Already in May, the market started to feel the “cooling process” as the Toronto market dropped by over 20%. This could also have had an impact on the slowed-down housing projects given that buyers have a variety of choice when it comes to buying a new home. This means that the housing construction pace does not directly affect buyers as they are still all set with a series of houses on the sales lists at their disposal.
However, a study conducted in May revealed that the prices had gone up by then due to the high demand of foreign and Canadian buyers and not because of lack of supply. The study also confirmed that the housing plans only followed the pace of Toronto’s population growth and demographics. According to that, the decline in construction projects in Toronto in May was more a result of the imbalanced population-demand ratio that has already been noticed since 2012.
Still, many believe that the housing construction drop contributed to slowing down the real estate market in the area and helped preventing a potential bubble effect. The 15% tax introduction for foreign buyers was the first and crucial step in doing so and many in the real estate business are convinced that it affected housing projects which were laid aside for a while. They discard the demographics theory and pin the construction slowdown to the new regulation.
The increase in interest rates by 0.25% that has been introduced several days ago can also be seen as an indicator for fewer construction projects. Even if it is not going to affect buyers long-term, as they can take it up with the additional 0.25%, they are still not ready to give it a go. It is simply a regular process after a change takes place. People wait to see how things will evolve before they can adapt to it. Processing takes its time after all.
Statistics and Toronto’s Significance
Housing starts that dropped in May were over 10% in Canada, whereby multiple-unit urban starts dropped even more (i.e. 10.8%), closely followed by single urban starts (almost 9%). The Toronto Area, as one of the lead markets, is still a great indicator of how the situation will evolve. Should they respond well to the many changes (regulation amendments, higher interest, etc.), then , it could also have a positive effect on other Canadian markets, especially if we consider that housing prices went up across the country three months ago because they were driven by the higher prices in Toronto (and Vancouver).
Investors May Also Lose Interest in Buying After the Interest Rate Increase
Investors had the biggest advantage of the low-interest rates that were in place for the past seven years as they expected prices to rise and profit from the situation and the promising market which led to a higher demand for building construction; but now, they will also have to take a step back as the high-interest rates, along with the other measures, affected them as well.
The bottom line is that the Government plan seems to work and that the fight against the threatening bubble is proving effective giving the market a chance to normalize which will benefit the entire community and the economy in general.