Why you should take a long-term mindset when buying real estate
April 19, 2021
Real estate prices are rising quickly, and as a result of these frothy conditions, some economists are calling for government intervention, while some pundits are labelling the situation a bubble. For many of you, buying real estate is scary during “normal” market conditions, so now it might be downright terrifying.
It probably isn’t the best time to be a property flipper, unless you like taking a lot of risk. However, there is one thing I’ve stressed many times in this column – don’t try to time the market. Buy what you can afford and where you can see yourself living for five or more years. If you do your research and buy for the long term, you likely won’t lose money.
Drawn-out approvals process
Here’s why. A couple of years ago, I launched a podcast called Toronto Under Construction with co-host Steve Cameron, and we typically talk to real estate developers for more than an hour. Among the common themes are lack of affordability, a long and drawn-out building approvals process, and a lack of land suitable for development. These three topics share a common long-term outcome – much higher new home prices.
When developer Sherry Larjani of Spotlight Developments was on our show, she told us that between the price of land, limited supply, the rising costs of construction, NIMBYs, development charges and government red tape and delays, it’s becoming more difficult for developers to bring affordable price points to market. She cites that the only way developers are going to build these days is if the project is luxury, as the costs are rising so quickly, and uncertainty is high.
Scott McLellan of Plaza points to the myriad of government fees pushing up new house prices, including development charges, Section 37 fees, parkland contribution, and a slew of back taxes that make things even more difficult for developers to bring reasonably-priced product to market. These costs are getting passed on to the buyers.
When Stuart Wilson of Alterra Developments was on our podcast, he educated us on the economic term “cost-push inflation.” This is when increasing costs for builders force them to raise prices to maintain the same margins. Currently, he said, it is about supply and demand; every construction trade is being called upon for bids, and with a limited number of trades, prices increase. Paired with government regulations, more and more costs are causing the final unit price for end users to continue to rise.
Bill Gairdner of Gairloch Developments spoke about building small midrise developments in Toronto, mentioning that there are 15 line items in your budget that are all taxes, going towards the city or province, plus hard cost escalation. It is extremely challenging, he says, to make a return that everyone can get excited about.
One thing we’ve mentioned regularly on the podcast is that if a developer isn’t making a reasonably high profit on a project, they will not get construction financing. A builder can’t just choose to make less money to improve affordability. It just doesn’t happen.
So, what does all of this mean? There continues to be huge demand for housing, and when the borders open back up post-COVID, there will be a mad rush into the country. Into a situation where there is already very high demand, with a system that doesn’t support getting lots of new housing built. It might look like we’re building plenty of new homes in the GTA because you see a lot of cranes, but we actually built more in 2002, when the population was a lot smaller.
High demand and not enough supply equals higher prices. There may be, and probably certainly will be, volatility in pricing in the short term. But buy for the long term, and you won’t get hurt by any such fluctuations.
About Ben Myers
Ben Myers is President of Bullpen Research & Consulting, a boutique real estate advisory firm, that works with landowners, developers, and lenders to better inform them of the current and future macroeconomic and site-specific housing market conditions that can impact their active or proposed development projects. Follow Bullpen on Twitter at @BullpenConsult or find Ben at bullpenconsulting.ca