The Bank of Canada took a victory lap yesterday as they cut interest rates by 0.5%. This is the fourth consecutive rate cut since June. The rationale given was that inflation in September hit 1.6% down from 2.2% in August.
The fact is, Canada’s economy is extremely weak right now. The drop in rates is needed to maybe stimulate growth.
For real estate investors, the rise in interest rates over the past few years has created a glut of condo’s for sale in the market. About 25% of new condo’s appear in the rental market. These are typically the smaller units in a high rise building that are purchased by amateur investors. These units are rarely purchased by owner occupants. Owners tend to want a larger floor area. Those who are willing to rent will often accept a smaller apartment.
When the bank of Canada dropped its rate on Wednesday this week, all of the major banks also dropped their prime lending rate in tandem.
The picture in the Toronto condo market is not pretty. The sold to new listing ratio is around 30%. The percentage of condos in the rental market that are experiencing negative cash flow is 81%. That’s up from about 40% only a couple of years ago.
The pre construction market is currently absorbing about 300 units a month against a backdrop of over 17,000 units of pre-construction units for sale. In the current market conditions I predict that none of these buildings will achieve the 70% sales threshold needed to qualify for construction financing. The only path for some of these condo projects will be to convert their offering to apartments. But if they’ve already taken deposits, they will need to recapitalize the projects in order to convert them to apartments. The appetite among lenders may be
In the last 7 days in the Toronto market we saw over 1350 new listings and more than 600 conditional transactions terminated.
On today’s show I’ve focused on the Toronto market. The picture is similar for condos in other markets across Canada. I would characterize the Vancouver market as being most similar to Toronto. But there is very little activity in new condos in Calgary, Ottawa and Montreal. The name of the game in Canada right now for apartment living is purpose built apartments.
For that asset class the drop in interest rates translates into long term improvement in the outlook for that sector.
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