State of the pre-construction market in Canada
A perfect storm has been quietly brewing in Canada’s pre-construction condo market, creating an environment where neither developers nor buyers can come out ahead. On the developer side, rising construction costs mean they must list properties at higher prices to remain profitable. For buyers, with high interest rates in mind, these high prices look unappealing compared to potential resale values and rental income. The result? Sales have slowed, fewer projects have launched and prices remain stubbornly high.
Many buyers have instead turned to the resale condo market. A flood of new listings has led to more competitive prices, even when accounting for differences in finishes or amenities.
Pre-construction benefits
Pre-construction condos still offer unique opportunities to buyers looking to enter the market. Here’s how:
- Reduced competition
While a slow market doesn’t often lead to price-cuts, developers are likely to offer incentives to “sweeten” the deal for buyers. Think free parking or waived closing costs. While some developers will advertise these incentives, it never hurts for you or your agent to ask. - Extended deposit structure
Down payments work differently for pre-construction properties. Only resale homes need a full down payment at the time of purchase. Pre-construction properties, on the other hand, generally use an “extended deposit structure”. This allows the buyer to pay out their down payment in installments. - 30 year amortizations
As of August 1st, 2024, lenders in Canada can offer thirty-year mortgages to first-time homebuyers purchasing new builds. In other words, these buyers have five more years to pay off their home loan than the standard period. This allows for lower monthly payments and eases the financial burden of purchasing a home.
Pre-construction risks
Benefits aside, purchasing a pre-construction property comes with a specific set of risks. Here are some that all buyers should factor into their decision-making.
- Price discrepancies
One of the biggest risks in the pre-construction market is the potential for overpaying. Because developers factor an inflation estimate into their prices, pre-construction units are generally more expensive than resale. These higher prices may not accurately reflect the future value of the units however. Resale condos, in comparison, are generally more affordable. They also provide immediate value without the uncertainty of future market conditions, because the listing price reflects current value. - Financial and legal risks
It’s often difficult for buyers to leave a pre-construction contract. While you can theoretically sell your contract before a project finishes, it’s not a guarantee. Depending on the terms of your contract, developers may have the option to prohibit a transfer or approve a transfer and charge additional fees and legal costs, including pocketing any profits you’ve made. Buyers should know that even if they manage to sell their contract, they might do so at a loss if the market has shifted.
The bottom line
The pre-construction condo market in Canada is currently facing significant challenges. High prices and market uncertainty make it a risky investment, especially for first-time buyers. However, with an informed approach, buyers can still find unique opportunities in this area of the market.
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