Pre-Construction Investors “Spooked” by Fair Housing Plan: Study

In the wake of the Fair Housing Plan – a 16-part set of housing affordability measures introduced by the Ontario government last April – the resale home market has been on a rollercoaster. Steep year-over-year declines in low-rise home sales and a moderation in prices have defined the market in the year that’s followed, before showing solid signs of a spring recovery, with recent month-over-month gains.

Experts pointed to the “psychological” effect of the FHP, which included a foreign buyer’s tax and new rent controls, for sidelining would-be buyers and effectively softening the market.

The impact on the pre-construction segment has been less clear, as demand for new builds is motivated more-so by investor appetite rather than end users. However, a new study released this week by new-construction portal BuzzBuzzHome sheds light on how investor activity and buyer preferences have shifted in the months following the introduction of the FHP. 

Related Read: One Year Later – Support Remains Strong for Fair Housing Plan

Before and After the FHP

To assess how the market has changed, BuzzBuzzHome looked at the volume of investor-related inquiries, before and after the FHP was implemented. They found searches spiked prior to the plan’s announcement on April 20 (when the market was immersed in a full-scale sellers’ market), and dropped immediately following, though never straying far from the historical provincial average.

In contrast, searches in other Canadian markets increased shortly following the announcement of the FHP, perhaps indicating “spillover” demand from investors for other, unaffected markets.

As well, in line with resale market trends, interest in condos quickly outpaced that of higher-priced home investments, with searches rising from 50 per cent of all volume in the first quarter of 2017, to 70 per cent for the same time period this year.

The report chalks this up to investors seeking lower-risk options, with concerns that softer interest in low-rise home would lead to lower returns. This reflects the 46.3-per-cent year-over-year decline in detached home sales this March.

“This could signify a return to safe assets: spooked investors are risk-averse investors,” states the report. “When looking for buyers to offload their property, investors may find a worry lack of appetite in the low-rise market.”

New Mortgage Rules Made an Impact

They also attribute the introduction of Guideline B-20, a slew of new mortgage qualification hurdles that went into effect on January 1st, behind increased demand for the condo segment.

“Buyers who were going to stretch their budget might be settling for the condo. Whether this reflects a permanent reallocation of demand from low-rise to high-rise or a temporary shock as buyers delay their purchases to save more has yet to be seen,” the report states.

New Build Prices Down in GTA

In terms of pre-construction prices, the report finds they remain little changed in Ontario, though trending lower than when the market was at its peak; overall Q1 prices rose 15 per cent year over year across all building types – actually higher than the period between 2016 – 2017 in the province. However, there were more dramatic declines recorded in the Greater Toronto Area, with the median list price falling 22 per cent for newly-built detached homes, to $1,087,490. Condos in the region, however, increased by 15 per cent to an average of $630,495 – though still a smaller increase than in 2017.

The report also found a shift in the type of site users, which could reflect smaller budgets as a result of new housing and mortgage policies – searches from those who identified as “renters” or “downsizers” spiked in in January, just as B-20 hit the market.

According to March data released by the Building Industry and Land Association (BILD), the new construction segment continues to perform below last spring’s levels, with a 67-per-cent decline in sales for low-, medium- and high-rise buildings, stacked townhouses and loft units.

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa. A born-and-bred Torontonian and quintessential millennial, she has over a decade of experience covering real estate, lifestyle and personal finance topics. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods. Find her on Twitter at @pjeg14.