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Baby, we got a bubble!?

I don't know for sure but I would like to see where developer's margins are 40-50%.

I know of one development and if sales go as planned and continue at present rates, the actual return 6 years later (from initial plan to completion) will be more like 30%. This is in West downtown and was benefitted by a coming to market at an opportune time and quick sales. So, I doubt we will find accurate numbers but I am guessing that the 40-50% is overstated unless the developer has owned the land for a long time.
 
this caught my attention because I always wondered what margin developers make. How do we know it is so high? If it is this high, what does this say about the competitiveness of the development industry (or lack thereof)? If it was competitive, wouldn't margins be much lower? Such a high mark-up would suggest that developers will continue to build even as the prices correct, even substantially. Also, I imagine that land acquisition costs would decline in the faces of property devaluation, somewhat buoying profits in the face of lower asking prices. What is there to lose if this industry really is this profitable. The real loser seems to be common purchasers who will pay for many years to come.

It is nowhere near that amount. You are not remotely in the ballpark.
 
Can you satisfy our curiosity and let us know the gross margin of the deveopers?

I can say for one project which I saw the proforma's on: with an up market and a multi year time horizon, the projected proforma profit was25% on the whole project. Remember, this is profit after taking into account the borrowed money and so the amount of committed capital is far less. The 25% I am quoting is the difference between cost / foot to build including land cost financing etc. vs. price of sale. Developers have been fortunate lately because they have been able to sell at a higher cost/foot than most proformas. That said, remember a number of projects get cancelled, redesigned etc. and in those cases developers lose millions.
 
I don't know for sure but I would like to see where developer's margins are 40-50%.

I know of one development and if sales go as planned and continue at present rates, the actual return 6 years later (from initial plan to completion) will be more like 30%. This is in West downtown and was benefitted by a coming to market at an opportune time and quick sales. So, I doubt we will find accurate numbers but I am guessing that the 40-50% is overstated unless the developer has owned the land for a long time.


According to the G&M article about Vancouver R/E prices, the construction costs run ~$200 a square foot in GVR for low rise.

Any comments on the story from the G & M on the Vancouver realestate market? Here is the link.

http://www.theglobeandmail.com/repo...ouver-in-a-real-estate-bubble/article1808967/
 
According to the G&M article about Vancouver R/E prices, the construction costs run ~$200 a square foot in GVR for low rise.

The question is what is being offered and what do you understand by low rise: 3-4 stories or 15-25?

I can tell you that based on what I saw with the proforma back in 2007: costs were quite a bit higher than that and that was 3 and 1/2 years ago (at least for a high rise in Toronto). That may be actual material and labour costs for low rise but then you have marketing, financing, land costs, architect, development fees, city fees etc. etc. etc.


I was looking at a mid rise project in the 20-30 story range.

Developers are of course not going to give you an open book to thier actual costs. However CDR, my guess is that in Toronto high rise buildings over 20 stories are close to double the figure quoted for Vancouver low rise in the paper. The developers have been blessed with rising prices the past few years which means if their costs have not risen at the same rates and they haven't I am sure, they are making more profit than what they project for. However that can turn around very quickly. Just witness in the US what is happening.

In South Florida, Trump Hollywood just closed 25 of 200 units. The other 100 walked away from their deposits. The bulk sale lender bought the building units it is rumoured for $300/sq.ft. This is a luxury project completed on the ocean. I suspect they will sell at $400-450/sq.ft which it could not be replaced for I am sure. That said, the point is development makes money, alot of money in good times but everyone because times have been so good forgets the bad times.

Again, that does not excuse the stupidity which was the Florida market from 2000-2006 during which time prices almost trebled (at least along the Ocean)
 
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Hi all, remember I said so far I haven't heard any of my relative / friend group in China comes to Canada for R/E investment? well...here is the update, the first one I have heard just over the weekend. One of my mother's close friends' daughter's family.

Background: Beijing R/E market started to drop and the husband is holding the sales director position in one of Shanghai R/E builders. He is afraid of the future market in Shanghai (China) therefore decided to come Canada to invest (allocate $ in a different nest). According to their "research and assessment", Canada's R/E market is steady, healthy, and still room for growth...and the location being chosen by them is - Vancouver.
 
Hi all, remember I said so far I haven't heard any of my relative / friend group in China comes to Canada for R/E investment? well...here is the update, the first one I have heard just over the weekend. One of my mother's close friends' daughter's family.

Background: Beijing R/E market started to drop and the husband is holding the sales director position in one of Shanghai R/E builders. He is afraid of the future market in Shanghai (China) therefore decided to come Canada to invest (allocate $ in a different nest). According to their "research and assessment", Canada's R/E market is steady, healthy, and still room for growth...and the location being chosen by them is - Vancouver.

Thanks X2. While anectdotal, it is very interesting. We know Asia chooses Vancouver because of its gateway to Asia. But still, about the most expensive real estate market in North America?

Maybe still room to grow based on Asian city/European cities /New York City standards but exactly the same type of speculation that is causing Shanghai to drop now (overshot any normal reasonable perameters) is being fed by investors from abroad who do not appreciate I believe the local market realities. That said, I realize it is presumptious of me to write this as certainly a sales directorof a real estate builder from Shanghai should be informed. I just think the view from Beijing of what has transpired and now that it is starting to drop has lead him to think he can still catch a rising market here based on all the Chinese investing in Vancouver. I don't believe that is the case but watch, 2 years from now, maybe Vancouver will be $1500+/sq. ft. for moderate range product.

Basically, I believe when I hear this that your family friend is basing this on what is being said in Asia, and based on Vancouver's limited land and large Asian population, is concluding that Asia will continue to fund Vancouver as an "Asian subcolony".

Can you find out from your family friend what their read on Toronto is? Are they coming here to invest in the same way or is Vancouver the preferred destination by say a 5:1 margin or10:1 or what?

By the way, the decision to spread one's eggs: to diversify, makes perfect sense
 
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..and the location being chosen by them is - Vancouver.


for Asians I can understand the greater appeal of Vancouver vs. Toronto because of the proximity to Asia and time zone differences (an extra 5 hour flight) for anyone who has to travel back/forth across the Pacific.

but cost still seems astronomical by local standards ... what is the average, $700 PSF ?!?
what are rents like in Vancouver based on PSF?
in TO, the average new construction non- true luxury condo gets ~$2.50 PSF without parking or locker.
 
Interested, I think the article about Vancouver has answered your question already.

"..Yu is careful to add a caveat, though. Vancouver is popular as a lifestyle destination for those who can afford it—not as a place to make a living. More ambitious immigrants, Asian and otherwise, are more likely to choose Toronto. In fact, British Columbia (which essentially means Greater Vancouver) receives about 15% of all Canadian immigrants, which, given its population, is only slightly more than its proportional share. On the other hand, it gets about half of the annual 10,000 or so people who can prove they are already wealthy and therefore eligible for easier, if more expensive, rides in the entrepreneur and investor classes. And the rest of Vancouver’s 15% share fits a distinctly different profile than do immigrants to places like Toronto and Montreal: more skilled and better educated, and much less likely to arrive as refugees."

As always wealthy millionaires choose Vancouver and the rest of us come to Toronto :)

The family I referred is above the most middle class there so simply they can afford Vancouver city's cost and btw easy to travel between China and Canada.
 
Here's another article from today's Globe.

Housing becoming more affordable
STEVE LADURANTAYE — REAL ESTATE REPORTER
Globe and Mail Update
Published Monday, Nov. 29, 2010 5:00AM EST
Last updated Monday, Nov. 29, 2010 5:59AM EST

It’s becoming more affordable to own a home, according to Royal Bank of Canada (RY-T55.00-0.29-0.52%), but the high cost of ownership will act as a drag on the market and keep a lid on future price increases.

In its quarterly housing affordability report, Royal Bank of Canada said the cost of home ownership moved lower for the first time in more than a year over the summer, as low mortgage rates and prices made it easier for buyers to pay for their homes.

But while homes were more affordable they were still more expensive than long-term averages in many markets, suggesting “greater than usual tensions exist for Canadian home buyers.”

“These tensions are unlikely to derail demand for housing in the near term but will act as a restraint on growth in market activity going forward,” said senior economist Robert Hogue.

It’s the first time affordability has improved since mid-2009. The RBC Housing Affordability Measure shows the proportion of median pre-tax household income required to pay the principal and interest on a mortgage, property taxes and utilities. The figures assume a 25 per cent down payment and a 25-year loan at a five-year fixed rate.

In the third quarter, a two-storey home ate up 46.3 per cent of the household income of a typical Canadian family, down from 48.9 per cent in the second quarter. The long-term average – going back to 1985 – is 43.3 per cent.

The bank said the improvement could be short lived if mortgage rates begin to move higher to reflect an improving economy.

“Higher mortgage rates will be the dominant factor raising homeownership costs over the medium term, although increasing household income as the job situation continues to strengthen in Canada will provide some positive offset,” he said. “We expect housing demand and supply to remain mostly in balance, setting the course for very modest home price increases.”

From the report:

British Columbia: “In the third quarter of 2010, the RBC Housing Affordability Measures for British Columbia dropped between 1.8 and 5.0 percentage points, representing the largest declines since the first quarter of 2009. Still, all RBC Housing Affordability Measures remained significantly above long-term averages. Very poor affordability is likely to weigh on provincial housing demand in the period ahead.”

Alberta: “The RBC Measures eased between 0.8 and 1.8 percentage points, more than reversing modest rises in the second quarter. Homeownership in Alberta is among the more affordable in Canada both in absolute terms and relative to its historical averages. Such a high degree of affordability augurs well for a strengthening in housing demand, once the provincial job market sustains more substantial gains.”

Saskatchewan: “The RBC Affordability Measures dropped between 1.8 and 2.2 percentage points, which was the most since early 2009. While lower than they were a year ago, the measures are still modestly above their long-term average, thereby suggesting to us that current market conditions are stretching homebuyers’ budgets to a degree. However, those budgets are likely to be boosted from a strong expected rebound in the provincial economy and, thus, family income this year and next.”

Manitoba: “The RBC Measures fell between 0.9 and 2.3 percentage points, reversing one-half to three-quarters of the increase that occurred since the spring of 2009. Lower mortgage rates in the third quarter were particularly helpful in bringing down homeownership costs in the province although some price declines (particularly for two-storey homes) also contributed. Manitoba is one of only two provinces, alongside Alberta, where the measures for all housing types are currently below long-term averages, which will be a supportive factor for demand going forward.”

Ontario: “RBC’s Housing Affordability Measures fell between 1.3 and 2.4 percentage points, fully reversing the increase in the second quarter. Meanwhile, existing home sales ended their earlier precipitous slide by sustaining three straight gains (on a seasonally adjusted basis) from August to October. This recovery confirmed our earlier expectation that the slowdown in activity in the spring and summer largely reflected various transitory factors – including the HST and changes in mortgage lending rules – that brought demand forward to the start of this year. With the market now back in balance, the recent softness in home prices will likely prove to be a healthy recalibrating following a strong rally.”

Quebec: “Following four consecutive increases, the RBC Measures for the province fell 1.4 to 1.8 percentage points (depending on the housing type). Still, the measures remain close to the pre-downturn peaks and above their long-term average, which will act to restrain growth in demand in the period ahead.”

Atlantic: “The RBC Housing Affordability Measures moved down between 1.0 and 1.5 percentage points in the third quarter, with the levels returning to roughly where they were in mid to late-2009. Overall, housing affordability continues to be quite attractive in Atlantic Canada.”
 
Here's another article from today's Globe.

Housing becoming more affordable
STEVE LADURANTAYE — REAL ESTATE REPORTER
Globe and Mail Update
Published Monday, Nov. 29, 2010 5:00AM EST
Last updated Monday, Nov. 29, 2010 5:59AM EST

It’s becoming more affordable to own a home, according to Royal Bank of Canada (RY-T55.00-0.29-0.52%), but the high cost of ownership will act as a drag on the market and keep a lid on future price increases.

In its quarterly housing affordability report, Royal Bank of Canada said the cost of home ownership moved lower for the first time in more than a year over the summer, as low mortgage rates and prices made it easier for buyers to pay for their homes.

But while homes were more affordable they were still more expensive than long-term averages in many markets, suggesting “greater than usual tensions exist for Canadian home buyers.”
“These tensions are unlikely to derail demand for housing in the near term but will act as a restraint on growth in market activity going forward,” said senior economist Robert Hogue.

It’s the first time affordability has improved since mid-2009. The RBC Housing Affordability Measure shows the proportion of median pre-tax household income required to pay the principal and interest on a mortgage, property taxes and utilities. The figures assume a 25 per cent down payment and a 25-year loan at a five-year fixed rate.

In the third quarter, a two-storey home ate up 46.3 per cent of the household income of a typical Canadian family, down from 48.9 per cent in the second quarter. The long-term average – going back to 1985 – is 43.3 per cent.

The bank said the improvement could be short lived if mortgage rates begin to move higher to reflect an improving economy. “Higher mortgage rates will be the dominant factor raising homeownership costs over the medium term, although increasing household income as the job situation continues to strengthen in Canada will provide some positive offset,” he said. “We expect housing demand and supply to remain mostly in balance, setting the course for very modest home price increases.”

From the report:

British Columbia: “In the third quarter of 2010, the RBC Housing Affordability Measures for British Columbia dropped between 1.8 and 5.0 percentage points, representing the largest declines since the first quarter of 2009. Still, all RBC Housing Affordability Measures remained significantly above long-term averages. Very poor affordability is likely to weigh on provincial housing demand in the period ahead.”

Alberta: “The RBC Measures eased between 0.8 and 1.8 percentage points, more than reversing modest rises in the second quarter. Homeownership in Alberta is among the more affordable in Canada both in absolute terms and relative to its historical averages. Such a high degree of affordability augurs well for a strengthening in housing demand, once the provincial job market sustains more substantial gains.”

Saskatchewan: “The RBC Affordability Measures dropped between 1.8 and 2.2 percentage points, which was the most since early 2009. While lower than they were a year ago, the measures are still modestly above their long-term average, thereby suggesting to us that current market conditions are stretching homebuyers’ budgets to a degree. However, those budgets are likely to be boosted from a strong expected rebound in the provincial economy and, thus, family income this year and next.”

Manitoba: “The RBC Measures fell between 0.9 and 2.3 percentage points, reversing one-half to three-quarters of the increase that occurred since the spring of 2009. Lower mortgage rates in the third quarter were particularly helpful in bringing down homeownership costs in the province although some price declines (particularly for two-storey homes) also contributed. Manitoba is one of only two provinces, alongside Alberta, where the measures for all housing types are currently below long-term averages, which will be a supportive factor for demand going forward.”

Ontario: “RBC’s Housing Affordability Measures fell between 1.3 and 2.4 percentage points, fully reversing the increase in the second quarter. Meanwhile, existing home sales ended their earlier precipitous slide by sustaining three straight gains (on a seasonally adjusted basis) from August to October. This recovery confirmed our earlier expectation that the slowdown in activity in the spring and summer largely reflected various transitory factors – including the HST and changes in mortgage lending rules – that brought demand forward to the start of this year. With the market now back in balance, the recent softness in home prices will likely prove to be a healthy recalibrating following a strong rally.”

Quebec: “Following four consecutive increases, the RBC Measures for the province fell 1.4 to 1.8 percentage points (depending on the housing type). Still, the measures remain close to the pre-downturn peaks and above their long-term average, which will act to restrain growth in demand in the period ahead.”

Atlantic: “The RBC Housing Affordability Measures moved down between 1.0 and 1.5 percentage points in the third quarter, with the levels returning to roughly where they were in mid to late-2009. Overall, housing affordability continues to be quite attractive in Atlantic Canada.”


These 2 bolded points bely the markets underbelly. Still above historical norms despite mortgages rates being at their lowest level in 50 years. So while taking a 5 year mortgage and 25% down( a significant downpayment considering in other posts people have said the average down payment was 7% ) and allowing that interest rates I assume can't go down from here but will be rising and these numbers reverse very quickly.
 
Forgive me - I have some very stupid questions. My apologies if this subject belongs elsewhere on the forum (where?)

I am trying to assess the probability of the % differential in bubble decline (assuming it occurs/continues) between pre cons, new(er) builds, and older buildings (say 10+yrs).
If I need to buy to live and want to minimize my downside risk, which of the above 3 options would decline the least? And why?

For "older" buildings in desirable d/t core nabes, what kind of difference should I reasonably expect to see in a building which has maintained its CAPX vs. one whose maintenance has been neglected.

Am I better off purchasing older, well maintained resale? How well do older condos maintain their value, and what's/when's the optimal bailout exit strategy?

Many thanks - Cate
 
Forgive me - I have some very stupid questions. My apologies if this subject belongs elsewhere on the forum (where?)

I am trying to assess the probability of the % differential in bubble decline (assuming it occurs/continues) between pre cons, new(er) builds, and older buildings (say 10+yrs).
If I need to buy to live and want to minimize my downside risk, which of the above 3 options would decline the least? And why?

For "older" buildings in desirable d/t core nabes, what kind of difference should I reasonably expect to see in a building which has maintained its CAPX vs. one whose maintenance has been neglected.

Am I better off purchasing older, well maintained resale? How well do older condos maintain their value, and what's/when's the optimal bailout exit strategy?

Many thanks - Cate

I'll hazard a few guesses. New because it goes up more and costs more means that it likely will lose more.

That said, a building must be maintained, if not, in a down market, it will be unsellable. I think you are safer with slighly new, by this I mean a building perhaps 2-5 years old for a few years. Unlikely to have major expenses, still modern, and the new premium for future growth should be out of the price.

Location is always important. So desirable areas will decrease less I would believe.

On the other hand, a 20 year old building has expenses but if good reserve fund and well run/maintained, you get good value and have protection on the downside.

At least that would be my guess.

Hope this helps.

Good luck Cate.
 
Forgive me - I have some very stupid questions. My apologies if this subject belongs elsewhere on the forum (where?)

I am trying to assess the probability of the % differential in bubble decline (assuming it occurs/continues) between pre cons, new(er) builds, and older buildings (say 10+yrs).
If I need to buy to live and want to minimize my downside risk, which of the above 3 options would decline the least? And why?

For "older" buildings in desirable d/t core nabes, what kind of difference should I reasonably expect to see in a building which has maintained its CAPX vs. one whose maintenance has been neglected.

Am I better off purchasing older, well maintained resale? How well do older condos maintain their value, and what's/when's the optimal bailout exit strategy?

Many thanks - Cate

i would recommend an older building from the 1980s in the dt core ...
better constructed with solid concrete walls and larger units for less money, unless you've set your heart on getting an all glass building.

maintenance fees are higher based on SF, but cost is roughly the same @ ~$0.50-0.55 PSF between new and older.
don't believe the marketing hype of $0.45 PSF for pre-construction ... ask anyone who's lived in a new build about what has happened to their maintenance fees after the first year once the developer is no longer on the hook.

also pre-construction is grossly over-priced IMO with places asking $600+ PSF for your average condo, when newer (1-5 years) resales are $400-450 PSF
 

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