About 18 month’s ago, I wrote an Insight Article about how pre-construction condo prices are primed to increase. If you want to read the Article, you can find it HERE. Was I correct in writing that 18 months ago? Heck yeah!
Soaring to New Heights – We were just about to break the $1,000 per square foot milestone in the M5V postal code (Entertainment District) 18 months ago and today, that same area is easily over $1,300 per square foot. They say a picture is worth a thousand words, so here a price list of a building in the M5V area at the time of launch 18 months ago versus now.
The ridiculous thing is that these were “summer prices” and projects adjacent to this, such as The Well, sold out at $1,350 per square foot despite being further from the subway.
So, here we are in the Fall of 2019 and unfortunately, I have to write another version of this article. Let me preface this Insight Article by saying that I am not suggesting that prices can increase like this again (at the same rate), however, what I can say is that all of the same patterns which I saw 18 months ago still apply to today’s market.
Development Charges (“DC Rates”) – I wrote the 2018 version of this Insight Article because development charges quietly doubled overnight in February 2018. This was a low-key and sneaky move by the City of Toronto back in 2018, and the final half of that development charge increase is about to kick in. Have a look at the photo below. The red arrow is where we are right now and anything to the right is going to phase in within the next 15 months.
That’s another cool 30% increase in development charges alone! That cost is NOT being paid by the Builder nor the City. You guessed it – these fees are on us, the end-users and investors. We’re forking out this additional 30%!
Reverse Engineering – I want to give you an idea of how I reverse engineer what I think prices will be for a given project. So let me be real with you for a second. All of the Builders that I know are FOR PROFIT businesses and they must build to make money – that is a fact. However, the perception of greedy Builders is usually just false presumptions (although it could be true for some). As with any business though, Builders work with margins and bottom lines. From speaking to various Builders, the target profit margins on condo developments is roughly 15%. Seemingly, this may seem like a low profit margin percentage, but you have to remember that it’s 15% of a multi-million dollar project – the profit is huge!
So with that out of the way, let me show you how I reverse engineer the pricing.
By the Square Footage – On the left-hand side, you can see my rough estimates that make up the per square footage cost in 2018. For example, the cost Downtown was approximately $1,000 per square foot in 2018. On the right-hand side, I only increased the development charges by 30% as per the chart above, and you can already see that it increases the price that is passed down to the end consumer. For instance, the cost Downtown is now approximately $1,060 per square foot in 2019 after considering the increase in development charges.
In this next chart below, if I also (conservatively) increase the cost of land by 10% and construction costs by 20% (both of these costs have increased more than ever as per studies by the Altus Group), you can now see clearly as to why $1,350 is the new norm.
Now combine all of the above with the next 30% increase in development charges (in addition to possibly land and construction costs), and you can probably now understand why I’m writing this Article on why pre-construction condo prices are going up yet again. Don’t forget, this is all before ANY appreciation in the actual marketplace – this is all just taking into account the increase in costs.
There is More Room to Grow – How much more growth will we experience exactly? This will depend on how the market appreciates. If Trudeau gets his way in this year’s election and the first time home buyer incentive gets a turbo boost from the Liberals, then expect even more room to grow. That’s why I’ll be doubling down on Toronto investments over the course of the next 10 years. If this is something that you are interested in doing with me, do reach out, my contacts are below.
Until next time, Happy real estate-ing