I attended a real estate discussion panel last week with developers and city planners and it was an interesting discussion, to say the least. It almost felt as if all the panelists were on trial with the type of questions that they were being bombarded by.
Most of the attendees were asking about 1 of 3 things:
1. Prices increased too much, everything is unaffordable
2. NIMBY (Not In My Back Yard) protest
3. Foreign Investments
Maybe it was due to the background of the panelists, or maybe it was just an avenue for people to complain in the hopes that another outcome will occur if they voice their concerns, but I was definitely not feeling great about the energy in the room as it was largely, if not all, negative.
Although the headlines are screaming for a crash, the market is actually going quite strong and prices will likely continue to increase in the most affordable segments of the market, that is condos and townhomes but especially so in the pre-construction condo segment of the market.
Price Increase Again, But Why??! Pre-construction condo prices are going to see an increase soon but not because of the usual root cause (i.e., lack of supply). On the contrary, the increase is actually caused by the City of Toronto, believe it or not.
What most people don’t often talk about is the significant cost to develop such huge towers. Everybody thinks that the builders are charging more strictly due to demand. While there is truth to increasing prices when demand is high, there are also other reasons, such as increasing construction and development cost that result in increased prices.
Take the recent minimum wage increase as a prime example. I don’t know about you, but I’ve noticed that all my favourite restaurants have increased the prices on their menu. I remember back when I was a child, I could get a large bowl of pho (Vietnamese beef noodle soup) for around $5.00. This year, it officially surpassed the threshold of double digits ($10.00), as the cost to create this delicious bowl of noodle soup has increased. This same phenomenon is occurring in the pre-construction world as well and basically everything else. The most recent increase from the City of Toronto was the doubling of development charges, effective February 1st, 2018. Nobody talks about this in the headlines but it’ll trickle down to the end-user without a doubt.
Doubling the Charges – Take a look at the development charge cost increase yourself. You can see in the right-hand side, all the development charges have effectively doubled, if not more.
Capped Levies – As of right now, the standard capped levies that we get for our clients is around $8,500 to $10,000 for Bachelors and 1-bedroom units. For 2 bedroom units and up, it’s between $10,000 to $15,000. The developer would be responsible for the balance of that.
Effectively, with this new Toronto development bylaw, somebody will be paying for it. In other words, that’s us – the end consumers.
The Two-Way Play Wrap-Up – I can see this playing out in two ways:
The capped development fees will be higher in accordance to the increased amounts.
The price per square foot will go up.
Most developers who I have talked to are still working out the numbers to see how it affects the bottom line for them, so we will have to wait and see how this all plays out in reality.
All I know is, like my bowl of pho, we will be the ones paying for it as the end consumer. It’s unfortunate, but it is just the way it is unless someone can convince the City of Toronto to eliminate an additional $300 million dollars of annual generated revenue from these development charges.
