A Peek Into the Future
What can real estate builders and developers expect in 2017?
By Bo Mocherniak
Because it often takes several years for a shovel to hit the ground, real estate developers have to anticipate future market demand with the launch of every project. Typically, a project’s feasibility is modeled using a set of assumptions around pricing, financing costs, both hard and soft construction costs, and market absorption. Even small changes in consumer demand can have a significant impact on the home buying market, which translates into a new set of assumptions and expectations for developers.
These feasibility assessments have become increasingly challenging in light of recent government intervention impacting foreign buyers. Depending on the severity of the market forces, many developers in Ontario are wondering if it’s time to consider re-evaluating certain projects, beginning with those that may have been marginal to start. While it may not be time to pull the chute quite yet, it should be noted that the future is far from certain.
A Changing Market
It has been argued that over the past few years, foreign purchasing behaviours have been a significant contributor to the overheated markets in Vancouver and Toronto.
This includes many foreign buyers taking advantage of tax loopholes by claiming homes as their primary residences while they continue to live overseas. This misrepresentation allowed them to be exempt from the capital gains tax when it came time to sell. To stop this, the Canada Revenue Agency now requires all homeowners to report the sale of a primary residence. In addition to this measure, the British Columbia government introduced a 15% foreign buyer tax for real estate in the Vancouver area in July of this year, which could potentially be introduced in other markets as well.
Recent indicators from the Vancouver area show that the 15% buyers’ tax implemented in July, which became effective August 2, 2016, has had an almost immediate effect on the consumer market. “Buyer fatigue has been a huge factor, especially in the detached house market. Now, we’re not having those crazy multiple offers,” Dan Morrison, president of the Real Estate Board of Greater Vancouver, told The Globe and Mail in October of 2016.
Reports from the B.C. government show the number of foreign buyers in the Vancouver area housing market dropped in the first month of the tax, although it is assumed that this was due to a rush to close transactions before August 2. However, the downturn in Vancouver may have more of a long-term impact. Cameron Muir, chief economist at the B.C. Real Estate Association, forecasts the average price of a home in B.C. will drop 6.4% 2017 as a result of the move.
Toronto Mayor John Tory is asking the Ontario government to begin monitoring property purchases by foreign buyers, although the government has not yet committed to the idea of gathering more housing data. It is entirely possible that if government intervention is implemented in Toronto, the market will experience a cooling effect similar to that in Vancouver.
Economic trends will also have an impact on developers. With the United States recently hiking interest rates, this is already having an impact in Canada as several banks have increased their residential mortgage rates. Although it is not generally anticipated that Canadian banks will materially raise rates in the near future, these increases in the United States will likely affect development activity.
A number of lenders are also starting to tighten up on loans to developers. In fact, some institutions have hit their limit on allocating funds to real estate projects. Some lenders will only lend to existing clients and are limiting the amount that they are giving. Developers may have to look for alternative lending sources in the future.
There have been many reports in the news about the large debt levels that Canadians are taking on. For now, it seems only the lending institutions are becoming concerned about borrowing capacity, but if homeowners start worrying, this could have a significant ripple effect within the industry.
Facing the Future
Should developers be concerned about the appetite for Canadian real estate? Most certainly they should as there are lessons to be learned and there are signs that the tides may be shifting, and momentum is a powerful thing. That said, no one knows for certain what the future may bring.
Bo is National Leader for the Real Estate and Construction Group of Grant Thornton Canada, and a member of the Grant Thornton International Real Estate Sector Group. He can be reached at firstname.lastname@example.org.