The opportunity to lock in a real estate investment for the future while avoiding the impact of today’s higher interest rates is pushing more buyers into the presale market, says one expert.
“Homebuyers do believe that presale is a strong opportunity today. And they believe that because they can lock in today's price, and they can avoid today's interest rate,” said Ryan Lalonde, president and partner of MLA Canada.
The real estate service provider predicts that presale activity in the first two quarters of 2023 will be lower than the record highs seen in 2021 and 2022.
However, this will be “viewed positively” when compared to the low sales activity and negative sentiment of the second half of 2022, MLA Canada said in a market analysis released March 2.
In the coming year, MLA Canada forecasts that there will be 95 presale program launches, which will bring a total of roughly 11,000 units to the market. Of this total, it is predicted that there will be 4,300 concrete, 4,950 wood frame and 1,750 townhome units.
“What's been really interesting is that over the last 12 months, as we've seen market corrections primarily tied to post COVID-19 and interest rate adjustments, there's been a shift in demand away from resale towards presale transactions,” Lalonde said.
One of factors driving this shift in sentiment is a lack of supply in the resale market, he said.
Taylor Biggar, chairman of the Real Estate Board of Greater Vancouver (REBGV), described Metro Vancouver’s housing market as “significantly undersupplied” in his organization’s latest monthly report.
Last month’s home sales totalled approximately 1,808 – 33 per cent below the 10-year February sales average, according to the REBGV’s report.
Of the presale units that will hit the market this year, MLA Canada predicts 45 per cent of released inventory will be absorbed by 2024, according to its latest market report.
“Homebuyers are not finding access to supply in the resale marketplace and then are considering presale as an alternative. And that's been really driving price points and driving absorption in the presale marketplaces,” he said.
As a result, the gap between presale and resale pricing has been growing in certain markets, according to Lalonde.
“That's quite surprising to us, given the fact that you have what seems to be some strong headwinds and certainly lower buyer sentiment in today's marketplace than what we've seen in the past. But still, people believe that the future value of a new home is higher than what a comparable resale home would be transacting for in any general marketplace.”
When it comes to the success of a presale, real estate agent Jesse Klein said that presale projects priced 15-20 per cent over resale are struggling to hit their sales targets. He described the current premium for presale as “crazy high.”
“If they lower it to maybe five or 10 per cent above resale, then they're getting a lot of activity, and they're actually making a lot of sales,” he said. “It really depends on where you're priced. There's a pretty huge discrepancy between well priced projects, and then those that are asking quite a bit above the resale market. So, last year, you could ask 20 per cent over resale and still sell out but it’s definitely not the case right now.”
In the short term, Lalonde sees the impact of this shift in buyer sentiment resulting in less pressure on resale pricing as more buyers look to presale as an alternative.
“I think what you're going to continue to see is strong demand for presale and strong pressure on presale to be able to fill in whatever the resale marketplace is unable to fill,” he said.