5,000 already sold pre-construction condo units could be cancelled due to rising construction costs!
We all know that condo prices in Toronto have been increasing very quickly.
But you probably don’t know that construction costs are actually increasing at a faster rate than prices.
We saw an average 13% increase in resale condo prices year over year.
Construction costs?
20% year over year!
Let me share this interview with you, between CP24 and the president of the real estate research firm Urbanation.
I think Shaun gave a perfect summary of the things that we previously talked about.
#1 Our country is at record low unemployment. Developers have to pay more to fight for workers, so labour costs go up.
#2 Material costs are up because of supply chain issues caused by the pandemic and the Ukraine war.
#3 The city is increasing development charges by 40%.
#4 The Inclusionary Zoning policy is mandating developers to build affordable housing units within new condo developments.
These are the primary reasons behind project cancellations.
What’s the worst thing about a project cancellation?
The time you lost.
You get back the deposit you paid, but you cannot buy back the time.
$100,000 from 1 year ago is worth a lot less today.
Canada’s inflation rate was at 7.7% in May, so you have already lost 7.7% of your purchasing power.
Let’s just say pre-construction condo prices increased roughly 15% over the past year.
You see, the opportunity cost of a project cancellation is very expensive.
And it gets worse and worse if the project takes a few years to cancel.
If you purchased a pre-construction condo unit in the past couple years, should you be worried?
It depends on what you bought.
If it’s a project that I recommended to you, then you do not have to worry.
I’m extremely cautious about what I recommend because I put my name on it.
I only choose developers who actually care about their reputation so they won’t let a cancellation ruin their names.
The ones who are financially very strong so they can continue to build even the profit margin is cutting thin.
The ones who have bargaining power with the trades so they have some control over the skyrocketing costs.
You see, it’s more important than ever that you pick the right developer and the right project, otherwise the price you pay for a cancellation will be very expensive.
Here’s the thing.
The market is cooling and the construction cost is skyrocketing.
These 2 things together may create a crisis of project cancellations.
But remember every crisis is an opportunity.
And this time the opportunity is at the niche high end pre-construction condo market.
Why?
Developers are not stupid, they know the market has cooled down.
It’s not the same as before, any developer can launch whatever product, it will just sell anyway.
Now, only high quality developers with high end products can get the attention.
And they would strategically release only a limited number of units and price them just slightly higher than commodity products.
They want to get sales going first so they can start construction.
They can raise the price on the remaining units back to the high end pricing down the road to catch up on the profit margin.
With commodity products, there’s not much room to lower the price because construction costs keep increasing.
So now commodity products are pretty much staying in the same price range, but the prices of high end products are lowered to attract sales.
The result is a smaller than usual price gap between commodity and high end products.
Of course, higher end products are now much more attractive.
It’s a challenging time for developers.
But it’s a great time for investors to grab some value buys.
If you have some extra cash available and you don’t want to lose it to inflation, you can schedule a call with me at the link below and I’ll share some great value buy units with you.