Ask the Expert

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John Lusink, president of Right at Home Realty, answers: What do rising interest rates and housing-related measures announced in the 2022 federal budget mean for Ontario's condo market?

We are currently seeing a dramatic shift in the housing market with housing activity slowing down, thanks to a drop in demand. The housing market cool-down was prompted by rising interest rates, with the most recent quote for two-year fixed mortgage rates rising to 4.03 per cent.

Mortgage insurers in Canada are seeing a drop of nearly 40 per cent on unit application volume. Borrowers who are up for renewal will see their rates double in many cases, creating some real risk in the markets. The sales-to-new listings ratio in Toronto suggests that sales and selling prices will begin trending downwards at a rapid pace. In addition, other inflationary pressures such as fuel, the cost of food and other worldwide conflicts and challenges risk pushing the economy into a recession.

The Dual Impact of Rising Rates

One of the impacts of interest rate increases on potential homebuyers is with respect to their house-buying power, which has been reduced by almost $100,000 in many areas. However, we have also seen increases in household income, which has helped to temporarily ease the loss in house-buying power, that is, until we see another rate increase.

Another impact of rising interest rates is the financial disincentive that is created for sellers to sell their homes and buy a new home at a higher mortgage rate, which will further constrain housing supply and make real house price declines potentially unlikely. As a point of reference, the 30-year average fixed five-year rate is just over eight per cent, compared to where we have been and the current posted rate of four per cent.

Housing Related-Measures Building

The housing accelerator fund, rapid housing initiative and multi-generational home renovation tax credit will not impact the supply or market materially. These measures still have yet to be passed, and to be meaningful, overhaul of the municipal approval process and reduction of red tape is required to accelerate delivery times of new homes.

Saving

The proposed Tax-Free First Home Savings Account, increase to the First-Time Home Buyers Tax Credit (HBTC) as well as the proposed increase to the Home Accessibility Tax Credit (HATC) are all positive measures, but will not provide any material boost to enable those already marginally qualified to be able to enter the housing market. Notwithstanding that Canadians saved record amounts during the pandemic, the recent spike in borrowing costs coupled with the increases in prices, services have easily eroded any additional buying power that they may have had.

Anti-Flipping and Foreign Investment Ban

The proposed anti-flipping and foreign investment ban are not based on any sound data or research. While politically this may appeal to voters, the fact remains there is little research to back up the “assumption” that the overheated market has been caused by foreign buyers and other investors.

Ontario’s Condo Market

While overall activity has declined, condo supply continues to remain very constrained in the primary GTA markets. However, new pre-construction launches continue to be very popular.

Signs that developers are having to be more competitive, such as offers of rental guarantees, upgrades, inclusion of parking spaces, cash back and more flexible deposit structures are being seen now.

The key going forward is for buyers to ensure that the developers have “cost certainty” around their proformas. Recent reports of having to cough-up additional funds to cover the massive increases in construction costs have made preconstruction buyers a little wary of what they are getting into.

According to data from Right at Home, looking at January to May 2022 versus January to May 2021, we see price increases of 22 per cent on sales and a 13 per cent increase in rentals. On the transaction volume side, there is a decline of nine per cent, while lease transaction volume has declined by 11 per cent over the same period.

A 2022 Forecast

Rate increases, conflicts, supply constraints, savings and the recent relaxation of travel and other COVID-19 related measures will all contribute to the consumer taking a break from the real estate market and heading off to cottages and other destinations.

As such, we will continue to see a drop in market activity. This should not be translated into a crash, or bubble bursting or even major price drop. While the price acceleration will certainly slow, inflationary pressures will keep the new home/condo markets at their current levels and the continued restrained supply of resale homes will also serve to keep prices from dropping precipitously.

Subject to world events and federal policy makers being able to impact rising inflation in a positive way, we could see a slight rebound in the fall real estate market. Effectively, the 2022 spring market has been a no-show. Given that comparisons to 2021 and 2020 are not as relevant, we feel, 2019 is a much better frame of reference and as such, this is still a healthy real estate market. . . for now. 1

John Lusink is president of Right at Home Realty.

Building Science & Structural Engineers

Building Structure Parking Structures Building Envelope Reserve Fund Studies Performance Audits

Joyce | Vancouver, BC

As Ontario neighbourhoods adapt to accommodate more and more new citizens, the expansion of mass transit, residential housing and infrastructure could have consequences for pre-existing building owners. To limit the impacts of adjacent construction work on older assets with damage potential, many building owners and condominium corporations are turning to independent pre-construction surveys. Conducted by qualifi ed engineers prior to the onset of neighbouring work, these detailed inspections provide a snapshot of an existing property’s condition so that owners are aware of the issues that may be exacerbated by the sustained vibrations caused by construction work.

While in some cities, such as Toronto, developerled surveys of all neighbouring buildings are mandated before any new development can proceed, structural experts warn that existing assets aren’t being adequately protected given the surveys are more designed as a loss control and claims defense mechanism for the developer.

“For that reason, we recommend to our clients that they allow the developer do their preconstruction survey, then we’ll come in and conduct an independent survey they can directly rely on,” said Justin Tudor, President, Keller Engineering. “Developerled preconstruction surveys have value, but they are often cursory and may provide insu cient detail to ensure a comprehensive capture of existing conditions. Furthermore, the developer is often not required and is commonly resistant to providing the fi ndings of their pre-construction survey to the owner.”

Referring to an independent pre-construction survey his company recently conducted in Mississauga, Tudor explained that the assessment involved identifying existing cracks in walls, fl oors, and exterior cladding of the fi rst two storeys above grade, and interior fi nishes of all storeys below grade to facilitate a comparison once the adjacent construction was complete.

“Although other building elements can be a ected by adjacent work, extensive monitoring of elements such as stone facades require detailed investigations and costly initial surveys,” he said. “In our experience, crack creation or propagation in the building’s parking garage and lower levels is the most e ective way to monitor for building movements as a result of adjacent construction activities.”

THE VALUE OF INDEPENDENT PRE-CONSTRUCTION SURVEYS

Protect your building with a reliable condition assessment you can trust

TYPICAL PROJECT SCOPE

For most independent pre-construction surveys, the scope of the project includes: 1. A site review to document the building’s condition, noting existing cracks in foundation walls, and signs of deterioration and settlement. A basic review typically focuses on the fi rst two storeys of exterior cladding, below grade interior walls of common rooms, stairwells, corridors, and parking garage fl oors, walls and ceiling, but can be expanded to include upper stories by way of drone (if permitted in the area); 2. Preparation of video showing the general location and extent of pre-existing deterioration; 3. A report on the fi ndings, including a detailed summary with photographic documentation and recommended remedial actions, if required; 4. Storage of the documentation for a three-year period.

BENEFITS FOR THE PROPERTY OWNER

According to Tudor, the peace of mind independent pre-construction surveys bring to all types of building owners can’t be underestimated.

“Developments and transit expansions are happening all around us,” he said. “Those excavations will vibrate and potentially damage adjacent properties. Aging buildings need to be documented to capture the di erence between what’s fallen apart due to wear, and what’s damaged as the result of the construction.”

With a pre-construction survey, owners can rest assured that the conditions of their building are appropriately documented prior to any adjacent construction activities, so that any resulting damage can be attributed back to the source.

For more information on independent preconstruction surveys and other related services, please visit www.kellerengineering.com.