take a look at this housing development in Kitchener Ontario the plan was to build four condo Towers complete with a rooftop Sports field it would have added more than 500 residential units to an area where housing is pretty tight things look good the project got City approval in 2020 and the first Tower was supposed to be moving ready by 2024 but that didn't happen instead only one of The Four Towers was started and it wasn't finished this project is one of more than 200 housing developments that went insolvent just in the last year alone that
rate of insolvency is nearly 50% higher than the 10-year average and many of these developments are big big buildings that could have housed hundreds often even thousands of people real estate related insolvencies have been number one by a significant margin for the last year and the experts we spoke to say this is only going to get worse at a time when there is a huge need for more housing there's two completely opposite thoughts the public is told endlessly there's a housing supply problem like endlessly endlessly endlessly it's just infinitely repeated and then the public now
has to say that oh yeah nobody will buy them so what's going on let me start by showing you how these projects are supposed to work and then I'll show you where it all goes wrong so normally a developer buys some land draws up some plans and gets all the right approvals from the city then before a single shovel hits the ground they're starting to sell units generally 20% of the price up front the rest once the building's finished and they're trying to sell most of these units at least 70% otherwise Banks won't lend them
the millions of dollars they need to actually build the building now Crossing this threshold is a critical phase of the project because at this point point the developer in deep hoping construction goes according to plan fast forward a couple of years the building's done the developer closes on all of its sales collects all the money buyers still owe them people start moving in and the bank gets paid back with the profits everyone walks away happy but in the last few years developers have been hit with a perfect storm of trouble lucrative projects going into the
red often with no way of recovering their costs trouble number one the pandemic the pandemic has pushed prices beyond what anyone might have expected an unprecedented surge in demand has sent prices here soaring demand is here and Supply is here so price just goes through the roof and there was money because the government was giving out lots of money so prices went up quite a lot particularly in the development industry between 2020 and 2023 it became more expensive than ever to build in Canada according to RBC economists industry costs up more than 50% across the
country just look at the price on key materials concrete up 55% structural steel up 53% every part of the system was was stretched thin to try and maximize the capacity of building housing because the demand was enormous and so once those prices get up there and it go it trickles all the way down through the cost of Labor jumped too because there just weren't enough work workers to meet demand competing for those workers meant paying a premium wages went up almost 10% nearly double the pace of other Industries if you could find the right trades
people at all according to the Ontario government at one point in 2022 there were more than 28,000 construction jobs that went unfilled that was about a 33% jump over the previous year and when you don't have workers you have delays developers who started out before Co and were not finished before Co and it didn't matter how much they weren't finished like if it was only 10% it's still a big problem because they're getting a lot of delay and they're getting a lot of cost increase but developers weren't just getting hit with high material and labor
costs fees and taxes developers have to pay the government also went up in 2019 development fees on apartments of two bedrooms or more were about $45,000 for each unit in in a development fast forward to 2024 the fees on the same two-bedroom apartment units are about $69,000 each that's a 51% increase in 5 years and that's on each unit in a really big building of 500 units where let's say half are one bedroom the other half are two bedrooms that's an increase of nearly $10 million before I even really put a shovel in the ground
and just get my permit I immediately have $30 million in cost that I'm now like having to pay interest on yes interest something every homeowner dreads talking about except forget your puny half million doll mortgage and see what 6 or 7% interest on $30 million or more adds up to a significant part of the cost of the developer is the interested pays on its loan and of course as this goes on their loan is getting bigger and bigger and bigger they've got no way to repay it and the interest amount is going up like this
and this this is around where this perfect storm comes to a head because after running into so many unexpected increasing costs materials labor fees taxes interest everything's at a Breaking Point when a project fails people who've been waiting can be completely out of luck their deposits could just evaporate and sometimes unless another developer swoops in to save the project there's just not much the original developer can can do to recover because maybe you're thinking no problem everything's gotten more expensive that's inflation so the individual units in the building should be more expensive to compensate right
well but remember the problem for our borderline broke developer is that they've already sold 70 to 80% of the building's units just to secure bank loans to pay for the thing in the first place and those sales were at 2020 prices which means most of the expected revenue is fixed way below cost before construction even begins so you've got maybe 20 30% of your stock left all you can do is Jack those prices up to recover as much as you can sometimes you see projects that are under construction with inventory the inventory is pric 30
40% higher than what they initially sold for because they're using that inventory to make up for cost that have come up through the you know construction or um through that time lag but realistically who's all that eager to buy a condo at a 40% markup on what every other unit in that building sold for it's been crickets for me I mean I don't really necessarily have any clients who are reaching out looking for new construction um a because the average price is quite a bit higher than the average resale condo according to Urban Nation that's
a real estate consulting firm in the first first half of this year new condo sales in the greater Toronto area were down 57% from the year before and 72% below the 10-year average which makes selling any available inventory at that higher price very very difficult because this is what many people don't understand is there is a of ultimate point where people won't pay the rent and that fact affects developers at all stages of a build because even if we rewind back to the earliest phases of development when they're still in pre-sale mode maybe the right
thing to do is just price in all of your unexpected worst case scenario costs into the original sale price right well again who's buying at that price with interest rates being what they are maybe they would have paid it a year ago or two years ago or three years ago but not today makes sense that a lot of developers are now having a tough time selling these units and are now just pulling out of projects allog together because they can't sell them so the next time you hear the solution to the housing crisis is simply
to build more Supply that may be true but it's not so simple [Music]
