[Northern Light]

I don't disagree that it's a huge issue, but what would need to happen then is a fundamental shift in our extremely conservative lending culture. Yes, investors are a huge issue since they never intend to live in a space and when you're just buying off a plan, you don't care what the experience of that building will be. BUT since we (the development industry) can't get construction financing until 70 or 75% (depending on builder reputation) of units are sold, we need those investors since it's unrealistic to expect to sell everything to end-users (a process that can take years). Combine that with the fact that prices are far out of reach of most and it's a perfect recipe for exactly the kind of problem the City is seeing now. If banks were willing to change their lending practices, that could all change, but I do not see that happening unless they're forced to and so...here we are.

Those who build purpose-built rental don't generally 100% self-finance; and they have 0% pre-sales.

The industry already works differently when it has no other choice.

 

[egotrippin]

I don't disagree that it's a huge issue, but what would need to happen then is a fundamental shift in our extremely conservative lending culture. Yes, investors are a huge issue since they never intend to live in a space and when you're just buying off a plan, you don't care what the experience of that building will be. BUT since we (the development industry) can't get construction financing until 70 or 75% (depending on builder reputation) of units are sold, we need those investors since it's unrealistic to expect to sell everything to end-users (a process that can take years). Combine that with the fact that prices are far out of reach of most and it's a perfect recipe for exactly the kind of problem the City is seeing now. If banks were willing to change their lending practices, that could all change, but I do not see that happening unless they're forced to and so...here we are.

Thanks for the response. Clearly there are massive shifts needed across a number of issues from policy to lending, as you've mentioned. I also don't mean to demonize the industry, as with anything it's a business, I just feel that a lot of comments that suggest we need to build more condos, or they should be taller, etc. to help with the affordability is an oversimplification.

 

[ProjectEnd]

Those who build purpose-built rental don't generally 100% self-finance; and they have 0% pre-sales.

The industry already works differently when it has no other choice.

It's also a completely different business proposition. Far fewer companies can take on PBR, precisely because they themselves can't front the equity and banks won't lend to someone they're uncertain about re: what happens when the construction project is completed. If a developer is merely building on behalf of a pension fund or other holding entity, that relationship and business case would be disclosed prior to any loan being secured. If the developer wants to retain the asset, they need to prove they have the ability and structure (asset and property management departments, operations, etc.) to make it profitable (itself a completely different business case) over time. Fundamentally regardless of what you want to do with the building at the end of construction, you're going into it projecting rent growth...i.e. making it less affordable.

Always remember: at the end of the day, no developer is building themselves into poverty.

 

[ProjectEnd]

Thanks for the response. Clearly there are massive shifts needed across a number of issues from policy to lending, as you've mentioned. I also don't mean to demonize the industry, as with anything it's a business, I just feel that a lot of comments that suggest we need to build more condos, or they should be taller, etc. to help with the affordability is an oversimplification.

1000% correct. While I'm happy there are a sizable contingent of folks adopting the YIMBY brand in all its varied forms, their white-knighting of the development industry is at best unsophisticated and at worst a nauseating misunderstanding of why anyone builds for-profit housing in the first place.

At the end of the day, I do love what I do, but I've always felt it's important to identify and work to fix the issues within ones' industry (we all have them!). Problematically in Toronto development, very few seem to share that opinion. Hope springs eternal though!

 

[Northern Light]

It's also a completely different business proposition. Far fewer companies can take on PBR, precisely because they themselves can't front the equity and banks won't lend to someone they're uncertain about re: what happens when the construction project is completed. If a developer is merely building on behalf of a pension fund or other holding entity, that relationship and business case would be disclosed prior to any loan being secured. If the developer wants to retain the asset, they need to prove they have the ability and structure (asset and property management departments, operations, etc.) to make it profitable (itself a completely different business case) over time. Fundamentally regardless of what you want to do with the building at the end of construction, you're going into it projecting rent growth...i.e. making it less affordable.

Always remember: at the end of the day, no developer is building themselves into poverty.

Completely agreed on this.

I think the mechanism for shifting away from pre-construction financing is there, and I think that would likely lead to larger unit sizes and greater build quality since you have to vend (rent or sell) the finished, as-built product.

But that does not alter the economic proposition that one is building to make a profit, and charging what the market will bear.

Addressing affordability in that context is a function of a host of different things.......but generally involves public-sector/NGO construction; reduced demand (taking investors, and short-term rental out of the marketplace, as well as reduction of population growth to align w/what the industry can/will build (or even slightly under that so the industry can catch up a bit) ; As well, it also means growing incomes, both for the middle and low-income demographics, though both wages and benefits.

 

[egotrippin]

1000% correct. While I'm happy there's a sizable contingent of folks adopting the YIMBY brand in all it's varied forms, their white-knighting of the development industry is at best unsophisticated and at worst a nauseating misunderstanding of why anyone would want to build for-profit housing in the first place.

At the end of the day, I do love what I do, but I've always felt it's important to identify and try to fix the issues within ones' industry in search of better outcomes. Problematically in the Toronto development industry, very few seem to share that opinion. Hope springs eternal though!

Definitely, agreed especially with loving what you do, but also being able to call things out and look at ways to improve. I'm in the food industry, another hot topic these days, so I know well enough.

 

[smably]

Yes, the financialization of housing has caused real and serious problems and yes, in an ideal world we wouldn't have speculators competing with end users for limited housing units, but the housing crisis isn't just a crisis for purchasers, it's also a crisis for renters. It's worth remembering that in the vast majority of cases, an investor buying a condo unit doesn't make that unit unavailable for housing, it just shifts it to the rental market. That's not a particularly healthy result, in that mom-and-pop landlords are often terrible landlords, their renters often have to contend with personal-use evictions, the rich get richer while the poor get precarious housing, etc., — but it's still somewhere for someone to live.

I don't think condos are going to solve the housing crisis on their own, but I also don't think it's fair to say that "yet another condo" does nothing for the housing crisis. There will be more homes for more people, regardless of whether they own or rent, and that is a good thing that we need more of. I'd prefer a model other than condos sold to investors, but that's not a model that will change overnight, so in the meantime let's at least build some imperfect housing and push for better models for the future.

 

[Northern Light]

Yes, the financialization of housing has caused real and serious problems and yes, in an ideal world we wouldn't have speculators competing with end users for limited housing units, but the housing crisis isn't just a crisis for purchasers, it's also a crisis for renters. It's worth remembering that in the vast majority of cases, an investor buying a condo unit doesn't make that unit unavailable for housing, it just shifts it to the rental market. That's not a particularly healthy result, in that mom-and-pop landlords are often terrible landlords, their renters often have to contend with personal-use evictions, the rich get richer while the poor get precarious housing, etc., — but it's still somewhere for someone to live.

I don't think condos are going to solve the housing crisis on their own, but I also don't think it's fair to say that "yet another condo" does nothing for the housing crisis. There will be more homes for more people, regardless of whether they own or rent, and that is a good thing that we need more of. I'd prefer a model other than condos sold to investors, but that's not a model that will change overnight, so in the meantime let's at least build some imperfect housing and push for better models for the future.

Sure; but w/the long-discussed proviso; you could abolish all zoning tomorrow, and you will not get housing starts materially outpacing their recent peak.

Likewise if you put interest rates back to near zero.

That's not to suggest building more housing is a bad thing, and indeed we're building lots.

Rather than even as we've done so, affordability has grown worse, and in that context, we need to say, if you remove all nimby'ism equally and every other obstacle, affordability still won't improve one iota until we address the issue in other ways.

That's not taking a position in favour of Nimbyism any more than high interest rates, its just laying out the less than appealing facts in our current circumstance.

 

[smably]

Rather than even as we've done so, affordability has grown worse, and in that context, we need to say, if you remove all nimby'ism equally and every other obstacle, affordability still won't improve one iota until we address the issue in other ways.

Not one iota? If we removed every single obstacle to building more housing? That's a bold claim, to put it mildly!

 

[Northern Light]

Not one iota? If we removed every single obstacle to building more housing? That's a bold claim, to put it mildly!

I can assure you there are no spare high mast crane operators; and just ask @ProjectEnd about the waits for drywalling crews.

The industry is severely constrained by personnel limits; something that I'm assured is getting worse, not better.

There are also capital constraints, apart from interest.

No one will build and then under-price the market.

You would require the price of land to implode and bankruptcies to rocket and then the pro-formas would re-set to some degree, but only if you also suppressed demand.

* removing some of those barriers might make some difference in what a non-profit could achieve; but without more money to build those, it's a small difference against as huge problem.

 

[Towered]

Not one iota? If we removed every single obstacle to building more housing? That's a bold claim, to put it mildly!

Unfortunately, the construction industry doesn't have extra capacity to build more, faster. Resources are finite.

 

[smably]

Yes, the constraints in the construction industry are well documented. But the claim was that removing every obstacle to building new housing would have zero effect on affordability. Hundreds of thousands of dollars of DCs on every unit have no impact on affordability? We might as well add the HST back to PBRs if the only factor that affects affordability is construction capacity.

 

[Undead]

I love how the excessive demand side of the equation is a tiny asterisk in this discussion.

 

[Northern Light]

Yes, the constraints in the construction industry are well documented. But the claim was that removing every obstacle to building new housing would have zero effect on affordability. Hundreds of thousands of dollars of DCs on every unit have no impact on affordability? We might as well add the HST back to PBRs if the only factor that affects affordability is construction capacity.

Removing a few thousand dollars in DCs on units does not result in additional construction; it does, in theory, marginally reduce the cost of construction. However, a 1% increase in interest rates wipes all of that gain out and more, and we've had an increase of much larger than 1%.

Further, even if interest rates had not risen, developers would not pass on any savings from them to the consumer, because they have no market-based reason to do so. Demand exceeds supply. If a developer spends a hypothetical $650,000 bringing a condo unit to market; and they can retail that unit at $750,000, and you reduce their DCs by 5k per unit; they're still going to sell the unit at $750,000, because that's what there's a buyer willing to pay.

So all you did was fatten the bottom line by 5k.

Which, even if there were far more workers available, is not an exciting move.

Now, if you cut the cost by 50k per unit, that's a bit more interesting.

But you're still structurally limited by the trades; and on top of that, by capital you can afford.

Watch this, my build cost on a unit, including land is 600k; assuming the majority of it is financed, lets say 500k per unit, a 1% rate hike jacks the cost of that unit by $15,000 minimum (3-year cycle on debt in a best case scenario)

What we've seen is increases of 3% and more, so you've added not less than 45k per unit, and probably more.

*****

But let's step back from all the details for the moment.

In the City of Toronto, there are literally tens of thousands of units with all their approvals, opa, zba etc. That are not being started.

That tells you most of what you need to know.

 

[Jimto]

A factor that nobody appears to have mentioned is the building of public housing, or lack thereof. In the "old days", the construction of public housing kept the construction industry busy during economic slow downs when private development also slowed down. Another factor not mentioned is the ongoing pandemic and consequent effect on supply chains, movement of skilled workers, etc.