Home builders

Canadian home builders ask buyers for more money to complete construction

Phew! Real estate prices in Canada are skyrocketing, so it’s a good thing you bought years ago and are just waiting for construction. Speaking of which… The cost of building a new home has risen so rapidly that many developers are grappling with the costs. Buyers who thought they had gotten a home at low prices years ago are now asked to forgo part of the winnings or get their deposit back. Here’s how the housing bubble in Canada made paper homes more profitable than real ones.

Building construction costs are rising

The cost of building a house is skyrocketing, almost as quickly as house prices are going up. In the first quarter of 2021, the 11 largest cities saw their construction costs increase by 5.6% in a single quarter. Costs are now 11.7% higher than a year ago and 25% higher than in 2017. This is the aggregate of cities, not regions experiencing explosive growth.

In and around the GTA, costs are rising even faster. The first quarter of 2021 saw construction costs increase by 7.2% over the quarter and 15% from the previous year. Since 2017, manufacturers’ costs have increased by 27.7%. More than half of the increase has barely occurred in the past year.

Costs increase mainly due to hardware compression. Record demand, triggered by low interest rates, means it exceeds supply. Materials like lumber have increased by over 240% in the past year. Stimulating demand while supply faces artificial constraints has become a disaster. There is a shortage of everything from building materials to labor.

Developers are now asking for more money or canceling purchases

Sudden increases in costs are now forcing home builders and buyers to pre-sale. A typical home builder has a profit margin of around 18%, which gives them a decent cushion to absorb any cost overruns. They also typically anticipate cost increases that exceed inflation.

If costs increase more than their profit margin, they basically have three options. They can lose money, cancel and resell the project, or ask buyers for more money. The latter appears to be an approach that is taking place quietly across the country.

Canadian home builders ask buyers for more money

Canadian home builders are asking buyers of years ago for more money to complete. For example, a builder in southern Ontario asked buyers in 2016 to forfeit half of their earnings. Threatened to see the project become unsustainable, buyers are asked to pay or find new accommodation.

Source: 2016 email from home builder to buyer.

Above is a letter sent to a 2016 presale buyer, who is still waiting for their home to be built. The home builder asks them to agree to increase their purchase contract by almost a quarter. In this case, they had bought a home for $ 489,900, which the builder estimates at $ 724,900 today, an increase of 47.96%. The suggested solution is to split the winnings and adjust the purchase price to $ 607,400. This would see their cost base increase by 23.98% from what they initially purchased. The alternative is that they receive their deposit and the builder sells the house.

Source: 2016 email from home builder to buyer.

Imagine witnessing a mad house price run-up and, relieved, barely beating the market. Then thinking that you just won a small fortune for your decision. Only to be asked to forfeit $ 117,500 of your earnings – just over a year of gross income for the median household. The other option is to get your $ 80,000 back and try to buy a house 50% more than when you thought you originally bought it. I don’t know about you, but it would feel like I was just being assaulted.

Low interest rates have increased the value of goods so quickly that it is no longer profitable to manufacture them. Paper houses see their value skyrocket, but cannot be produced at the price they were sold for. Both the builder and the buyer have larger gains in equity than if the house were actually built.

I would say we’ve been a few months now where interest rates need to be raised to reduce demand, right? Damn manufacturing. This always hinders rapid paper wealth.

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