November 12, 2024
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In a recent Vancouver Real Estate Podcast interview, Avesdo President Ben Smith shared compelling data suggesting we’ve reached the bottom of the pre-sale market. With Avesdo processing 80% of BC’s new construction contracts, Smith’s unique perspective offers valuable insights for those considering a pre-sale purchase, particularly along transit corridors.
“Whether we’re here today or the bottom is December 27th at 5 a.m., I don’t know, but we’re close,” says Smith. Here are the five key indicators that suggest now might be the optimal time to consider a pre-sale purchase, especially near transit corridors:
1. Rock-Bottom Project Pricing
Pre-sale prices have consolidated into two distinct bands that developers cannot build below due to basic construction costs:
- Wood-frame projects: $800-1,000 per square foot
- Concrete towers: $1,000-1,250 per square foot
This represents a significant market compression from previous peaks, where prices ranged from $650 per square foot in suburban areas to $2,500 per square foot for luxury towers. Today’s narrow price bands reflect the true cost of building – anything below these levels is impossible to build profitably, and anything above isn’t launching at all. This compression indicates a market finding its equilibrium at genuinely feasible price points.
These price points represent absolute minimums in today’s market – a “floor” created by hard construction costs, rising development charges, and municipal fees. When a project’s numbers don’t work at these levels, developers aren’t choosing to lower prices – they simply aren’t launching at all. As Smith explains, “If you can’t build it and hit that number… they just won’t launch it.”
We’re seeing this play out in real time. September 2024 marked the lowest launch rate in Smith’s career, with developers choosing to hold back entirely rather than launch at unfeasible prices. “When you just look at all the costs, the costs are rising, not falling,” Smith notes. “Even if we’ve seen any relief from labor or some of these things, land costs, just read the news and you’ll know that the municipalities are doubling DCCs and adding all these things. And there’s no cost relief.”
2. The Market’s New Normal
Smith reveals a fascinating market dynamic – while individual unit prices have decreased (for example, a one-bedroom in Burnaby that was worth $1,350 per square foot at the peak might now be $1,250), the average price in the market has actually increased by 7% since the peak.
How is this possible? Smith explains that the entire market has compressed into a narrower band. Previously, new developments ranged from $650 per square foot in suburban areas up to $2,500 per square foot for luxury towers. Now, the market only operates between $800-$1,250 per square foot. The bottom of the market moved up (from $650 to $800), while the top end simply stopped launching.
He uses a simple example to illustrate: “Let’s say people used to be used to paying $500,000 for a home. Now they’re willing to pay $600,000. Well, okay. As prices come down on a per door basis, they’re still willing to pay $600,000. So as long as you can deliver at $600,000, you don’t have to deliver at $500,000 anymore – because people are used to $600,000.”
Smith uses mortgage payments to further explain this psychology: When variable rates pushed monthly payments from $2,500 to $5,000, people adapted. Now, even if rates allow payments to drop to $3,000, that feels like relief – but notice it’s still higher than the original $2,500. The market has adjusted to a new normal, and prices won’t need to return to previous lows.
3.Supply Has Hit Historic Lows
September 2024 marked one of the lowest pre-sale launch rates in decades. Project launches dropped an astounding 180% from Q2 to Q3 2024, with absorption rates falling to approximately 25%. In real estate terms, absorption rate means the percentage of available homes that are selling – so only a quarter of available pre-sale homes are finding buyers.
The market is experiencing unprecedented supply constraints. “Talking to those older than me, I’m told they haven’t seen it this bad since the 90s,” Smith reveals. The impact is significant – 45% of all 2024 sales came from pre-2024 inventory, showing how the market is absorbing existing supply without new inventory being added.
“You’ve seen the articles. 2028, we’re not going to have any completions,” Smith warns. He breaks down the domino effect: If developers aren’t launching projects now, they can’t achieve pre-sales. Without pre-sales, they can’t start construction. Without construction starts, there will be no completed homes in 3-5 years. This creates a dangerous supply gap that will impact the market for years to come. It’s a direct chain reaction – fewer launches today means fewer homes being built tomorrow, creating a severe supply shortage by 2028.
4. Interest Rate Relief Coming
Smith outlines several upcoming opportunities for rate reductions:
- December 11, 2024: Potential 25-50 basis point cut
- January 29, 2024: Expected 25 basis point cut
- March 12, 2024: Anticipated 25 basis point cut
- April 16, 2024: Possible 25 basis point cut
Smith notes that “By the time that spring market kicks, I don’t know too many economists that would bet against where we’ll be at that point” – meaning there’s strong consensus that interest rates will be notably lower by spring 2024. Each time rates drop by 50 basis points (or 0.5%), buyers save approximately $28 per month for every $100,000 borrowed. For example, on a $600,000 mortgage, a 0.5% rate reduction would save $168 monthly ($28 x 6).
The timing is particularly significant for pre-sale buyers because they’re in a unique position. Unlike resale buyers who need to qualify for a mortgage immediately, pre-sale buyers won’t need their mortgage until their building completes in 2-4 years. As Smith explains, they’re “just hedging against what they’re going to have to do when it closes.” This means today’s pre-sale buyers should feel fairly confident knowing that by the time they need their mortgage, rates will likely be significantly lower than today, making their monthly payments more affordable. They get to buy at today’s prices while benefiting from tomorrow’s lower rates.
5. Peak Developer Incentives are Right Now
Current market conditions have created unprecedented developer incentives, particularly on remaining inventory. The scale of these incentives is remarkable – Smith notes that during the market peak, even basic requests for deals were dismissed: “At the peak when you’re like, ‘can you give my client a deal? Like, can you throw in a locker?’ No, get out.”
Today, the situation has completely reversed. “Nowadays, almost every single contract has a deal on it,” Smith reveals. Looking at the actual contracts flowing through Avesdo’s system, he identifies two main types of incentives:
- Deposit Reductions: “It was 20% without fail… now big negotiations are happening on deposits.” While developers still need to meet bank requirements, some are getting as low as 10% – a significant savings on high-value properties
- Price Adjustments: Whether publicly advertised or negotiated privately on older inventory, virtually every deal now includes some form of price reduction or added value
What makes these opportunities uniquely valuable is that they’re only available on existing inventory – and that inventory isn’t being replaced. With developers holding back new launches until market conditions improve, once a unit, for instance unit 103, sells with today’s incentives, there won’t be another one coming to market until developers see stronger absorption rates and better pricing. As Smith emphasizes, “This is not the Gap with 27 jackets in the back of the warehouse that you don’t know about. Like there’s one unit 103. And once it’s sold, there’s not another one until the next building comes.”
Even more telling, we know these deals are temporary because “as demand increases, you don’t get deals. It’s just the way it goes.” The current wave of incentives exists only on today’s inventory, and that inventory is steadily being absorbed without being replaced by new launches.
Looking Ahead
For those considering a pre-sale purchase, current market conditions present a unique window of opportunity. The combination of price floors, peak incentives, and anticipated interest rate cuts suggests we’re at or near the bottom of the market.
Smith explains that the market’s seasonal nature creates a predictable pattern: “Anyone who’s in pre-sales knows, or not even pre-sales, even new home, there’s seasonality to this market. We go fall, which is September, usually comes within two weeks after Labor Day, runs through till the end of October. Soon as the fat man in the red suit is starting to come to town, it slows down. And so November, the launches tail off. Not much happens through December and January. It kind of picks up a little bit, end of January through February. And then the spring market usually is April.”
With developers showing unprecedented sophistication in managing supply and holding back launches until market conditions improve, the current window of opportunity – particularly through the traditionally slower winter months – may offer the best combination of pricing and incentives we’ll see in this cycle. Much of the current inventory only exists because developers launched projects expecting stronger market conditions in 2023/2024, and were caught by the market slowdown.
Looking further ahead, the severe supply constraint suggests potential shortages by 2028. As Smith notes, “We’re just not prepared for that in the future.” The lack of launches today means significantly fewer completed homes in the years ahead.
Frequently Asked Questions
Q: How long is this “bottom” expected to last?
A: According to Smith, with the traditional seasonal slowdown through winter and no significant launches expected until spring 2025, this window of opportunity could last through the winter months. However, he notes, “Whether we’re here today or the bottom is December 27th at 5 a.m., I don’t know, but we’re close.”
Q: Why aren’t developers just lowering prices to sell more units?
A: Smith explains that at current construction costs, development charges, and land costs, projects simply aren’t feasible below certain price points – $800-1,000 per square foot for wood frame and $1,000-1,250 for concrete. Rather than launch at unfeasible prices, developers are choosing not to launch at all.
Q: What happens to the market in 2028?
A: Smith warns about a potential supply shortage because of the lack of construction today: “2028, we’re not going to have any completions.” This is because today’s lack of launches means no pre-sales, which means no construction starts, which ultimately means no completed homes in 3-5 years.
Q: Will developer incentives get better?
A: Smith suggests current incentives are likely at their peak. “As demand increases, you don’t get deals. It’s just the way it goes.” Moreover, with no new launches replacing sold inventory, once units with current incentives sell, those opportunities disappear.
Q: How much would interest rate cuts help buyers?
A: With four potential rate decisions between December 2024 and April 2024, and analysts expecting at least 25 basis points per cut, buyers could see significant improvements in affordability by spring. Each rate reduction impacts monthly payments on mortgages, with multiple cuts expected before the spring market begins.