Pre-Sale Absorption Rate Drops to 20% Prompting Developers to Cancel Projects

With May sales figures set to be released in a few days there is somewhat of a renewed optimism. Sales have picked up a bit, at least month over month. This is partly seasonal, with May likely to be the busiest month of the year, as it usually is every year. Condo sales will come in at a six year low, edging out May 2013 which was previously the slowest May in nearly two decades. In other words, it’s bad but could be worse. Prices appear to have stabilized somewhat, although they certainly face further downwards pressure. That catalyst is likely to come from a rise in unemployment and increasing inventory, both of which will probably stem from the pre-sale market. Hence why i’ve become increasingly focused on this segment of the market. There are already indications that peak jobs are in the rearview mirror. Here in Vancouver, The annual percent change of unemployment across Vancouver has risen for five straight months. Perhaps this is just a temporary bounce higher but if you ask anyone in the Real Estate & Construction sector they would probably agree.

Developers have already begun pulling back on new projects as pre sale demand hits the skids. The media has recently been reporting on this, which is basically a lagging indicator. This has been happening for some time and shouldn’t be surprising given the pre-sale absorption rate has tumbled to just 20% as of April, with developers having to offer a year supply of free wine and avocado toast to entice buyers.

As I wrote a few weeks back, new land sales dropped over 50% in the first quarter of 2019 as Developers struggle to justify current land and construction costs. The math simply doesn’t work, especially given the downside risks. According to Altus Group, in Vancouver, one out of every five condo units that developers filed for approval in 2016 have been abandoned by the developer.

While construction workers are busy scrambling to finish the record number of units under construction, once this backlog starts to ease, the future pipeline looks pretty thin. In other words, lots of trades people yet fewer projects. Simple supply and demand suggests this should not only impact wages but also migration flows. Something i’ve talked about before but very few seem to understand.