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.

Outlines

00:00

🏢 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.

05:00

📉 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.

Keywords

💡Housing Development

Housing development refers to the process of constructing residential units, typically in the form of apartments, condominiums, or townhouses. In the video's context, it highlights a specific project in Kitchener, Ontario, which was planned to include four condo towers but only one was started and not completed, illustrating the challenges faced in the housing market.

💡Insolvency

Insolvency is a financial state where an individual or company is unable to pay their debts. The script mentions that over 200 housing developments went insolvent in the last year, with a rate nearly 50% higher than the 10-year average, indicating a significant issue in the real estate market.

💡Pandemic

The pandemic refers to the global outbreak of COVID-19, which has had widespread effects on economies and industries. The video script discusses how the pandemic led to an unprecedented surge in demand for housing, pushing prices beyond expectations and causing a strain on the construction industry.

💡Supply and Demand

Supply and demand are economic concepts that describe the relationship between the availability of a product and the desire for it among consumers. The script uses these terms to explain the imbalance in the housing market, where high demand and limited supply have led to soaring prices.

💡Construction Costs

Construction costs refer to the expenses incurred in building a project. The video highlights that between 2020 and 2023, industry costs in Canada increased by more than 50%, with key materials like concrete and structural steel experiencing significant price hikes, impacting the feasibility of housing projects.

💡Labor Shortage

Labor shortage describes a situation where there are not enough workers to meet the demand for labor in a particular industry. The script cites the Ontario government's data showing over 28,000 construction jobs unfilled in 2022, contributing to project delays and increased labor costs.

💡Development Fees

Development fees are charges imposed by the government on new construction projects. The video script points out that these fees have risen significantly, with a 51% increase for two-bedroom apartments between 2019 and 2024, adding to the financial burden on developers.

💡Interest Rates

Interest rates are the percentage at which interest is paid by borrowers on their loans. The script discusses how high interest rates on developer loans have increased the cost of projects, making it more difficult for developers to repay their loans and complete projects.

💡Pre-Sale

Pre-sale refers to the practice of selling units in a development before construction is complete. The video explains that developers typically aim to sell at least 70% of units at this stage to secure bank loans for construction, but this can become problematic if costs rise after units are sold at lower prices.

💡Inventory

In the context of real estate, inventory refers to the unsold units in a development. The script mentions that developers may increase prices of their remaining inventory to cover rising costs, but this can make it difficult to sell units at a time when the market is already struggling.

💡Housing Crisis

A housing crisis is a situation where there is a significant shortage of affordable housing. The video script suggests that while increasing supply may seem like a solution to the housing crisis, the complexities of the real estate market, including high costs and low sales, make it a challenging issue to address.

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

[Music]