Potential for Higher Development Costs Affecting Greater Toronto High-Density Land Prices

Published May 6, 2019 by Real Estate Leads

It’s a well-established fact that the only way to realistically address the housing shortages in cities like Vancouver and Toronto is for the city councils to amend zoning regulations for higher-density building development. It goes without saying that this is no easy task, as if it were then we would already see these changes in place. It’s certainly not as easy as just going ahead with it, and that these changes are slow to get off the ground is an unfortunate reality.

It’s also a fact that many homeowners – and especially those who own their properties outright – are often not in favour of these types of prospective zoning changes. This is often said to be in large part attributable to the fact that increasing housing stock means their property values will go down. Interestingly, there have been studies done that show that there’s no truth to this, and that’s a fact that realtors – among others – will be quick to point out anytime the opportunity presents itself.

Yes, of course that’s in something of a self-serving interest, but it’s important that the lack of affordable housing in major urban areas of Canada be addressed effectively. What it would mean for realtors is more properties, more clients, and ultimately more business. That’s a big plus, but the current depressed state of the housing market in Canada and the ratio of supply and demand being drastically titled towards demand at this time makes it so that realtors needs to work harder than ever to gain their share of the pie.

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There’s yet another factor that’s threatening to depress new home construction starts even further in Canada’s most populous city – Toronto. Specifically, it’s the increased development costs that developers have to take on in conjunction with already sky-high values attached to the land they need to build them on.

Price Growth Rates Finally Stabilizing

The rate of price growth for new condominium apartments in the Greater Toronto Area has finally started to calm down after a good many years of rapid appreciation. Unsold new condo prices jumped by some 50% in 2018, and are progressing along much the same trajectory so far this year. In many GTA submarkets this year, price growth is actually well below double-digits.

However, the average price-per-foot for a new condo in the M5A postal code area – including the East Bayfront, Corktown and Regent Park areas most notably – went up by 32% year-over-year to $1,176 per square foot. In M5V, encompassing the Entertainment District, prices leaped 33% annually to $1,301 per square foot.

The deduction that land owners and their brokers are coming to when weighing residual value of the lands based on $1,300-per-square-foot pricing is the land being worth $250 to $300 per buildable square foot. That in itself is workable for developers, but when they then must factor major increase in costs, the whole thing becomes far less workable in a hurry.

Dramatic Rises in Construction Costs

A well-known Toronto developer was heard to say recently that in 2015 he had hard construction costs of $190 per square foot. Fast forward to 2017 and his construction costs were $275 per square foot. Today, he reports that he’s dealing with construction costs at $315 per square foot – over some 65% higher from four years ago.

That’s not all that’s dissuading developers from starting new builds in certain ares of the city where they’re very much needed. They also have to take on development charges. The development charge for smaller suites in Toronto is nearly $26,000 per unit, an increase of 34% annually. Larger units have a charge of nearly $38,000 per unit, an increase of 40% annually.

The long story short of this is that when costs rise, developers will pay less for land to maintain their margins. But when there’s only so much leeway with the cost of the land, in many instances these potential developments end up dying on the proposal table. That means fewer building starts, fewer new homes, and less for the homebuyers and the realtors who serve them.

Land Prices Escalating

And land prices are escalating, in a big way. This is natural, and something that’s an inherent part of the realities of supply and demand in the real estate and property development businesses. As a result of it, competition for development sites is fierce and if a developer doesn’t pay above-market for land, more often than not they won’t get it and the entire process goes back to square one.

Longer approval timelines, higher financing costs, higher development costs, higher construction costs, and greater built form and interior use requirements with the new TOCore planning framework will continue to put upward pressure on costs. It’s not a recipe for building the affordable housing Toronto needs.

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