction home.
Preconstruction condos used to be one of the hottest investments during the real estate booms of 2021 and 2017. Today, existing condos are cheaper. For example, in the country’s largest real estate market of Toronto, a condo on the resale market had an average selling price of $708,000 in September, according to the local real estate board.
In comparison, the average price per square foot for a preconstruction condo in Toronto was $1,529 in the quarter ended in June, according to condo research firm Urbanation Inc. That puts the price of a 550-square-foot preconstruction condo at about $841,000.
The federal housing agency, Canada Mortgage and Housing Corp., has started to warn that the lack of investor demand will lead to a downturn in construction of new homes. The agency’s deputy chief economist, Aled ab Iorwerth, said the longer insured mortgage period could help, but not at the scale that is needed.
“Ottawa will have to do something to entice more investors into housing development,” Mr. ab Iorwerth said in an interview.
Developers must sell the majority of the units in their condo building in order to obtain financing to start construction. If the developer can’t sell enough units, they won’t get financing to build. And ultimately, that could contribute to the lack of homes at a time when the country’s population is growing.
Across the major cities of Vancouver, Calgary, Edmonton, Toronto, Ottawa and Montreal, new condo-unit starts were lower in the first half of this year compared with the same period in 2023, according CMHC data.
Mr. ab Iorwerth said he is concerned that condo starts will struggle for a while, particularly in Toronto, where sales have dropped to nearly a three-decade low.
Urbanation has found that more than 80 per cent of new condo investors in the Toronto area are bleeding cash as the rental income from their units is not covering the increasing mortgage and costs of owning the property. The average monthly ownership costs for new condos in the Toronto region was $3,250 in 2023, which is 21 per cent higher than in 2022, and 54 per cent above 2021.