Why Are Real Estate Developers Experiencing Difficulties with Pre-Sales?

Real estate developers have had a difficult year in 2019 in Vancouver. Condos and apartment pre-sales volumes for new development projects have decreased, even for larger and more experienced developers. Read more as Steve Saretsky breaks down the numbers for a clear picture on the current state of the real estate development community in Vancouver.

Latest on Canadian Real Estate Developer Trends by Steve Saretsky

It’s no surprise 2019 proved to be a difficult year for the Vancouver housing market. This was perhaps especially true in the development community which witnessed many multi-million dollar projects launch unsuccessfully, or fail to launch entirely. Per official data released by Urban Analytics, The number of condo pre-sale units released for sale in 2019 fell sharply in Metro Vancouver. Developers put 7,588 units up for pre-sale, less than half the 18,998 released in 2018.

Despite the lure of free avocado toast and other sales gimmicks, pre-sale condo buyers remained elusive in 2019. As noted by Michael Ferreira, head of Urban Analytics, the soft patch didn’t discriminate, “even some larger, experienced developers with deep pockets and more favourable financing thresholds to meet said their sales volumes had dropped as much as 70 per cent and they were putting on hold several high-rise, transit-oriented towers that had zoning and building permits secured and promotional brochures printed.”

Remember, under the Real Estate Development Marketing Act, rea lestate developers have nine months to secure construction financing, in which lenders typically require about 60% of a project to be pre-sold. A feat which proved insurmountable for many developers, particularly as investors scurried to the sidelines.

As a result, housing starts should slow in the year ahead, at least that’s what the BC Government is expecting. In their recent unveiling of the 2020 budget, finance minister Carole James forecasts only 35,000 new units of housing will be started in 2020, a decline of 22% from the historic high of nearly 45,000 new units in 2019. This key predictor of future housing supply is expected to fall over the following two years to hit the historic 30-year average of 30,000 units a year.

A drop off in housing starts is arguably not what the doctor ordered, particularly for a city grappling with an affordability crisis. However, there remains a record 46,000 units under construction, with completions expected to hit new highs this year.

Further, a recent reversal in market conditions should entice investors to dip their toes back into pre-sale centres, at least for more sharply priced homes. Just don’t expect much change in the luxury market, particularly with our friends over in China quarantined.  The Coronavirus has slammed the brakes on purchasing activity not just in Vancouver, but back home as well. Recent reports have noted China Evergrande, the country’s third biggest builder by value, has begun discounting all flats. The company will offer a 25% discount on all 811 projects until the end of February, and will narrow that discount to 22% in March.

Three Things I’m Watching:

1. Metro Vancouver Developers put 7,588 units up for presale, less than half the 18,998 released in 2018.

2. There are just over 46,000 units under construction in Metro Vancouver. Completions should hit a record high this year.

3. The mortgage stress test is about to get easier. It will now more accurately reflect current borrowing rates, so it should fall about 30-40 basis points. The new rules are effective April 2020.