Canadian Construction Sector Insights: Resilience Despite Challenges and Residential Downturns
Canada’s construction small and medium enterprises have shown resilience amid economic challenges in 2024, with stable employment, growth in non-residential construction, and eased construction costs despite higher borrowing rates and a residential downturn. The Canadian Construction Association (CCA) released a quarterly report in August, providing a comprehensive analysis of Canada’s construction sector and insights into the challenges faced and successes within the industry. Economic Context and Monetary PolicyIn Q1 2024, Canada’s economy posted modest growth of 0.6%. Despite this, the country’s per-capita GDP remains 3% below pre-pandemic 2019 levels and has largely stagnated over the past decade. In contrast, the U.S. saw per-capita GDP rise by 7%, thanks to a robust services sector, highlighting a significant gap between the two economies.This slower economic growth in Canada has reduced inflationary pressures, which has allowed the Bank of Canada to implement its first interest rate cuts in four years. In June and July 2024, the overnight rate was lowered to 4.50%, aligning with actions by central banks in Switzerland, Sweden, and the European Union. However, the Canadian rate remains higher than the Bank’s estimated neutral range of 2.25% to 3.25%.Construction Sector PerformanceThe Canadian construction industry had subdued activity in Q1 2024, with overall growth of just 0.1%. This modest figure hides a more severe contraction in the residential sector, where activity fell by 1.1%, a significant drag on overall performance. This decline in residential construction reflects the ongoing challenges the housing market faces, particularly due to high interest rates and cooling demand.Non-residential construction, on the other hand, grew by 0.6%, extending its growth streak to nine consecutive quarters. This sector’s growth was driven by modest increases in industrial and institutional investments.Repair and engineering activities also made positive contributions, with the latter rebounding by 1% after two quarters of contraction in 2023. This recovery is significant for the broader construction sector as these areas play a critical role in sustaining overall industry growth.Investment Trends Investment in the construction sector presented a mixed picture. The building construction sector saw a 0.6% decline in overall investments, mainly due to a 3.6% drop in multi-residential construction. Conversely, the non-residential sector maintained its growth trajectory for the ninth straight quarter, though at a slower pace. Investments rose by 0.2%, adding $152 million to the sector. The most notable gains were in industrial construction, up 1.2% ($57 million), and institutional construction, which saw a robust 4.6% increase, adding $165 million. The rebound in institutional construction is especially noteworthy, as it follows five quarters of decline, potentially signalling new opportunities in public infrastructure and institutional projects.Commercial construction, however, did not follow this positive trend. It experienced its sixth consecutive quarterly contraction, with a 2.5% decline in investments, totalling $71 million. This disparity between residential and non-residential performance underscores the varying impacts of economic conditions across different segments of the market.Business Dynamics and Sector ResilienceThe Canadian construction industry is dominated by small and medium-sized enterprises (SMEs), with about 396,000 businesses active in 2023. Of these, small firms with fewer than 100 employees represent a significant portion, while micro businesses with one to four employees make up 68% of the total. Medium-sized firms account for just 0.8%, and large firms with more than 500 employees comprise less than 1%.SMEs face greater vulnerability to economic downturns due to their limited financial reserves. However, the sector has shown resilience, with the number of active businesses increasing in 2023. Moreover, business exits have stabilized, with fewer firms leaving the market compared to the historic lows recorded in Q2 2020.Material Costs and Price TrendsMaterial costs in Q1 2024 showed a range of trends. The Building Construction Price Index (BCPI) rose by 0.77%, continuing its deceleration for the fifth consecutive quarter. This moderation in construction costs is favourable for stakeholders in the industry, including investors, as it signals a slowdown in price pressures.The Industrial Product Price Index (IPPI) declined slightly by 0.21%, although this masked considerable variations across product categories. The chemicals and chemical products group saw a 0.63% increase, while cement and other non-metallic mineral products rose by 2.93%. The energy products group saw a notable 4.25% decrease, with refined petroleum, motor gasoline, and diesel prices falling sharply. Conversely, lumber and wood products saw a 2.42% increase, driven by higher softwood lumber prices, which could affect construction project costs, particularly in residential and commercial buildings.Capacity UtilizationThe construction sector’s Capacity Utilization Rate (CUR) rose to 86.7% in Q1 2024, marking a stabilization and modest recovery from previous declines. This increase suggests a rise in demand and improved operational efficiency, which is a positive sign for future construction activity.Future OutlookLooking ahead, the outlook for the construction industry is cautiously optimistic. Interest rate cuts could further improve the financial environment, particularly for SMEs that have shown resilience despite economic pressures. However, potential policy shifts, international tariffs, and global oil price fluctuations continue to pose risks. Labour shortages remain a significant concern, with many construction businesses expecting ongoing difficulties in securing skilled workers.
Occupancy Costs vs. Closing Costs: Understanding Financial Commitments in Pre-Construction Properties
Investing in pre-construction condos can be a valuable addition to your portfolio, but in Ontario, there are unique financial commitments tied to this type of property investment that need to be understood—particularly the distinction between occupancy costs and closing costs. These two phases of ownership come with separate financial obligations that can have a significant impact on the profitability of the investment.What Is the Interim Occupancy Period?When a condo unit is completed, there are situations where it can be occupied while the rest of the building is being finished.The interim occupancy phase occurs between the time when you take possession of your condo and the actual closing date when the property title is transferred to you. This period exists because, in Ontario, pre-construction projects are often completed in stages. While you can take possession and live in or rent out the unit once it’s ready, you don’t officially own it until the building is fully registered, which can take months, sometimes even a year or more.During the interim occupancy period, buyers are required to pay what is known as “occupancy fees.” These fees cover the developer’s costs until final registration, but they don’t reduce the principal balance on your mortgage.Breakdown of Occupancy CostsOccupancy fees are essentially a form of rent paid to the developer, calculated as follows:Interest on the Unpaid Balance: This is the interest on the outstanding balance of the purchase price that has yet to be paid at closing. If you’ve put down a deposit, the unpaid balance is the remaining portion of the total purchase price.Estimated Maintenance Fees: This covers the estimated cost of maintaining the building, including amenities, security, and repairs, similar to regular condo maintenance fees. However, these can be speculative before the actual costs are known.Property Taxes: Even though you don’t own the unit yet, you are still responsible for property taxes from the time you take occupancy. These are based on an estimated value, which can differ from the final assessed value after registration.The problem many investors face is that these interim costs don’t contribute to building equity. Essentially, you’re paying for the privilege of occupying the space without reducing the amount you owe. For investors, this period can be particularly costly if rental income during this phase doesn’t cover the fees.The Transition to Closing CostsClosing costs occur once the building is registered and the title to the unit is transferred to the buyer. These costs include legal fees, land transfer taxes, development levies, and other associated expenses. At this stage, you’ll also begin your mortgage payments.Key closing costs include:Land Transfer Tax: In Ontario, this tax is applied based on the purchase price of the property. If you’re buying in Toronto, you’ll also need to account for an additional municipal land transfer tax.Development Levies and Tarion Warranty Fees: Developers often pass on the cost of municipal development charges and the cost of the Tarion Warranty Program, which insures your unit against structural defects.Legal Fees and Title Insurance: Legal fees are essential to finalize the transaction, and title insurance is necessary to protect you against potential ownership disputes or other claims against the property.Impact of Rising Interest RatesInterest rates play a crucial role in determining the financial burden of both occupancy and closing costs. During the occupancy phase, the interest portion of the occupancy fee is determined based on the prevailing interest rate on the unpaid balance. As rates rise, this portion can become significantly higher than expected, eating into the profitability of the investment.The Importance of Proper Financial PlanningTo maximize the profitability of a pre-construction condo investment, you need to plan for both occupancy and closing costs, as well as potential shifts in interest rates. You also need to be aware that occupancy fees don’t build equity.Additionally, preparing for closing costs, which can range from 1.5% to 4% of the purchase price, is essential to avoid being caught off guard. Investors need to budget accordingly, factoring in the possibility that rental income may not cover all interim costs, especially if interest rates rise. Proper financial planning ensures that the transition from the occupancy phase to the final closing is as smooth as possible.
Western Surrounding GTA Area: September 2024 Real Estate Market Update
The western region surrounding the GTA Real Estate Market, comprising Guelph, Oakville-Milton, and Kitchener-Waterloo, demonstrated varying trends across the different municipalities, reflecting economic pressures. Residential SalesThe residential sales in August 2024 showed a decline in all three municipality-regions: Guelph, Oakville-Milton, and Kitchener-Waterloo.GuelphThe Guelph market experienced a 7.8% decrease in sales compared to August 2023, with 172 units sold in the month. This was 21.1% below the five-year average for the area, indicating weaker buyer demand despite continued interest in Guelph’s stable housing market.Oakville-MiltonThe Oakville-Milton area recorded 204 sales in August 2024, down by 5.1% year-over-year and 28.2% below the five-year average. Sales in this upscale market have been impacted by higher borrowing costs, leading to cautious behaviour among buyers.Kitchener-WaterlooThis region witnessed a more significant slowdown, with home sales down by 10.5% year-over-year in August, totalling 489 transactions. The Kitchener-Waterloo market has been particularly sensitive to rate increases, and sales were 26.3% below the five-year average for the month.Across all three regions, sales levels have been markedly below their historical averages, as rising interest rates continue to temper buyer activity.New Listings and InventorySupply-side activity varied across the Western surrounding areas of the GTA.GuelphNew listings in Guelph were down by 2.9% from August 2023, with 302 new residential listings hitting the market. Active listings in the region stand at 620, slightly above last year’s levels but still constrained compared to long-term norms.Oakville-MiltonThe Oakville-Milton market saw 421 new listings in August 2024, down 4.5% from a year earlier. The region currently has 825 active listings, as sellers remain hesitant due to uncertain price trends and buyer reluctance at current interest rates.Kitchener-WaterlooKitchener-Waterloo experienced a slight increase in new listings, with 759 properties listed in August 2024, a 1.8% increase compared to the same period last year. Active listings totalled 1,390, providing more options for buyers, although inventory remains below what is needed to balance the market.Inventory levels are mixed across these municipalities, with slightly higher listings in some regions while others face continued tight supply. However, buyer demand still appears subdued.PricesAverage prices in Southern Ontario have shown resilience despite declining sales, though price growth has softened across all regions.GuelphThe average home price in Guelph increased marginally by 1.1% year-over-year to $842,000. Detached homes remain the most sought-after property type, though affordability concerns are pushing more buyers towards townhomes and condominiums.Oakville-MiltonOakville-Milton continues to be one of the most expensive housing markets in Southern Ontario, with an average home price of $1.36 million in August 2024. This represents a 2.4% increase from last year. Detached homes in Oakville remain in high demand, although higher borrowing costs are keeping many potential buyers on the sidelines.Kitchener-WaterlooThe average home price in Kitchener-Waterloo was $805,000 in August 2024, a modest 0.8% increase year-over-year. Detached homes continue to be the dominant segment of the market, but the region’s lower price point compared to the GTA is attracting buyers priced out of other areas.Rental MarketRental markets experienced mixed trends in these areas, according to Zumper.GuelphGuelph’s rental market has tightened over the past year, with vacancy rates dropping to under 2%. The average monthly rent for a one-bedroom apartment is around $1,850, while two-bedroom units rent for approximately $2,400. Oakville-MiltonOakville-Milton’s rental market remains competitive, especially for units in transit-accessible locations. Vacancy rates are hovering around 1.8%, while rents for a one-bedroom apartment are now averaging $2,100. Two-bedroom units are renting for about $2,800. Kitchener-WaterlooKitchener-Waterloo’s rental market is similarly constrained, with vacancy rates under 2%. Average monthly rents for a one-bedroom unit have risen to around $1,950, and two-bedroom units are averaging $2,600. Employment TrendsGuelphGuelph experienced an unemployment rate: 4.7%, an increase of 0.8% from July 2024. This is 10.3% below the peak of June 2020 and remains below the long-term average. It had a total decline of 2,100 jobs in August 2024, comprising 1,200 fewer full-time jobs and 900 fewer part-time positions. Full-time employment is down 3,500 jobs compared to the peak in January 2024.Kitchener-Cambridge-WaterlooThe unemployment rate in this area was 7.1%, up by 0.6% from July 2024. This rate is 6% below the July 2020 peak but remains above the long-term average. The region lost 3,700 jobs in August 2024, including 2,700 full-time positions and 1,000 part-time jobs. Full-time employment is still down by 2,800 jobs from its peak in June 2024.TorontoToronto had an unemployment rate: of 8%, a rise of 0.3% from July 2024. This rate is 7.1% below the July 2020 peak but remains above the long-term average. Toronto added 3,800 full-time jobs but lost 1,300 part-time jobs, resulting in a net increase of 2,500 jobs in August 2024. Full-time employment is still down by 11,000 jobs from the peak in June 2023.Consumer ConfidenceConsumer confidence in Southern Ontario, including these three regions, is reflective of broader provincial trends, according to the Conference Board of Canada. In September, the Ontario-wide consumer confidence index remained cautiously optimistic, buoyed by stable employment numbers but tempered by inflation concerns and higher borrowing costs. The Bank of Canada’s interest rate hikes continue to impact buying power, and many potential homebuyers have opted to delay purchases, contributing to softer sales activity across the province.
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