The real estate market in Toronto and Vancouver is already expensive and is estimated to be getting worse.   The respective provincial governments took measures to combat the rapid growth of prices in these metropolitan areas, with the collection of taxes directed to foreign buyers the most relevant action.   The immediate reaction of such a measure was a huge decrease in transactions in the resale market.   Market interventions on the demand side are the best short-term solutions, but they may not have a lasting impact on the market unless they are paired with processes to stimulate supply.   Vancouver and Toronto have focused on measures to free houses that have not been inhabited by their owners, as well as actions to curb short-term rental platforms like Airbnb (to add those homes back to rental shares).   Supply measures take time and the average sales price in the Vancouver metropolitan area is approximately $ 70,000 above the maximum price before market intervention last year, proving that the impact of the tax on the foreign buyer was temporary.   Supply measures like Airbnb restrictions have been popular among the general public, but strangely, building more homes is often faced with strong opposition, due to heritage considerations, infrastructure costs, environmental concerns, parking or architectural style. However, the biggest complaint is that prices or rents are too high and inaccessible, and many hold the opinion why even bother in the construction of this luxury home?   The problem with this anti-development stance is that even if all of the 99,000 homes that are unoccupied by regular residents in Toronto (second property, holiday home, Airbnb suite) are eliminated, that offer would represent less than three years of supply. Excluding new rentals, Toronto's RMR absorbed 98,753 new homes between January 2015 and July 2017, according to the CMHC.   However, we must take into account that new housing is expensive because the costs of the inputs are expensive. The average sale of high-density land in the city of Toronto over the past year was $ 9 million, or $ 70,000 per unit.   Construction costs account for between 40% and 50% of the final sale price, or about $ 160,000 for an 800-square-meter high-rise apartment. Adding soft costs like planning, architecture, engineering, marketing, and sales commissions adds another $ 90,000 to the price. That's $ 400,000 before a developer has made a penny.   If a builder buys land for $ 9 million, it would require about $ 1.35 million for down payment and working capital (15%). A 65% land loan with a bank ($ 5.85 million) would cost the project $ 30,000 per month of interest, which is costly when the planning approval process is getting longer.   The other 20% required to purchase land may come from the developer's equity partner, and are likely to be entitled to the first benefits the project has.   Even when the developer gets planning approvals, and secures the right sales to qualify for construction financing, he is likely to have to pledge his corporate assets or even his personal assets to secure this financing.  

The developer is taking a lot of risk when building a project, and therefore, will seek a higher return on investment.

That being said, there is no way for a developer to obtain financing if the project was not significantly profitable for both the borrower and the lender.

The only real way to reduce costs is through the price of land or construction costs. However, there is a strong plan by the Ontario government to reduce expansion, which has resulted in fewer projects on cheaper offshore land that is built on less expensive materials.

The growth is aimed at areas with transit access (the most expensive land), and on high concrete towers that are more expensive to build. As all city parking lots and low-rise shopping centers are redeveloped, and the main properties easy to develop, they disappear, land costs and construction will continue to increase.

The fight against demand has proven to be a losing battle in many international communities, as it can damage individual buyers in the short term and even stifle future supply. Measures are needed to promote supply, but it will not be cheap. The long-term outlook for Toronto and Vancouver is much higher.

If you are thinking of selling or buying a property, contact me and I will be happy to advise you at every step of the process.