Why Development Land Is The Most Common Asset to Fall into Distress
Distressed real estate sales have surged recently, and a significant portion of these sales involve development land. According to Colliers’ Jeremiah Shamess, Executive Vice President and founder of Colliers Private Capital Investment Group, this trend is particularly evident across Ontario, where development projects are frequently falling under receivership. While each case has its unique circumstances, a commonality remains: the mortgaged property is often a piece of development land.
There are three primary reasons for this phenomenon, as outlined by Shamess, who specializes in the sale of buildings and development land in the Greater Toronto and Hamilton Area (GTHA).
Firstly, development land typically carries short-term debt. This type of debt is tied to loan-to-value ratios and the progression of the project. When the short-term debt is due, developers face the challenge of either paying cash or refinancing. However, refinancing has become increasingly difficult in the current economic climate.
Secondly, the revenue side of the business has taken a significant hit. Shamess points out that condo sales have dropped drastically, reaching only about 20% of last year’s market. In April, Urbanation reported that only four new projects in the GTHA came to market in Q1 2024, and 60 condo projects have been put on hold over the last 24 months. Since financing for construction is often contingent on presales, the slowdown in condo sales has severely impacted the ability of developers to move forward with their projects.
Thirdly, rising development charges and financing costs have further eroded the value of development land. Since 2020, financing costs have surged by 57%, significantly affecting developers’ bottom lines. Recent increases in condo development fees in Toronto, influenced by changes to the provincial Development Charge Act and earlier hikes by the City of Toronto, have exacerbated the situation. As a result, developers find themselves needing to inject more capital into their projects, coupled with the uncertainty of future revenue.
This convergence of factors explains why many distressed development projects are those where condos were planned. Notable examples include the church conversion project at 248-260 High Park Avenue and several projects by Vandyk. While some rental projects have faced distress, they have generally been funded by pension funds, which have mitigated the extent of issues compared to condo developments. The condo developers most affected tend to be smaller firms juggling multiple projects in the entitlement and zoning stages simultaneously.
Market conditions have also made it challenging to find buyers for these distressed assets. Despite this, deals are still happening, and resetting the value of assets in the market can be seen as a positive development. Shamess suggests that the current state of distress in the market is likely to persist for some time.
Historically, such cycles take a few years to resolve. Until demand for housing rebounds, the market will continue to face significant challenges.
As we navigate this period of uncertainty, one must ponder: will the cyclical nature of the real estate market ultimately lead to a resurgence in development, or are we witnessing a fundamental shift in how these projects are financed and executed?
Rent vs. Buy: Navigating the Changing Landscape of Home Ownership
With changing interest rates comes the age-old question: is it better to rent or to buy?
In a recent survey, Royal LePage found that 29 per cent of renters had contemplated buying a property before renewing or signing a lease. Thirty-three per cent of these would-be buyers said they were waiting for interest rates to decline. Now that the Bank of Canada has lowered its key rate to 4.75 per cent, it seems a good time to revisit the question of whether it’s better to rent or to buy. The Financial Post’s Shantaé Campbell weighs the options in this evolving economic terrain.
So, what has changed? The Bank of Canada’s decision to drop its key rate has made borrowing slightly cheaper, making mortgages somewhat more affordable. Those considering buying a home may be tempted by the prospect of lower monthly mortgage payments.
For instance, using Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10 per cent down payment on a $703,446 home with a 5-year variable rate of 5.95 per cent amortized over 25 years (total mortgage amount of $652,727) would have a monthly mortgage payment of $4,157. With the BoC’s 25-basis point decrease, their variable mortgage rate drops to 5.70 per cent, lowering their monthly payment to $4,061. This means that the homeowner will pay $96 less per month, or $1,152 less per year in mortgage payments.
Desjardins economist Kari Norman points out that while this reduction makes home ownership more affordable for some, it may also attract more buyers, potentially driving up home prices. Despite lower interest rates, home prices in many parts of Canada remain high. Cities like Vancouver and Toronto have average home prices around $1 million, necessitating a substantial down payment.
So how do we calculate if it’s more costly to rent or buy? The five-per-cent rule is a helpful tool when considering the costs of renting versus owning. According to this rule, if a year’s rent is less than five per cent of a comparable home’s value, renting is financially attractive. If it’s more, owning might be better. For example, if you’re renting a one-bedroom plus den condo for $2,000 a month, your annual rent totals $24,000. Dividing this amount by 0.05 gives you $480,000. If a similar condo in your area costs more than $480,000, renting may be the smarter financial choice. If it costs less, buying might be more advantageous.
Another way to determine the cost-effectiveness of renting versus buying is by calculating the price-to-rent ratio for a particular area. This ratio is obtained by dividing the median home price by the median annual rent. While the price-to-rent ratio doesn’t provide a comprehensive view of overall affordability, it can offer insight into the relative value of different property types compared to rental rates. A price-to-rent ratio of 21 or higher means buying is more expensive than renting. A ratio below 16 suggests buying is cheaper. A ratio between 16 and 21 indicates renting may be more favorable.
What are the price-to-rent ratios across Canada? According to a Zoocasa report released in late May, investing in a condo may be wise in cities with low price-to-rent ratios, such as Edmonton at 9.7. Calgary and Winnipeg also have low ratios, at 10.8 and 11 respectively. Vancouver, Kitchener-Waterloo, and London have condo price-to-rent ratios under 16, indicating high rental costs compared to owning. Halifax-Dartmouth offers favorable conditions for buying a detached home with a ratio of 12.9, despite two-bedroom rental prices rising 15.6 per cent year-over-year. Burnaby and Vancouver have the highest ratios for detached homes, indicating buying is much costlier than renting.
So, why are people still hesitant to buy right now? Lower interest rates make buying more appealing, but high home prices and substantial down payments remain major barriers for many prospective buyers.
Phil Soper, president and chief executive officer of Royal LePage, noted that while a third of Canadian adults are currently renting, and many families are content doing so, the desire for home ownership remains strong among a large portion of this segment of the population. However, the greatest barrier to entry is the ability to drum up the initial capital for a down payment.
For example, a 10 per cent down payment on a $703,446 home equals $70,344, reducing the mortgage amount to $652,727, which the homeowner will repay over 25 years. In addition to a hefty down payment, closing costs can run a homebuyer three to five per cent of the purchase price of a resale home.
On the other hand, renting avoids these hefty upfront costs and exempts tenants from property taxes, maintenance, and major repairs, making it a more financially accessible option for many, even if rental prices in major Canadian cities like Vancouver and Toronto often exceed $2,000 per month for a one-bedroom apartment. And while renting can be more affordable month-to-month, it doesn’t build equity like homeownership does. However, Norman points out there’s no guarantee home values will appreciate as much as they have in the past.
So, what’s the verdict on renting vs. buying? The national average rent for a two-bedroom condo is $2,236. To purchase a home at the national average price of $699,117, a buyer needs at least $48,938 saved up for a seven per cent down payment, plus $26,007 for CMHC insurance. Aside from all the additional costs associated with buying a home, this means the minimum monthly mortgage payment would be $4,206 at a 5.70 per cent variable rate. For renters, the $2,236 monthly rent is subject to annual increases, while a homebuyer’s variable mortgage rate can cause their payments to increase or decrease. Unless the renter relocates to a cheaper property or changes their living situation, it’s unlikely their rent will ever go down.
According to Urbanation and Rentals.ca’s June report, asking rents in Canada have surpassed $2,200, reaching a record high. Rents increased by 9.3 per cent annually in May, matching April’s growth rate and the 9.1 per cent average annual growth over the past three years – including the rent declines of 2020 and 2021. Still, despite the recent interest rate drop, buying and owning a home remains costlier than renting in most parts of Canada.
Ultimately, the decision to rent or buy hinges on various factors including financial situation, lifestyle preferences, and long-term goals. While some may prioritize the stability and equity of homeownership, others may find the flexibility and lower upfront costs of renting more appealing. In the face of fluctuating interest rates and housing market dynamics, one must ask: is the dream of homeownership still worth the price, or is the freedom of renting the smarter choice?
How Much You Need to Earn to Afford a House in Each Major Canadian City in 2024
According to the Canadian Real Estate Association, the national average home price reached $698,530 in March 2024, marking a 2 per cent increase year over year. While home ownership remains achievable in some markets, skyrocketing prices in others have made it feel completely out of reach. Here’s a breakdown of how much you need to earn annually to afford a house in each major Canadian city in 2024.
Calgary, Alberta – Calgary remains one of the more affordable markets in Canada, with an average home price of $580,400 in April 2024. To afford the down payment of $33,040, buyers need a household income of $87,000, translating to about six years and one month of savings. At this price point, you could purchase a four-bedroom, two-bathroom detached home on a quiet street in the northeast part of the city.
Greater Toronto, Ontario – Toronto had the second-highest average real estate price in April at $1,113,600. This requires a substantial minimum down payment of $222,720. With a median annual salary of $85,000, you’d need to save for 42 years and two months. Alternatively, for a lower price point of $899,000, you might opt for a three-bedroom, two-bathroom modern semi-detached home in Danforth Village.
Saint John, New Brunswick – Saint John is currently the most affordable city for potential homebuyers, with an average real estate price of $288,300. The $14,415 down payment needed, based on a median income of $56,000, would take just four years and two months to save. At this price range, a duplex in Saint John East with a four-bedroom upper unit and a two-bedroom lower unit is within reach.
Hamilton-Burlington, Ontario
In the Hamilton-Burlington area, the average home price is $850,500. With a down payment of $60,050 and a median salary of $76,000, you’d be saving for about 12 years and seven months. Homes in this price range include a three-bedroom, two-bathroom end-of-row townhome in Ancaster with a large backyard.
Ottawa, Ontario – Ottawa’s real estate market remains relatively affordable with an average home price of $636,700. To save for the $38,670 down payment at a median income of $63,000, it would take nine years and nine months. In this price range, you can find a fully detached three-bedroom, three-bathroom house in Barrhaven with a finished basement and spacious yard.
Victoria, British Columbia – Victoria is the third most expensive city on this list, with an average home price of $861,000. A down payment of $61,100 would require 16 years and four months to save at a median household income of $60,000. For slightly below this price range, you could find a two-bedroom, two-bathroom character townhouse in Fairfield.
Greater Vancouver, BC – Vancouver had the highest average home price in April at $1,196,800, necessitating a down payment of $239,360. With a median income of $80,000, you’d be saving for 48 years and three months. At this price point, a two-bedroom, two-bathroom townhouse in Mount Pleasant with an open-plan layout and 14-foot ceilings is possible.
Regina, Saskatchewan – Regina is the second most affordable city in April with an average home price of $313,100. To save for the $15,655 down payment at a median income of $75,000, it would take three years and four months. In this range, you could purchase a three-bedroom, two-bathroom detached home with a sunroom in the Arnheim Place area.
Kitchener-Waterloo, Ontario – In Kitchener-Waterloo, the average real estate price is $740,900. This requires a down payment of $49,090. With a median income of $81,000, it would take nine years and eight months to save. At slightly above the average rate, you could buy a detached four-bedroom, three-bathroom house in the Columbia Forest neighbourhood of Waterloo.
Edmonton, Alberta – Edmonton remains an affordable market for first-time homebuyers, with an average price of $385,900 in April. To save for the $19,295 down payment at a median salary of $80,000, it would take three years and nine months. In this range, a three-bedroom, two-bathroom half duplex in the Cy Becker neighbourhood is available.
Saskatoon, Saskatchewan – Saskatoon’s average real estate price is $394,300, requiring a $19,715 down payment. With a median income of $75,000, saving would take four years and two months. A corner-end townhouse unit with three bedrooms and two bathrooms in the Stonebridge area fits this budget.
Halifax, Nova Scotia – Halifax’s average real estate price is $529,600, requiring a down payment of $27,960. At a median income of $69,500, it would take six years and six months to save. About 90 minutes outside the city in Kings County, a newly constructed three-bedroom, two-bathroom detached home near the Bay of Fundy is available.
Montreal, Quebec – Montreal remains one of Canada’s more affordable housing markets, with an average home price of $531,300. This means buyers need a down payment of $28,130. With a median income of $65,500, it would take seven years to save. For a lower price point, consider a one-bedroom, one-bathroom condo in a boutique building close to Downtown Montreal, Plateau Mont-Royal, and Old Montreal.
St. John’s, Newfoundland and Labrador – St. John’s average real estate price is $335,000, requiring a $16,750 down payment. At a median annual income of $72,500, it would take three years and nine months to save. A 2168 square foot, two-apartment bungalow in Kilbride is within this price range.
Winnipeg, Manitoba – Winnipeg is another affordable market, with an average home price of $353,600. This requires a down payment of $17,680. At a median income of $71,500, saving would take four years. A three-bedroom, two-bathroom house in the desirable neighbourhood of Tuxedo is within this budget.
As prospective homebuyers face varying challenges in each city, one must consider not only the financial requirements but also personal lifestyle and long-term goals. The real question remains: In a market of rising prices and economic uncertainty, is the dream of homeownership still attainable, or has it become a distant aspiration?
-The TanTeam Editorial
