The real estate industry in Canada has had an unbelievable year in recent years. Although most of us were hit with a pandemic, the real estate industry in Ontario, Quebec and British Columbia has been beyond hot. We’ve seen real estate prices rise in areas such as Toronto, Markham, Belleville, Ajax and Whitby to name a few.
With a tight supply of existing homes, home buyers are offering upwards of $100,000 over asking for homes in areas such as Ajax. In February of 2021, a home sold in Ajax for an incredible $225,000 over asking. Some of the flare can be attributed to the selling realtor, but the low supply of homes has a huge impact.
Why Does a New Build Home Cost So Much?
As existing home prices soared, so did the price of new homes, pre-construction semi-detached homes and condominiums. You may be asking yourself, why do new homes cost so much in Canada? There are a number of reasons why the cost of new construction homes have gone up – especially this year.
Rising Costs of Construction Material
With the pandemic surrounding us, many people have invested into home renovations and remodeling projects – putting pressure on material availability, and causing an increase to building products. For example, the cost of lumber, drywall and other common construction products has risen considerably.
In Canada, pre-construction home builders will often pass these added costs onto the buyer.
Lack of Available Lot for New Build
As new homes are being built on a particular area owned by the land developer, the number of lots available will decrease. With a decrease in supply, there will be an increase in prices. It’s one of the reasons why home builders will start increasing their prices.
For example, if you purchase a semi-detached corner house from a builder for $900,000 in January of 2019, the same home will be selling for $1,049,000 just a few months later. It’s one of the reasons why many people line up ahead of the opening to get first access to the new build.
Increasing Labor Costs for Construction Work
With time, labor costs in construction will increase. However, we don’t know if the builder is actually paying their employees more. For all we know, the builders can upcharge the costs of labour, while the workers get paid the same as they were.
Costs of Builder Upgrades are Increasing
When you purchase a home from the builder, you are purchasing the bare minimum for the home. You will need to purchase upgrades for the doors, knobs, tiles, bathrooms, ceiling heights, etc. These costs can quickly add up, as the average home spends upwards of $100,000 on upgrades. As an incentive, builders may offer discounts, such as a $20,000 rebate on upgrades. Despite the rebates, the costs of builder upgrades can be high enough to make the home unaffordable.
Rising Costs of Digital Marketing, SEO and Branding
You might be wondering what digital marketing, SEO and branding have to do with a pre-construction home or new construction home. The real truth is that, developers and builders have an incredibly high overhead they take on to beat their competitors.
The marketing material, sales office, Google Ads, Facebook Ads, list building, website costs, search engine optimization and logo branding all cost money. With an increased supply of builders trying to win your attention, the costs of acquisition from digital marketing have gone up. As with any business, these costs will be factored into the price of your home – not directly, but indirectly.
Increased Government Taxes, Surcharges and Fees
A great deal of the rising price of new homes can be attributed to the fees, taxes and surcharges charged by the government to the builders. According to the Building Industry and Land Development Association, the average new home construction costs $222,000 more due to government fees and taxes. These are charges levied onto the builder, who then passes them on to the buyer.
A $222,000 increase on the cost of a home accounts for $940.06/month at an interest rate of 2.00% amortized over 25 years. When factoring in mortgage approval guidelines, this can be a burden for some home buyers.
The fees can be for things such as the school district, local sewer hookup, gas lines, fire and police safety and recreational services.
In 2020, the City of Belleville looks to be increasing some fees that are being charged to home builders. Again, these additional charges will be passed down to the buyer.
The costs of new construction homes are rising much quicker due to a combination of all these factors. If you factor a 5% increase on material cost, 5% increase on labour costs and 5% increase on costs of upgrades – you will see a large increase in the price of the new construction home.
You have to keep in mind that, even if developer fees are reduced – we are not confident that builders will reduce the cost of the build. At the end of the day, the builder is in this to make a profit.
With the rate of appreciation and over asking sales, most new build homes are now selling on the market soon after possession – where they’re profiting upwards of $200,000.