HOW TO DETERMINE IF A CONDO PROJECT IS OVER PRICEDBy CondoWong Monday, September 30, 2019
A few weeks ago, we talked about investing in the top 3 winning neighbourhoods in Toronto with the 4-5-6 rule.
If you missed it, you can click WATCH NOW.
We said that if you have $450,000, go for Vaughan. $550,000, go for midtown. $650,000, go for downtown.
How did I come up with these numbers?
How do you know they are not overpriced?
Today, I’m going to share with you, a formula that you can use to determine if a pre-construction condo project is overpriced, underpriced or a value buy.
If we know the developer’s costs, then we have the knowledge to determine if a condo is overpriced. So let’s get right into it.
We can break down the basic building costs into 3 categories.
The average land cost in Vaughan is $200 per square foot. $350 in midtown and $450 in downtown.
It is no surprise that land in downtown is the most expensive and it will only get even more expensive.
Why? Because the City of Toronto has passed new regulations like the TOcore to restrict developments in the downtown core.
How? There are new minimum requirements on the distance between buildings so they can’t be too congested.
Old office, hotel and rental buildings can only be replaced, so you can’t just take them down and build new condos. More areas are marked as heritage conservation areas.
What do these all mean?
It will be much more difficult for developers to find available sites in downtown Toronto and they will be more expensive to acquire and to build.
Let’s continue on with the building costs.
Labour, material, currency rates all contribute to the construction cost.
It’s $300 per square foot in both Vaughan and midtown and $400 in downtown.
Shouldn’t the construction cost be the same across the board? Why is it more expensive in downtown?
Because you need to block off some roads for construction.
Imagine blocking off a road in the already super congested downtown.
The construction workers may need to work at night and during restricted hours.
Also, the city of Toronto recently increased the Street Occupancy Fees by 1,000%.
That’s right. 1,000%
All of these factors would translate to a longer construction time and a higher construction cost in downtown Toronto.
Let’s take a look at the ongoing constructions in the GTA at the moment.
There are 15 office buildings under construction in downtown Toronto alone, 271 high rise residential buildings in different stages of construction just in the GTA.
There are also 26 subway stations under construction along the Eglinton LRT.
Our airport is under expansion and renovation.
The combination of residential, commercial and institutional construction is unprecedented growth that our country has never seen and there is no sign of flattening out.
We are struggling with labour shortage, concrete shorting and crane shortage.
On top of the shortages, we have increased tariff that incurs to import materials, added labour cost, longer time on the road to deliver goods.
All these would mean higher construction costs going forward in all the 3 neighbourhoods.
#3 Government Charges
The government charges include HST, development charges, education and park levies. It’s $120 for Vaughan, $180 for midtown and downtown.
The City of Toronto continues to add infrastructure like the Eglinton LRT, schools, parks, daycare, water and sewage.
There is no way to pay for all these within the city’s current budget so they continue to look for the development industry to fund these.
The development charges for fall this year will be increased for an additional 25%.
So any new pre-construction projects launching this fall just got more expensive.
So now we got the basic building costs.
As we discussed in the Top 3 Winning Neighbourhood video, we would only consider neighbourhoods that are along the subway line, these areas will obviously be more expensive to acquire and build over the average.
Let’s just add $100 to all 3 of our neighbourhoods.
The condos in Vaughan are mostly entry level while midtown and downtown are more on the high-end level. We’ll add $100 for high end finishes.
Now we’re ready for the total cost. In Vaughan, it’s $720 per square foot.
Let’s go back to our 4-5-6 rule. $450,000 for a 1 bedroom unit in Vaughan translates to $900 per square foot.
So the developer will be making roughly $180 per square foot.
I would say a profit under $200 per square foot is very reasonable for a development that takes 4 years to complete.
In midtown, the total cost is $1,030 per square foot and $550,000 1 bedroom translates to $1,100 per square foot.
If you see a pre-construction unit in midtown today pricing over $1,300 per square foot, I’d say it’s overpriced.
In downtown, the total cost is $1,230 per square foot and $650,000 1 bedroom translates to $1,300 per square foot.
Would a project be underpriced?
Yes! That happens when the developers cannot foresee the increase in construction costs and government charges.
What would happen then? They have to cancel the project even after it is sold out because no one is going to build at a loss.
Over the past 24 months, there were 6,589 units cancelled in the GTA.
These developers are generally new and inexperienced.
That’s why I would only recommend projects from reputable developers.
If you need project recommendations, you can schedule a call with me.
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