We’re in a housing crisis. Why are so many builds going bust? | About That

Summary

The housing development in Kitchener, Ontario, which aimed to build four condo towers with over 500 units, has faced insolvency, with only one tower started and unfinished by 2024. This is part of a larger trend, with over 200 developments going insolvent in the last year, a 50% increase from the 10-year average. The pandemic, rising construction costs, labor shortages, increased fees and taxes, and high interest rates have created a 'perfect storm' for developers, leading to a decrease in new condo sales and a complex challenge in addressing the housing supply problem.

Takeaways

• 🏢 The housing development in Kitchener, Ontario, planned for four condo towers with a rooftop sports field, aimed to add over 500 residential units to a tight housing market.
• 🏗️ Despite city approval in 2020 and an expected move-in ready date by 2024 for the first tower, only one tower was started and not completed, reflecting a broader insolvency issue in housing developments.
• 📉 Over 200 housing developments went insolvent in the last year, a rate nearly 50% higher than the 10-year average, impacting large-scale projects that could house hundreds to thousands of people.
• 💡 The public narrative of a housing supply problem contrasts with the reality of unsold units, highlighting a complex issue in the housing market.
• 📈 Developers typically secure land, city approvals, and pre-sell units (usually 20% upfront) to secure bank loans for construction, aiming to sell at least 70% of units to meet bank requirements.
• 📊 The pandemic has caused unprecedented demand and price surges, making construction more expensive than ever between 2020 and 2023, with industry costs increasing by over 50% in Canada.
• 🛠️ Material costs, such as concrete and structural steel, have risen significantly, and labor costs have jumped due to a shortage of workers, leading to delays and increased wages.
• 💼 Development fees and taxes have also risen, with a 51% increase in fees for two-bedroom apartments from 2019 to 2024, adding to the financial strain on developers.
• 📈 High interest rates on developer loans add to the cost burden, with the loan amount growing as construction progresses and costs increase.
• 💔 Projects failing due to unexpected costs can leave buyers out of luck, with deposits lost and little recovery possible for the original developer.
• 📉 New condo sales in the greater Toronto area have dropped significantly, down 57% in the first half of this year compared to the previous year, and 72% below the 10-year average, indicating a challenging market for selling units at increased prices.

Q & A

What was the original plan for the housing development in Kitchener, Ontario?

The original plan was to build four condo towers complete with a rooftop sports field, adding more than 500 residential units to the area.

What was the expected timeline for the first tower to be move-in ready?

The first tower was supposed to be move-in ready by 2024.

What happened instead of the completion of the project as planned?

Instead of completing the project, only one of the four towers was started and it was not finished.

What is the insolvency rate of housing developments in the last year compared to the 10-year average?

The rate of insolvency in the last year is nearly 50% higher than the 10-year average.

Why have real estate related insolvencies been the number one issue for the last year?

Real estate related insolvencies have been the number one issue due to the perfect storm of high material and labor costs, fees, taxes, and interest rates, which have made it difficult for developers to complete projects and recover their costs.

How does a typical housing development project work in terms of sales and financing?

Typically, a developer buys land, gets approvals, and starts selling units upfront, usually 20% of the price, with the rest due once the building is finished. They aim to sell at least 70% of the units to secure bank loans for construction.

What impact did the pandemic have on housing development costs in Canada?

The pandemic led to an unprecedented surge in demand, pushing prices beyond expectations, making it more expensive to build, with industry costs increasing by more than 50% across the country.

How did labor shortages affect the construction industry during the pandemic?

Labor shortages led to delays and increased labor costs, with wages going up almost 10% to compete for a limited workforce, nearly double the pace of other industries.

What was the increase in development fees for two-bedroom apartments from 2019 to 2024?

Development fees for two-bedroom apartments increased by 51% from $45,000 per unit in 2019 to $69,000 per unit in 2024.

How did rising interest rates affect developers' ability to finance their projects?

Rising interest rates increased the cost of loans for developers, making it more difficult to repay the loans and adding to the overall project costs.

What challenges are developers facing when trying to sell the remaining units at higher prices to compensate for increased costs?

Developers face challenges selling units at higher prices due to market resistance and a decrease in demand, as potential buyers are not willing to pay a significant markup compared to initial sales prices.

What was the decline in new condo sales in the greater Toronto area in the first half of the year compared to the previous year?

New condo sales in the greater Toronto area were down 57% from the previous year and 72% below the 10-year average.