New construction vs. Resale prices

[TOBoy]

I am a bit confused. From what I've gathered, I am getting the impression that preconstruction condos cost more than resale. Am I correct? If so, it does not make any sense to me, as the original purchaser bears all the risks of a brand new building, such as uncertain views, finishes, quality, etc.

 

[fencejack]

I was thinking the same thing. Considering all the risks and wait time involved, one would think buying pre-construction would definitely come at a lower price. I have been looking at both types of condos recently and noticed pre-contrustion prices are just ridiculous.

If you can lock in at a low mortgage rate and find something you really like, I'd say go for it. I'll be doing the same. Unfortunately I haven't found a unit I really like yet, which is why I might make some low ball offers for a pre-construction unit.

 

[cdr108]

pre-construction pricing is controlled by the developer ... although some ppl think otherwise.

they have certain costs (land, materials, labour, marketing, profit, etc) that are factored into their price; and more than likely won't budge on price unless there are extenuating circumstances.
(ie. really close to financing so discounts for few units to reach their requirement, etc)


re-sale prices are determined by the market ... more representative but can still be propped up by external forces such as historical low mortgage rates.

 

[TOBoy]

So why are people paying $600/sf for a pre-construction unit knowing it will drop to $400/sf? Hypothetically speaking of course. Developers are not willing to lower their prices in a down market, but they raise prices in an up market. It's a lose-lose situation for buyers.

 

[BMyers]

Pre-construction condos are priced higher than resales for several reasons:

Let's assume you are the first person in the door.

1) You have the choice of any suite on any floor with any view, you do not have this with a resale.

2) You generally have much nicer, newer finishes than a lot of resales and you get to choose your flooring colours, countertops, cabinets, etc. There will be no holes in the wall, no scratches on the floor,no dust behind the refrigerator!

3) People pay more to have something new and never lived in.

4) Condo fees are always the lowest during the first few years after registration

5) Even during this global market meltdown, the average price of a resale condominium apartment fell very little, there will be no huge correction in prices. Only a few new projects actually lowered prices. Even if someone bought at Ice, Hullmark Centre, 300 Front or U Condos, your unit will be worth more when you move in then what you paid for it. Let's say you buy a $200,000 unit and put $30,000 down, the unit is built and registered in 4 years. At that time the unit is now worth $260,000 - on paper your $30,000 investment has doubled, much better than sticking it in the bank.

6) You get a builder warranty if something goes wrong. Your brand new appliances are under warranty. You likely have a individually controlled meter so you can control your energy costs. You likely have a more efficient and possibly green building, which controls costs.


~~~~~~~~~~~~

Let's look at the risk. If the project gets cancelled, you get your deposit back plus interest.

If prices drop drastically during the pre-construction phase, the project will likely get cancelled, because no bank will loan the developer the money, too much "closing risk".

If prices somehow dropped drastically during construction and your $200,000 unit is now only worth $150,000 - you could walk away from your deal and only lose your $30,000 deposit. Or you hold onto your unit and hope prices go back up to $200,000 in a couple years and you will not lose anything.

If you bought a resale for $200,000 and prices dropped to $150,000, now you could potentially have lost $50,000, whereas if you bought a new unit, you would only have lost $30,000.

I hope that helps.

 

[cdr108]

If prices somehow dropped drastically during construction and your $200,000 unit is now only worth $150,000 - you could walk away from your deal and only lose your $30,000 deposit. Or you hold onto your unit and hope prices go back up to $200,000 in a couple years and you will not lose anything.

If you bought a resale for $200,000 and prices dropped to $150,000, now you could potentially have lost $50,000, whereas if you bought a new unit, you would only have lost $30,000.

That is completely FALSE !

Agreement of Purchase and Sale is a legal contract, and one cannot simply 'walk away' from the deal.

In this scenario, there is no difference between pre-construction or resale if the value drops.

BTW, if the value dropped $50K, the value will not 'go back up' to $200K in 'a couple of years' unless the construction was just completed by the start of the next RE up cycle.

A 33% appreciation could take anywhere from 6 to 10 years based on historical (100 years) RE trends.

 

[Eug]

Times have changed?

When I bought my presale way back when, it was no more expensive than a recent resale of the same level. In fact, I think it was a bit cheaper. Mind you, this was at a time when the market (both resale and presale) was ramping up.

 

[BMyers]

That is completely FALSE !

Agreement of Purchase and Sale is a legal contract, and one cannot simply 'walk away' from the deal.

In this scenario, there is no difference between pre-construction or resale if the value drops.

BTW, if the value dropped $50K, the value will not 'go back up' to $200K in 'a couple of years' unless the construction was just completed by the start of the next RE up cycle.

A 33% appreciation could take anywhere from 6 to 10 years based on historical (100 years) RE trends.

Of course it is a legal contract and the developer could sue you, but chances are he/she wouldn't - they already have your $30,000 plus interest, it is not likely that they would spend the time or money trying to recoup damages.

It is also possible in this scenario that the bank would not give you $170,000 mortgage for a condo worth $150,000 - this is currently happening in Vancouver.

How do YOU know if the unit will not go back up in a 'couple of years', are you an expert on condominium apartment price trends? There was only a 1% drop year over year for the average resale PSF in the Toronto CMA, this was the first year over year decrease in 12 years. I have all the data and I doubt you would be any better at predicting the sales cycle then I would. We had a major crash in the 80's yes, but I don't forsee that happening again.

I can show you hundreds of units that realized at 33% gain from pre-construction to registration in recent years.

 

[movieguy]

Pre-construction condos are priced higher than resales for several reasons:

Baring the obvious reason of unfair, apple to oranges comparison of buildings, pre-construction has historically been cheaper than resale. This should be the norm.

When pre-con is greater than resale, you have a bubble. We witnessed this in 2004.

The sharp rise in pre-con prices in Toronto is due to increased material costs and heavy taxation on developers. Developers' margins are at their thinnest and they put all the blame on the city. A few years ago, it cost $2k per condo in fees to the City. The number is now $20k+. Developers want to lower prices, but are unable to without incurring heavy losses. They know quite well a resale condo next to a site, with the same finishes and amenities, cost $100/square feet less and buyers won't put up with it.

How bad is it? In C01, there are 4000 pre-con units available for sale. They only sold 100 last month.

 

[BMyers]

I really find it interesting that people always want to prove they are smarter than you on these forums.

Instead of writing: I think you are incorrect, a agreement of purchase and sale in a legally binding contract that you can't get out off without legal ramifications. Instead it's "That is completely FALSE!". You need to BOLD it and add the exclamantion point.

I just did a very quick look to see if I could find some suites with good appreciation.

Here are a couple outstanding ones (sold without parking)

Encore at the Met, sold June 2005 in pre construction for $110,000, 362 sf
Sold Resale in January 2009 for $180,000 - 65% appreciation in less than 4 years.

College Park Phase II, Sold in October 2004 in pre construction for $175,200, 580 sf
Sold Resale in July 2008 for $298,000 - 70% appreciation in less than 4 years.

These are exceptions obviously, but to find a lot of units with 33% appreciation is very easy. There is a reason over 22,000 condo units sold in 2007 and over 14,000 sold in 2008.

We are definetely seeing a pull back in prices, if you bought in 2008, you will likely not see an increase of 70% or even 30% when the project registers and you plan to sell your unit right away. However, chances are it will be worth more than what you paid for it.

 

[DarnDirtyApe]

BMeyers, your logic assumes that condo prices will continue to increase at historical rates (or at a rate greater than inflation) indefinitely. The problem is that prices are already too high as compared to renting, so how are they going to continue to increase?

 

[cdr108]

I really find it interesting that people always want to prove they are smarter than you on these forums.

Instead of writing: I think you are incorrect, a agreement of purchase and sale in a legally binding contract that you can't get out off without legal ramifications. Instead it's "That is completely FALSE!". You need to BOLD it and add the exclamantion point.

I just did a very quick look to see if I could find some suites with good appreciation.

Here are a couple outstanding ones (sold without parking)

Encore at the Met, sold June 2005 in pre construction for $110,000, 362 sf
Sold Resale in January 2009 for $180,000 - 65% appreciation in less than 4 years.

College Park Phase II, Sold in October 2004 in pre construction for $175,200, 580 sf
Sold Resale in July 2008 for $298,000 - 70% appreciation in less than 4 years.

These are exceptions obviously, but to find a lot of units with 33% appreciation is very easy. There is a reason over 22,000 condo units sold in 2007 and over 14,000 sold in 2008.

We are definetely seeing a pull back in prices, if you bought in 2008, you will likely not see an increase of 70% or even 30% when the project registers and you plan to sell your unit right away. However, chances are it will be worth more than what you paid for it.

Sorry if it came off rude, but the information you provided regarding buying pre-construction was misleading and leads one to believe it is completely risk free.

The R.E. appreciation values you used from the past decade of unprecedented increases is unrealistic.

I based my estimations on historical data of 100 years, which equates to 4% compounded annual appreciation.

However, if that's too conservative, even the 6% c.p.a. appreciation used by eug is still under the 100-150% increase in the last 10 years' boom.

 

[movieguy]

The R.E. appreciation values you used from the past decade of unprecedented increases is unrealistic.

BT did note they are expectional numbers, but I agree with CDR that it is not likely buying pre-con in 2008 guarantees even a minor appreciation when the building is complete.

For example, Waterpark City purchased in 2007 for $360k sold in May 2009 for $353k.

Follow CDR's advice and look at pre-con from 1988. A lot of people didn't break even until 2001.

The affordability rating for Toronto is at their worst number in decades. The normal rate is 4 (lower the better). During the boom when people made money, it was 6. Now with rising unemployment and inflation, that number is 8. I will sound like a broken record mimmicking all the other crash-predictors, but the number is quite alarming.

 

[cdr108]

BT did note they are expectional numbers, but I agree with CDR that it is not likely buying pre-con in 2008 guarantees even a minor appreciation when the building is complete.

For example, Waterpark City purchased in 2007 for $360k sold in May 2009 for $353k.

Follow CDR's advice and look at pre-con from 1988. A lot of people didn't break even until 2001.

The affordability rating for Toronto is at their worst number in decades. The normal rate is 4 (lower the better). During the boom when people made money, it was 6. Now with rising unemployment and inflation, that number is 8. I will sound like a broken record mimmicking all the other crash-predictors, but the number is quite alarming.

hi movieguy ... what's this affordability rating you're referring to?

are you talking about the # x earnings?

 

[AKS]

That's why many projects are getting canceled. And future construction will decrease for the next few years until the market can accept the current costs of building new housing. So sooner or later, the prices will continue going up again. Or else no new housing for a long time to come. I doubt development fees will decrease to help build new housing. Development fees will only increase and so will future housing prices. Also it's unlikely material and construction costs will drop if any at all. There's also the cost of installing green roof by law for all new construction. If there's no new housing, resale prices will increase due to demand until pre-constructions becomes more affordable in the eyes of the buyer.