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“Deals are collapsing. No one is buying because there is so much uncertainty. But if the population is going to grow, we need housing.”
Builders are also being careful not to overbuild as they did 10 years ago. Photo by Richard Marjan /Saskatoon Star Phoenix
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This is where inflation and the associated rising interest rates have really come home to roost.
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In the third quarter of 2022, there were 257 new home sales in the Saskatoon region, down 48.4 per cent over last year and a 63.3 per cent decrease from the 10-year average.
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These were the harrowing numbers in the Saskatoon and Region Home Builders Association’s most recent quarterly report. Perhaps more harrowing yet was the explanation for the declines.
“Deals collapsed as multiple buyers were not able to secure financing, even those pre-approved by the banks,” said the report. “Lenders were not anticipating interest rates to rise as fast as they did, forcing them out of honouring pre-approvals and mortgage rate commitments.”
In other bad news, first-year interest payments on an average new single-family Saskatoon home soared to more than $17,000 (assuming a new 25-year mortgage with a 10 per cent down payment).
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That’s the third highest amount ever, and an 88 per cent increase compared to the same period of last year.
Insert emoji of a shocked face here, because I can’t find the words. But here’s the situation in a nutshell.
“Sales have come to a halt,” Nicole Burgess, CEO of the SRHBA, told me. “Deals are collapsing. No one is buying because there is so much uncertainty. But if the population is going to grow, we need housing.”
Indeed, we do already, if her experience as a landlord is any indication.
Burgess rents out a small home in an older Saskatoon neighbourhood. Her tenants recently gave notice, and of course she advertised it for rent.
She had heard the rental market was tight, but …
“Within 24 hours, I had 500 responses. I was shocked. I don’t know where people are living,” she said.
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“It was really eye-opening. People were telling me their life stories, that they were going to be homeless.”
So in terms of not adding inventory to the market, which appears to be sorely needed, there are several factors in play from the home-building side. And yes, the biggest one is interest rates.
“What it essentially has done is number one, it’s priced potential buyers out of the market, because you add that to the (mortgage) stress test; or put potential buyers that still could afford a new home … on the sidelines.
“They’re sitting back and waiting to see what’s going to happen with interest rates in the coming months.”
As to price (another factor), new homes are, of course, generally more expensive than existing ones. That being said, you can find a new home for an average $526,000, which is close to the most desirable price range, although the square footage would be a bit lower.
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Also worth remembering is that there are very few quality existing single-family homes on the market, even as it slows down.
Meanwhile, while the supply chain is improving, it’s still plaguing the home-building industry, as are labour shortages. Government fees are increasing “faster than inflation,” she said.
“It’s kind of a perfect storm for our industry.”
The other enormous issue about to face home building is the demise of the PST rebate on new homes, coming at the end of March. Buyers receive a 42 per cent rebate from the province for homes priced between $350,000 and $450,000. It’s a small amount in the scheme of things, but it makes a huge difference to the consumer.
When PST was first applied to new homes, it “decimated” the industry, Burgess said. In today’s environment, removing the rebate, which kicked in alongside the pandemic, will have further dire consequences.
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“For the industry, they’re immensely concerned about what impact that’s going to have. How we’ve positioned it to the government … is in a perfect world to remove PST on new housing, but if not that, extend the program. We need it. And we need it now.
“It would be a very important step forward in mitigating the increase of interest rates. But it doesn’t sound like that’s going to happen.”
Indeed, Burgess and her organization have put forth the abovementioned rental market issues in their arguments to government.
And so, due to all of these factors, builders have shifted their activities to purpose-built rentals, which now account for 48 per cent of construction. Burgess said she couldn’t believe the magnitude of that shift.
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Builders are also being careful not to overbuild as they did 10 years ago. Saturating the market with homes that sit for a long time is also a lousy idea, regardless of demand — even pent-up demand, which is surely coming at some point.
What all of this means “is our inventory (of homes) will continue to stay low,” said Burgess.
And if we do see the population surge the government is hoping for, where will we put these people?
Despite this rather dreadful state of affairs, Burgess does see hope on the horizon due to Saskatchewan’s improving, if not surging, economy. But interest rates will have to stabilize and then drop, and the industry needs a nod or two from the governments regulating it.
It’s not just about the builders. It’s about having enough housing.
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Joanne Paulson is a Saskatoon author and freelance journalist who has been covering real estate, off and on, for more than 25 years. Do you have a fascinating real estate story to share? Get in touch at [email protected].
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