High interest rates are stalling building projects across the nation, exacerbating the financial strain on developers and the housing market. With borrowing costs doubling since early 2022, construction activities have markedly declined. But the Federal Reserve’s rate hikes may continue with the current economic conditions signaling ongoing delays and cancellations for the construction industry.
The high interest rate environment has led to a decline in construction activities across North America. This widespread impact affects new starts and pushes ongoing projects into receivership as developers struggle to manage rising expenses, highlighting the gravity of the situation. One of the recent projects affected by high interest rates includes The One, an 85-storey mixed-use development in downtown Toronto.
Launched by developer Sam Mizrahi nine years ago, the project was forced into receivership in October after a key lender grew impatient with delays, rising debt, and ballooning costs. This situation is not unique; an increasing number of residential construction projects have faced similar fates over the past 12 months due to the dangerous combination of higher interest rates and rising construction costs.
In January 2023, the Bank of Montreal and other creditors secured a court-appointed receiver for a 55-storey condominium tower in downtown Vancouver, with BMO claiming over $82 million in owed debts.
In November 2023, several Vandyk Properties developments in Toronto, totaling 1,700 units, were placed into receivership due to debts exceeding $200 million.
To make matters worse, a recent report from RBC showed that housing affordability has reached record lows, with ownership costs consuming a staggering 63.5% of a median household’s income by the end of 2023. This dramatic rise in costs has made it significantly more expensive for potential homeowners and developers alike.
Earlier this year, the Bank of Canada made headlines as the first major central bank to cut interest rates, reducing its rate by a quarter-point to 4.75%—its first reduction in four years—marking a pivotal move in addressing post-pandemic inflation.
South of the border in the United States, there is cautious optimism about the potential easing of interest rates. Some experts are predicting that the Federal Reserve might start cutting rates before the end of 2024 if inflation continues to decline as expected. This shift could see the federal funds rate drop by up to 150 basis points by the end of 2026.
Developers and policymakers are closely monitoring economic indicators and central bank policies to navigate this high-interest environment. Without a significant reduction in borrowing costs, the stalling of building starts is likely to persist, further straining the already pressured housing market.
