We’re in a housing crisis. Why are so many builds going bust? | About That
Summary
TLDRThe 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.
Outlines
🏢 Housing Development Insolvency Crisis
The script discusses a housing development project in Kitchener, Ontario, which was planned to include four condo towers with a rooftop sports field, adding over 500 residential units to a tight housing market. Despite city approval in 2020 and an expected completion date of 2024 for the first tower, only one tower was started and remained unfinished. This project is part of over 200 housing developments that went insolvent in the last year, a rate 50% higher than the 10-year average. The insolvency rate in the real estate sector is significantly higher, and experts predict worsening conditions. The script highlights the normal process of development, which involves land purchase, plan approval, and pre-construction sales to secure bank loans. However, developers have faced a 'perfect storm' of issues including the pandemic's impact on demand and costs, material and labor cost surges, labor shortages, and increased government fees and taxes, all contributing to financial strain and project failure.
📉 The Impact of Rising Costs on Developers
This paragraph delves into the financial challenges faced by developers due to rising costs. The pandemic has led to an unprecedented surge in demand and prices, making construction more expensive than ever in Canada. Between 2020 and 2023, industry costs increased by over 50%, with key materials like concrete and structural steel seeing significant price hikes. Labor costs also rose due to a shortage of workers, leading to increased wages and project delays. Government fees and taxes on development have also increased substantially, adding to the financial burden before construction even begins. The combination of these factors has led to a breaking point for many projects, causing them to fail and leaving buyers at risk of losing their deposits. The script also touches on the difficulty of selling the remaining units at a higher price to compensate for increased costs, as the market is already saturated with high-priced units that are not selling well, leading to a significant drop in new condo sales in the Greater Toronto Area.
Mindmap
Keywords
💡Housing Development
💡Insolvency
💡Pandemic
💡Supply and Demand
💡Construction Costs
💡Labor Shortage
💡Development Fees
💡Interest Rates
💡Pre-Sale
💡Inventory
💡Housing Crisis
Highlights
A housing development in Kitchener, Ontario, with plans for four condo towers and a rooftop sports field was approved in 2020 but has faced delays and insolvency issues.
Over 200 housing developments went insolvent in the last year, with an insolvency rate nearly 50% higher than the 10-year average.
Housing supply is a repeated public concern, yet many housing developments fail due to financial difficulties despite the need for more housing.
Developers typically secure 20% upfront from buyers and rely on selling at least 70% of units to secure bank loans for construction.
The pandemic has caused unprecedented demand and price surges in the housing market, making construction more expensive than ever.
Industry costs in Canada increased by more than 50% between 2020 and 2023, affecting key materials like concrete and structural steel.
Labor costs have also risen due to a shortage of workers, with wages increasing by almost 10% to compete for a limited workforce.
In 2022, over 28,000 construction jobs in Ontario went unfilled, a 33% increase from the previous year.
Developers face increased fees and taxes, with development fees for two-bedroom apartments increasing by 51% from 2019 to 2024.
High interest rates on developer loans add to the financial burden, with costs escalating as loans grow larger.
When projects fail, buyers may lose their deposits, and original developers struggle to recover due to fixed sales prices below construction costs.
Developers have to increase prices on remaining units by 30-40% to cover increased costs, making sales difficult.
New condo sales in the greater Toronto area dropped 57% in the first half of this year, highlighting the difficulty in selling at higher prices.
The housing crisis solution of simply building more supply is complicated by financial and market realities.
Developers may pull out of projects entirely if they cannot sell units at a price that covers increased costs.
The transcript highlights the complex challenges in the housing development industry, including supply and demand dynamics, cost escalation, and market responsiveness.
Transcripts
take a look at this housing development
in Kitchener Ontario the plan was to
build four condo Towers complete with a
rooftop Sports field it would have added
more than 500 residential units to an
area where housing is pretty tight
things look good the project got City
approval in 2020 and the first Tower was
supposed to be moving ready by 2024 but
that didn't happen instead only one of
The Four Towers was started and it
wasn't finished this project is one of
more than
200 housing developments that went
insolvent just in the last year alone
that rate of insolvency is nearly 50%
higher than the 10-year average and many
of these developments are big big
buildings that could have housed
hundreds often even thousands of people
real estate related insolvencies have
been number one by a significant margin
for the last year and the experts we
spoke to say this is only going to get
worse at a time when there is a huge
need for more housing there's two
completely opposite thoughts the public
is told endlessly there's a housing
supply problem like endlessly endlessly
endlessly it's just infinitely repeated
and then the public now has to say that
oh yeah nobody will buy them so what's
going
on let me start by showing you how these
projects are supposed to work and then
I'll show you where it all goes wrong so
normally a developer buys some land
draws up some plans and gets all the
right approvals from the city then
before a single shovel hits the ground
they're starting to sell units generally
20% of the price up front the rest once
the building's finished and they're
trying to sell most of these units at
least 70% otherwise Banks won't lend
them the millions of dollars they need
to actually build the building now
Crossing this threshold is a critical
phase of the project because at this
point point the developer in deep hoping
construction goes according to plan fast
forward a couple of years the building's
done the developer closes on all of its
sales collects all the money buyers
still owe them people start moving in
and the bank gets paid back with the
profits everyone walks away happy but in
the last few years developers have been
hit with a perfect storm of trouble
lucrative projects going into the red
often with no way of recovering their
costs trouble number one the pandemic
the pandemic has pushed prices beyond
what anyone might have expected an
unprecedented surge in demand has sent
prices here soaring demand is here and
Supply is here so price just goes
through the roof and there was money
because the government was giving out
lots of money
so prices went up quite a lot
particularly in the development industry
between 2020 and 2023 it became more
expensive than ever to build in Canada
according to RBC economists industry
costs up more than 50% across the
country just look at the price on key
materials concrete up 55% structural
steel up 53% every part of the system
was was stretched thin to try and
maximize the capacity of building
housing because the demand was enormous
and so once those prices get up there
and it go it trickles all the way down
through the cost of Labor jumped too
because there just weren't enough work
workers to meet demand competing for
those workers meant paying a premium
wages went up almost 10% nearly double
the pace of other Industries if you
could find the right trades people at
all according to the Ontario government
at one point in 2022 there were more
than 28,000 construction jobs that went
unfilled that was about a 33% jump over
the previous year and when you don't
have workers you have delays developers
who started out before Co and were not
finished before Co and it didn't matter
how much they weren't finished like if
it was only 10% it's still a big problem
because they're getting a lot of delay
and they're getting a lot of cost
increase but developers weren't just
getting hit with high material and labor
costs fees and taxes developers have to
pay the government also went up in 2019
development fees on apartments of two
bedrooms or more were about
$45,000 for each unit in in a
development fast forward to 2024 the
fees on the same two-bedroom apartment
units are about
$69,000 each that's a 51% increase in 5
years and that's on each unit in a
really big building of 500 units where
let's say half are one bedroom the other
half are two bedrooms that's an increase
of nearly $10 million before I even
really put a shovel in the ground and
just get my permit I immediately have
$30 million in cost that I'm now like
having to pay interest on yes interest
something every homeowner dreads talking
about except forget your puny half
million doll mortgage and see what 6 or
7% interest on $30 million or more adds
up to a significant part of the cost of
the developer is the interested pays on
its loan and of course as this goes on
their loan is getting bigger and bigger
and bigger they've got no way to repay
it and the interest amount is going up
like this and this this is around where
this perfect storm comes to a head
because after running into so many
unexpected increasing costs materials
labor fees taxes interest everything's
at a Breaking Point when a project fails
people who've been waiting can be
completely out of luck their deposits
could just evaporate and sometimes
unless another developer swoops in to
save the project there's just not much
the original developer can can do to
recover because maybe you're thinking no
problem everything's gotten more
expensive that's inflation so the
individual units in the building should
be more expensive to compensate right
well but remember the problem for our
borderline broke developer is that
they've already sold 70 to 80% of the
building's units just to secure bank
loans to pay for the thing in the first
place and those sales were at 2020
prices which means most of the expected
revenue is fixed way below cost before
construction even begins so you've got
maybe 20 30% of your stock left all you
can do is Jack those prices up to
recover as much as you can sometimes you
see projects that are under construction
with inventory the inventory is pric 30
40% higher than what they initially sold
for because they're using that inventory
to make up for cost that have come up
through the you know construction or um
through that time lag but realistically
who's all that eager to buy a condo at a
40% markup on what every other unit in
that building sold for it's been
crickets for me I mean I don't really
necessarily have any clients who are
reaching out looking for new
construction um a because the average
price is quite a bit higher than the
average resale condo according to Urban
Nation that's a real estate consulting
firm in the first first half of this
year new condo sales in the greater
Toronto area were down 57% from the year
before and 72% below the 10-year average
which makes selling any available
inventory at that higher price very very
difficult because this is what many
people don't understand is there is a of
ultimate point where people won't pay
the rent and that fact affects
developers at all stages of a build
because even if we rewind back to the
earliest phases of development when
they're still in pre-sale mode maybe the
right thing to do is just price in all
of your unexpected worst case scenario
costs into the original sale price right
well again who's buying at that price
with interest rates being what they are
maybe they would have paid it a year ago
or two years ago or three years ago but
not today makes sense that a lot of
developers are now having a tough time
selling these units and are now just
pulling out of projects allog together
because they can't sell them so the next
time you hear the solution to the
housing crisis is simply to build more
Supply that may be true but it's not so
simple
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