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Even with a dip in home sales, as markets adjust to new rules, new home pricing remains high due to low supply and “right sizing” dilemma

Although some recent reports show a drop in actual resale sales — in the short-term dramatic double digit drops according to some brokers — prices are showing no sign of dropping on new homes.[1]

The Building Industry and Land Development Association recently released data detailing rising costs for new detached and semi-detached homes, as well as town homes. In April, the average cost of these homes had risen to over $1.2 million, with an average of $1.8 million for new detached houses alone and $1.6 million on a resale for detached homes. The main factor contributing to this steady rise in costs is “right sizing.” Even with listings increasing, right sizing isn’t as easy a fix.

 

New home prices remain high due to record low inventory. Unlike resale markets, which saw a surge in new listings, new homes rely on slower-reacting inventories.

 

Right Sizing Dilemma

Many residents are unable to find the right sized homes for their families, and builders are unable to keep up with increasing demand. This leads to many houses being purchased quickly, while others struggle to find enough space to fit their families and meet their needs. Then, as the market grows hotter, residents begin to fear selling their homes and purchasing another because they have difficulty finding a “right sized” replacement — whether they are down-sizing, or up-sizing. Despite this, demand remains, keeping pressure on pricing.

 

Right-sizing or right locating are the issues in the new market. Condos offer more inventory and more location choices, potentially with more affordable solutions, especially for down-sizing Baby Boomers who still want luxury and location. Pictured Aquabella by Tridel in Toronto.

 

This leads to more instability. Even though recent moves by the Ontario Government to moderate the market did seem to “stall” the buying intention of many, and also seemed to bring more listings into the market on the resale end, new homes respond on a longer-timeline than resale market forces. For example, if a Baby Boomer couple planned to downsize, and the recent market rule gave them the urge to sell — to realize their gain on their current property — this nets a new listing in the market, but creates a possibly “unfulfilled” buyer for a new home replacement. Ultimately, this could lead to an abandoned intention to buy.

New Homes Different from Resale

The overall inventory for new homes plummeted below 10,000 for the first time last month — 9,387 according to Altus Group. The decline happened quickly, as the area boasted over 21,000 new homes just last year. Nearly 4,700 homes sold in the Greater Toronto Area last month alone, and builders are struggling to meet the needs of potential buyers. Demand far outweighs supply for new homes, thus raising the costs even more.

 

New home prices remain high but stable due to short supply. Even within the supply, “right sizing” is adding an extra pressure on pricing.

 

Patricia Arsenault, Executive Vice President of Research Consulting Services with Altus Group, said:

“The declining number of new homes available to purchase is not a question of less product being brought to market. There were more than 11,000 units in projects opened in the first four months of this year, and that’s about one-third higher than the average for the previous two years; but new product is selling well. For example, for projects opened in the first quarter of this year, only one in five units were still available to purchase at the end of April. For the same period in 2015, that proportion was about double.”

Because of the sudden yet overwhelming changes in the Toronto market, a growing population is seeking alternative options in the form of condos. They are much more affordable than houses since they can house a large amount of people in a smaller area. Condos are also an attractive alternative because units are increasing in number and size as detached homes dwindle.

 

NOTES [1] Reported in the Toronto Star May 27, 2017

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