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Interesting article that relates to this discussion...
The End of Homeownership - Macleans.ca
For generations, middle-class Canadians have been sold on the promise of homeownership. The promise was always flawed. Today it’s simply broken.macleans.ca
Curious what any Canadians think...
excerpt...
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I am clearly biased as a developer. So far I’ve tried to stay out of the thread for this reason.
With that in mind, I’ll do my best to remain neutral.
Real Estate is like any other asset, priced based on demand vs supply. When you see population moving into some area and dwelling units not being built, prices go up.
The second driver of prices in RE is cost of borrowing. Interest rate matters because your total payments (debt service) change dramatically with the smallest of changes in the borrowing rates. In a declining rate universe, prices tend to soar (investors and owner occupiers both buy buy buy).
Third, replacement cost. Most people are completely unaware that in markets where you see highest prices, replacement cost of each next building is substantially more than the one before. Ironically (for today) I am not speaking about inflation! No. This is because we have certain environmental, safety, energy modelling, building code, seismic and so on… improvements. They truly all are improvements. Think that a new building will probably survive a local area 1-200 year earthquake event, but the older buildings may not. Think that in North America it’s a requirement to have two exit stairs on multi-unit buildings, when in most of the world one is sufficient. Why does this matter? In case of a fire, you are safer, more than one way to exit buildings … all quite obvious. Energy modelling later saves on energy and so on. All improvements, as I said, but they all COST more. Even with no inflation (I mean ZERO) in Canada, we are prescribed targets on say energy (here called Step Code) and we are upgrading building code in December. Without inflation, cost of construction will continue going up significantly over the foreseeable future.
Worse yet, we have an acute labour shortage. Yesterday at dinner we were just talking with a banker who said that “Capacity for Toronto is 26,000 units, demand is for 60,000 units per year. Even if every single project in the pipeline was approved today, they can’t be built”.
Oh it gets worse too… with higher interest rates, cost of buildings are higher to construct. Municipal fees are higher too, each year. Meaning: government charges more taxes! Across Canada.
Again, most people think “greedy developer” they aren’t thinking “government taxes are paid by me because developer adds it to cost“.
Is it any wonder prices have been going up over decades?
That’s not to say prices can’t go down. Not only they can, they do! Market corrects and plenty of people today are left holding the bag for buying units in the post covid rock bottom interest rates (in Canada).
Why? Because unlike the USA, where you lock your rate for 30 years, our rates are only locked for 1-5 years, and that assumes buyers locked in their rate (versus getting a variable prime + % rate). This means that by 2026 ALL mortgages that were taken on in 2021 will have been renewed at new rates. Today, these rates are massively higher.
Contrary to the main message of the thread, this is one example of a bad decision… it sounds like it…
Or maybe not. It’s actually a little more nuanced than that. Prices did drop, a lot. In some cases I’ve seen 30% lower… only by today, it seems most prices are back up again. Why? Supply vs demand. We’ve had record setting immigration and population growth. And our supply is a fraction of existing demand.
Draw your own conclusions, as I said, I am biased and want to stay neutral.
I will say this, I think rental rates will continue to climb…
edit: here is one developer showing a cost breakdown as part of marking their sales in Victoria BC
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