The Housing Project in Kitchener, ON
Take a look at this housing development in Kitchener, ON. 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 looked good.
The project got city approval in 2020, and the first tower was supposed to be move-in 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 buildings that could have housed hundreds, often even thousands of people.
Real estate-related insolvencies have been #1 by a significant margin over the last year.
Experts we spoke to say this is only going to get worse, at a time when there is a huge need for more housing.
The Housing Paradox
There are two completely opposing narratives. The public is told endlessly there’s a housing supply problem—repeated over and over again. And then the public hears that nobody will buy these units.
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.
How Housing Projects Are Supposed to Work
Normally, a developer buys some land, draws up plans, and gets all the right approvals from the city. Then, before a single shovel hits the ground, they start selling units—generally requiring 20% of the price upfront, with the rest paid once the building is finished.
Developers aim to sell at least 70% of the units. Otherwise, banks won’t lend them the millions of dollars they need to actually build the project.
Crossing this threshold is a critical phase because, at this point, the developer is in deep, hoping construction goes according to plan.
Fast forward a couple of years: The building’s done, the developer closes on all units, collects the remaining money, and pays the bank back with profits. Everyone walks away happy.
The Perfect Storm
In the last few years, developers have been hit with a perfect storm of trouble, causing lucrative projects to go into the red, often with no way to recover costs. Trouble #1: The Pandemic
The pandemic pushed prices beyond what anyone might have expected. An unprecedented surge in demand sent prices soaring.
Demand was here, supply was there, and prices went through the roof.
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 rose more than 50% across the country.
Just look at the price increases for key materials:
- Concrete: Up 55%
- Structural steel: Up 53%
Every part of the system was stretched thin to maximize the capacity of building housing because the demand was enormous.
Labor and Fees
The cost of labor jumped too, because there weren’t enough workers to meet demand. Competing for workers meant paying a premium. Wages rose almost 10%, nearly double the pace of other industries—if you could find the right tradespeople at all.
According to the Ontario government, at one point in 2022, there were more than 28,000 construction jobs unfilled, a 33% jump over the previous year.
When you don’t have workers, you have delays.
Developers who started before COVID and weren’t finished before COVID faced significant problems. Even if they were only 10% unfinished, delays and cost increases became overwhelming.
Fees also skyrocketed. In 2019, development fees on apartments with two bedrooms or more were about $45,000 per unit. By 2024, the fees rose to $69,000—an increase of 51% in five years.
For a large building of 500 units, where half are one-bedroom and half are two-bedroom units, that’s an additional $10 million in costs.
The Interest Rate Trap
Before even putting a shovel in the ground, developers immediately face $30 million or more in costs. And they pay interest on that amount.
Interest rates—something every homeowner dreads—pose a massive challenge for developers. Imagine 6-7% interest on a loan of $30 million or more.
As projects face delays and costs spiral, loans grow bigger, and the interest burden becomes insurmountable.
When Projects Fail
When a project fails, people who have been waiting for years can be completely out of luck. Their deposits may evaporate. Unless another developer swoops in to save the project, there’s little the original developer can do to recover.
You might think that rising costs would mean units in these buildings should sell for more to compensate. But here’s the problem:
To secure bank loans, developers often pre-sell 70-80% of units at earlier prices, locking in revenue far below today’s costs. Only 20-30% of units remain unsold, and developers try to jack up prices to recover.
Unsold Inventory
Sometimes, projects under construction have inventory priced 30-40% higher than initially sold units. Developers use this inventory to make up for rising costs during construction.
But realistically, who is eager to buy a condo at a 40% markup compared to similar units in the same building?
According to Urbanation, a real estate consulting firm, new condo sales in the Greater Toronto Area were down 57% in the first half of this year compared to the year before, and 72% below the 10-year average.
This makes selling available inventory at higher prices very difficult.
The Bigger Picture
At some point, people won’t pay higher prices, and this reality affects developers at all stages of a project. Even in pre-sale, pricing in all worst-case scenario costs may make units unaffordable, especially with current interest rates.
With developers struggling to sell units, many are pulling out of projects altogether.
So, the next time you hear that the solution to the housing crisis is simply to build more supply, remember: While it may be true, it’s not so simple.
Source: CBC News. (2024, August 19). We’re in a housing crisis. Why are so many builds going bust? | About That [Video]. YouTube. https://www.youtube.com/watch?v=0Ydd6R9vv0c