Why have Toronto condos become so %@$#$! expensive?
Why have Toronto condos become so %@$#$! expensive?
UC compares the financials of two of its condo projects, one from 2005 and one from today, to get a sense of what’s really going on in Toronto’s crazy condominium market.
Over the past 15 years condominium prices in Toronto have gone up relentlessly, and dramatically so in the past three years. Between 2005 and 2019 average condominium prices in the former City of Toronto increased over 150% (from $347 to $887 per square foot), and over 25% since the start of 2017 alone. By contrast, the general inflation rate (CPI) has gone up a meagre 26.5% since 2005, and 2.0% since 2017.
What explains the dramatic increase in condominium prices, and more particularly its clear divergence from the general inflation rate? Are developers suddenly raking in huge profits? Or is there some other cause (or causes) making condominiums unaffordable for the average Torontonian.
For 2020’s Site Magazine, Urban Capital decided to investigate. It took one of its developments from 2005 — a 170,000 square foot mid-rise building in an inner Toronto suburb — and compared it financially to a similar development it’s doing now, to see what gives. The culprit(s) are revealed below.
The two developments
The two developments used are similarly sized and located, providing a good point of comparison.
The method
UC took the financial projections of each development and in order to ensure that it was comparing apples to apples, it calculated all costs on a per square foot basis and excluded certain costs like contaminated soils, land loans and mezzanine financing, which didn’t necessarily apply to both. Then it did some high school math to calculate percentage increases of individual cost categories, both absolute percentage increases and percentage increases against the average. And presto, the culprits became “apparent”:
The main culprits
By far, the biggest cost increase has been Development Charges, rising from $1.80 psf in the 2005 development to $60.07 in the current one, a 3,244% increase. Overall government fees, charges and taxes have gone up 413%, from $29.12 psf to $149.43 psf. Clearly, for all three levels of government, development has been a golden goose.
One big change in the way condos are sold in the Toronto market is the role (and compensation) of third party brokers ― brokers who act for purchasers. It used to be that a developer would spend lots of money on advertising (old style print advertising!) and pay purchaser brokers 2.5% on about 25% of sales. Today the industry relies almost exclusively on brokers to drive purchasers to sites, and pays them 4% or 6% on almost 100% of sales.
The last big cost category increase is land costs. As most parking lot sites in the city have been developed over the past fifteen years, and with urban sprawl being (rightly) constrained by the greenbelt, development sites in the city have become harder to find and dearer. Good downtown sites sold for $40 per square foot of development potential back in 2005; right now that number would be more like $200 per square foot or higher. In the sample case, land costs per square foot of buildable area went up 160%.
The low down
Big picture, overall costs went up 139% and overall revenues went up 118%, but the financial parameter that really matters to developers ― profit margin (profit over cost) ― got crushed by 45%, declining from 24% to 13%. While no one cries for developers, the truth is that the high-risk game of condo development has gone from high-risk/high-margin to high-risk/low-margin. And even with the crushed margins, Torontonians are ending up paying almost two and a half times what they paid fifteen years ago for a condominium to live in.
