Canadian real estate developers are being squeezed by inflation, and it’s turning ugly. The Hazleton Development Corporation obtained Companies’ Creditor Arrangement Act (CCAA) protection on April 20, 2022. The developer cited rising costs as one of the primary issues putting a 265-home project at completion risk. In this particular case, costs rose less than typical for homebuilding in the area. This can indicate a broader issue will form soon.
Greater Toronto Real Estate Developer Sold Nearly All Units
The project at the center of the developer’s insolvency is the “Highlight of Mississauga.” Filings show 261 of the 265-units at the Dixie Road residential complex had already sold. Clearly not a lack of demand, with the units bringing in $111.63 million (avg. $427k/unit). It might seem cheap, but these units were mostly sold before 2019, when construction began.
Speaking of construction, they began September 2019 — 4 months later than expected. The project was slated for completion on April 30, 2021. A 4 month delay might sound unusual to the average person, but it’s really not. BILD, a Greater Toronto developer group, found 4 in 5 members are delayed between 3 and 6 months. These delays, often not related to the developer, can cost them a whack of money. Since developers pass costs onto consumers, it’s fair to say these delays cost buyers a whack.
Toronto Real Estate Development Is Now At Completion Risk
The filing shows the project is only partially finished and “completion is at risk.” Factors destabilizing the project appear primarily external, such as labor and supply shortages. Public health restrictions, rising construction costs for goods and services, and “the current economics” are also cited.
The cost of construction has climbed significantly since they first planned the project. An original project estimate shows $101.18 million was the forecast cost of building. By November 2021, it increased to $113.70 million, a 12.4% increase since the original estimate. That might sound like a huge overrun, but considering inflation — it’s actually pretty decent.
.“The fundamental economic reality is that the shortfall in revenues relative to costs must be addressed,” reads the Facts section of the filing. “The development is not viable ‘as-is’ and a restructuring, mothballing or sale of the Project is inevitable.”
Soaring Inflation Threatens To Destabilize More Projects Soon
Statistics Canada estimates building costs have soared over the past few years. In Toronto, the construction cost jumped 4.5% in just Q4 2021, with annual growth coming in at a whopping 25.6% increase. Since the project began construction in Q4 2019, the cost of building in Toronto has increased 35.1%. A cost increase of this magnitude would have been unreasonable to forecast. Even the Bank of Canada (BoC) can’t believe the current level of inflation.
Had developers incorporated that level of margin into the cost, buyers would pay for it. Imagine paying a 35% premium as a bet the BoC would keep interest rates too low for too long? A year ago, that would have been a ridiculous consideration.
It’s easy to wonder why this isn’t occurring more frequently if it’s a broad-based issue. The thing is, there’s been signs of this kind of risk for months. More common is developers circling back to buyers to ask for more money. Sometimes as much as $100,000 or more.
We only have a few hundred pages of documents, but the insolvency filing doesn’t appear unusual. In fact, it’s hard not to see this becoming more common in the coming months. Projects are sold years in advance before they’re built, and most likely didn’t account for such high inflation. High inflation is known as a destabilizing force in economics, and this is a typical impact.
Canada’s goal of doubling the pace of home building has invited similar concerns. The builder system is already at the point where construction is inflationary. Canada can’t even grow and cut down trees as fast as it wants to build homes. BMO has warned plans to double the building pace is unlikely for this reason.
A bigger concern is how many of these projects at double the building pace will fail? It’s somewhat reckless and would leave households with a higher risk of buyer failure. Though it’s a similar plan Canada uses with immigrants — failure of a few is just the cost of pursuing aggressive growth.
Careful here could they be doing this to fire sell to another corporation and then relist units at higher prices?
Is Canadian real estate that fragile that a few extra dollars in costs create bankruptcy? Ha haha 😂 good for them! Hike the interest rates!
The dominoes are beginning to fall. The bubble is bursting.
All it took was for overnight rates to go up to 1% and the entire Canadian real estate industry is already flipping on its head.
Kind of nips the whole narrative of robust, sustainable demand in the bud.
I think the big “Oh crap!” moment for many will be when the stories of those pesky corporate investors and private equity firms mass liquidating start to come out.
A total of 0.75% in interest rate hikes result in this. Imagine another one time 75 basis point hike in June. Will the politicians, in collusion with the real estate industry stop the Bank of Canada from doing its mandate, sound money?
This particular problem wasn’t caused by rising rates but by extending cheap money / low interest rates triggering inflation. The very thing that fueled Canada’s Real Estate Boom is destroying it.
True, but will the Bank of Canada be pressured no to raise rates, and go against their mandate to bring sound money and low inflation to Canada?
It’s unfair that the working class and the savers get screwed big time while those who own real estate get massive loans for low rates and HELOCs to fund a next new car. I have no pity for those who paid a mil for a cottage in the middle of Ontario or Winnipeg.
why would projects collapsing burst real estate bubble? if anything it limits supply and inflation increases cost to build so real estate prices may climb off inflation like everything else.
Project failure means less demand, especially considering the number of projects that have been sold exclusively to real estate agents.
You have it completely backwards. Housing demand is driven by real immigration/population growth, not real estate agents flipping to each other. 400,000 immigrants last yr, 430,000 this yr, 450,000 next yr. Soon it will be half a million a yr, with most of those immigrants moving to Ontario. The most recent Ontario Provincial housing task force reports says we need 1.5 MILLION homes in the next 10 years. That is real demand, that is unless you want to stop immigration. Projects that get cancelled only drives demand for existing supply higher. A housing crash is about as likely as immigration stopping. The day we stop immigration is the day I’ll sell my house & rent instead. My in laws immigrated 60+ years ago, they bought their semi in Toronto for under $30,000. Another 50 yrs from now you probably won’t be able to buy any home for under $10million due to both inflation & demand increases. Not buying now will be a huge mistake. The risk is to the upside not downside.
Chipboard – or OSB – used as siding and roofing sheeting, last summer was $11 for a 4’x8′ sheet, it was $55 in January. Just checked online and its about $49, driven by opportunism and greed.
A world event affects the price of gas and the effect is immediate, even though they had the gas in stock last week. It’s their gas, they can charge whatever they want, but opportunism and greed is the primary driver of recent price increases.
Butter. Used to be $4.29. Now its $7.99. The cows aren’t getting more money. The shipping component hasn’t caused the price to double. But it has affected people diets. It’s affecting their ability to cope. It is affecting the lives of their children.
Gordon Gekko said ‘Greed is good’. Charlie Sheen responded for us all – ‘How many super-yachts do you need to waterski behind?’
This building is only 14 stories tall. Isn’t the risk of financial failure higher in high inflationary times for taller buildings since they take longer to built?
What would have been the likelihood of completion had this been a stacked townhome community of 75 to 100 units instead of a building? I’m not sure that any of the GTA municipalities have factored any of these issues into their future growth plans and density plans.
Uh.. bring on the pain!!
Whenever there is an adjustment in the financial environment pain follows! Go figure…
What do you expect? The government of Canada have printed about 100 billions dollars during pandemic and has given this cash somehow. Half of money were stollen or hidden by the corrupted government. And today it’s time to harvest inflation results covering by Russia instead. One more clown in the world.