Investor buying power fades as Ontario’s pre-construction market looks to rentals for profit

• The pre-construction market in Southern Ontario faces a downturn in the face of an affordability crisis impacting buyers' ability to enter the market.

• High prices have driven established investors away, leading to a slowdown in pre-construction development and a shift towards resale homes.

• Builders are now focusing on developing subdivisions and condo buildings for rental use in order to recoup investments and profit.

The pre-construction market in Southern Ontario is going through a major transformation. After riding the highest of highs, the market’s been facing some deep lows driven by the affordability crisis that’s had a hold on buyers for the past few years. 

Mike Balchin, Real Estate Broker for Faris Team Real Estate Brokerage, has a front-row seat to the changes at hand. Balchin has been selling pre-construction properties since 2008 and has witnessed the market through its ups and downs. However, he says the backlog in pre-construction now is unlike anything he's seen before.

Cattle calls: Balchin’s early years in pre-construction were marked by stagnant sales. "Nothing was selling for over a year," he recalls. "But then, as prices came back, everyone started buying again." By 2015-2016, the market had become a frenzy. Pre-construction sites would sell out within hours, sometimes minutes. "We had what we called cattle calls," Balchin says, referring to the massive lines of buyers eager to purchase properties. "People would show up in the morning, and by afternoon, we'd be sold out." 

First through the door: At the heart of this frenzy were savvy investors who understood the market’s mechanics. "People could make $100,000 to $200,000 just by being the first person through the door," Balchin explains. Builders would strategically increase prices as sales progressed, giving early buyers a chance to profit when prices went up. But this model was built on speculation, and investors were happy to wait out the build time. "The longer it took, the better for them," Balchin notes, explaining that many buyers in the pre-construction market were actually planning to flip the homes for a profit once they were built.

Stopped market: However, today’s market has changed dramatically. Balchin points to one of the core issues: "The prices have gotten so high that the end user can no longer afford to pay what builders are selling them for." With investor returns disappearing, builders are struggling to attract both investors and buyers. "The investors have completely disappeared from the landscape," he says. "If you're not seeing 10% gains between when you purchase the contract and when the house is built, why would you invest? You can make that kind of money in the stock market."

Headed towards a cliff: The newest changes have led to a dramatic slowdown in pre-construction development, and Balchin predicts that housing starts will soon "plummet off a cliff." Builders are finding it increasingly difficult to sell properties to end users, who are opting for resale homes at better prices. "End users don’t buy from them because they can go and buy something in the resale market for a better price," Balchin explains. "The only thing you're seeing increasing right now is rentals."

The future is in rentals: In response to the changing market, builders are pivoting their focus to rental properties. "The future is rentals," Balchin asserts. "Builders are having to pivot now, and you're starting to see REITs building out subdivisions and buying up 100-block units and condo buildings to be used as rentals."