Homebuyers Shun New Real Estate in Vancouver, Hurting Builders

(Bloomberg) -- Politicians are desperate for developers in Vancouver to build more homes to alleviate pressure in one of the continent’s most expensive real estate markets. There’s just one problem — not enough buyers are showing up.

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With mortgage rates still near their highest levels in more than a decade, some condo developers are struggling to generate enough early interest in projects to get them built. Homebuilders in the province of British Columbia are constantly against the clock: it has a law that gives them just 12 months to market their projects, collect enough deposits and secure the financing to build.

They can ask for more time — but at that point, consumers may also be able to ask for their money back. Developers have begun lobbying the provincial government to relax the rules to allow them more time to sell. And it’s become common for Vancouver builders to apply for extensions to the city’s deadlines on approved projects.

New home sales dipped 20% in metro Vancouver last year, while inventories have climbed in recent months. New concrete condominiums jumped to 6,672 in the fourth quarter — up about a third from the previous quarter, according to the Urban Development Institute, an industry association. Unsold wood-frame condos were up 12% on the quarter, and 45% more than the prior year.

Banks typically ask developers to amass sale contracts that would cover 70% or more of the loan amount for a high-rise tower, unless the company can provide additional security.

“A lot of groups are not meeting that pre-sale test,” Beau Jarvis, chief executive officer of Wesgroup Properties LP, said during a real estate event in Vancouver this month. “You’ve seen a couple of cancellations, where people are giving deposits back to purchasers.” The 12-month time limit “is perhaps starting to impede the development of housing,” he added.

Anne McMullin, president of the UDI, said her group has been pushing the government in informal discussions to lengthen the timelines for selling planned new construction. It’s more than just interest rates at play. Condo projects are becoming larger and more complex, she said — partly a consequence of a push by governments and builders for greater housing density.

It’s a particularly pressing issue in Vancouver, arguably Canada’s most beautiful large city but also the epicenter of its housing crisis. There’s a scarcity of developable land, thanks in part to its natural features — mountains to the north, ocean to the west. It’s Canada’s priciest major city for homebuyers, with a benchmark price of C$1.2 million (about $875,000).

“It’s never been as expensive to own a home anywhere, anytime in Canada as it was in Vancouver in the fourth quarter,” Robert Hogue, assistant chief economist at Royal Bank of Canada, wrote in a recent report.

Restructuring Loans

Renting is also a nightmare for many, with vacancy rates below 1%. The average rent increase for two-bedroom apartments that turned over to new tenants was 34% in Vancouver, last year, according to data from Canada Mortgage & Housing Corp.

Matchmaking between the increasingly stretched budgets of buyers and builders is already tricky. BC’s 12-month deadline may be one hurdle too many.

A planned 24-story project in Burnaby, a Vancouver suburb, was seemingly abandoned last July, with the developer citing “market conditions.” A 400-unit condo project in Richmond was paused, and deposits returned, in May, according to local publication Richmond News.

The BC Financial Services Authority, which enforces the Real Estate Development Marketing Act, or REDMA, said it’s aware that the condo-marketing rules are an issue for the homebuilding industry.

“BCFSA is continuing to discuss early marketing with the development community so that any policy changes might be considered,” a spokesperson said in an emailed statement.

AJ Delisle, RBC’s vice president of real estate in BC, told an audience in Vancouver that the REDMA time limit makes pre-sales difficult when compared to other cities like Canada’s biggest, Toronto, where developers can market properties for years before construction finally begins.

“We are seeing quite a lot of requests coming in to the bank saying: ‘Hey AJ, we can’t meet our pre-sale requirement. What can we do to rejig the loan so that we can qualify, hit our REDMA deadline and get the loan done? And then we’ll keep selling after.’”

“That happens almost on every single deal right now.”

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