This year marks the 55th year during which I have been involved with the development of condominium projects. I started as an architect designing a project in Ottawa while working for Irving Grossman in Toronto . I then joined CMHC where I helped obtain approval for the first condominiums on leased land in Canada (South Shore False Creek). I was subsequently involved with dozens of condominium projects, first with Narod Developments, and then as a developer and planning/development consultant.
Presale condominiums really didn't become popular until the mid-80s. When I first started in this business, there was no such thing as condominium presale programs. Developers would design a project, undertake market studies, fina a lender to finance the project, and start building. They would start selling three or four months before completion from a model suite on a lower floor of the building.
I can remember when presale programs first became popular. They were the creation of a brilliant Toronto advertising/marketing executive named Stan Kates who started with a project by Tridel on Bay Street in Toronto. He came up with the concept of 'priority marketing' which invited buyers to get on a list so that they would be allowed to purchase a unit in the project. It was a high-pressured approach that included a sales trailer with no door handle, announcements over a loudspeaker each time a unit was sold, and so on.
What is the definition of Selling? After witnessing condominium presale programs I often quibbed that selling something you have to somebody who needs it is not selling. But selling something you don't have, to somebody who doesn't need it, that's selling! And that's what presale condominiums are all about. Selling something that doesn't exist to somebody who didn't even know he needed it!
I wrote about this ten years ago when the provincial government was considering the introduction of the SVT and I was writing a weekly column for the Vancouver Courier.
Last year, I elaborated on this history in a blogpost following a CBC radio interview during which I questioned the need for lenders to require presales given that so few projects were proceeding.
The investor presale market is dead. Recently it was reported that presale condominiums are down 95% in Toronto, and the situation is not much better here. According to realtor Steve Saretsky, "there have only been 121 condo units sold in Metro Vancouver this quarter. Down from a peak of nearly 6000 quarterly sales back in the bull market."
Builders are being increasingly cautious about launching new projects and are now focusing on homes for end-users - people who plan to live in them - rather than investors. This is because the investor market is dead. Yes dead.
Why? Because of a plethora of government taxes and initiatives intended to get 'speculators' out of the market. These included the Foreign Buyers Tax (and subsequent ban), Empty Home Tax (in Vancouver), Speculation and Vacancy Tax (SVT), restrictions on short term rentals, an anti-flipping tax, etc.
Furthermore, potential investors had to compete with a surge of 'purpose-built' rental projects encouraged by municipalities through density bonuses and reduced development charges and funding programs offered by senior levels of government.
'End-users don't want to buy years before completion. The other reason projects are not proceeding is that most 'end-users' no longer want to buy a presale unit years in advance of completion. For one thing, most buyers want to see what they are getting. For another, they need to time the purchase of a new home with the sale of their existing home. And given what has happened to prices over the past years, buyers are no longer confident prices will go up.
So what's the solution? I think it is time for lenders to go back to the future and reconsider the need for insisting on presale requirements. After all, 50 years ago most condominium projects proceeded without any requirement for presales.
What about GST, DCCs? While eliminating the GST on new units (I was president of UDI Canada when the GST was first introduced in 1991) as well as the HST in Ontario will definitely help the condo markets, as would reducing DCCs and taxes that discourage investors, until lenders start doing their own proper underwriting, rather than rely on presale performance, I don't think we are going to see many new projects launched in the year(s) ahead.
I recently discussed this Jami Makin at Business in Vancouver
To conclude, while eliminating presale requirements would mean developers and lenders would have greater difficulty testing the market, and more units would likely be unsold upon completion, this would allow many projects that are currently stalled to proceed. It would mean more jobs for those in the construction industry, more tax revenues for the province and municipalities, and over the long term a healthier, less distorted condominium market. I say less distortion since the reason we have seen so many small units in new projects is not simply due to shrinkflation. It is because those were the units that appealed to investors. And now they are gone.
I look forward to hearing what others have to say.
3 comments:
I say good riddance to the presale requirement. Both developers and lenders need to pony up their own money to see projects move forward. If this results in smaller, less risky buildings that get to the market sooner and take a less arduous approval process, so much the better. Cities need more bite-sized projects and fewer so- called iconic or, even worse, “luxury” ones.
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Thanks Michael, for a well written explanation of our current market situation.
The presale market seemed to be created a developer and engorged by buyers for two reasons.
The developer could be sure of a capital injection and find the confidence to proceed with a project, because others had endorsed it ahead of construction start. The Bank funding the project had less risk, and ultimately the interest on borrowing, would be lower than that charged, were the project to have no sales on the books.
The Investors or end user Buyers would make the purchase at lower than anticipated end price, so the Investor made money, the end user was rewarded by making the purchase on a rising market and creating equity prior to taking possession of the finished unit.
You are correct, the wheel has fallen off the waggon now that the foreign investor is excluded from purchasing, and the end user Buyer is not interested in purchasing early without a fair expectation of creating the equity gain. The Developer now needs to put more of their own money into funding the project., which will reduce the number of projects a Developer can take on at the same time. Add to that the cost of construction increase, and we have a real problem.
The Market chokes and stalls out!
Solution… weather the storm. From my sailor days, we would say ‘you cannot change the direction of the wind, but you can alter the setting of the sail’
How do we do that when the wind is blowing you onto the rocks? Change of direction to miss the rocks!
Work the sky-train corridor, where little or no parking is required in a development, make smaller less luxurious units, convince municipalities to allow development of housing components within Industrial Parks, close to new hospitals, schools and universities and major employers, so people can walk and cycle to work. Make larger units which can be an alternative to a house for a family.
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