As we all know, before COVID-19 hit Canada, the supply of housing units in the Toronto market had been consistently strained. Demand has been outpacing supply, leading to year over year record-price increases especially from 2019 onwards. With supply already being a pressure point, the arrival of COVID-19 will undoubtedly further add constraints and burdens to the already tight market. The majority of the COVID-19 pressure will be found in the short-term affects imposed on specific areas of the industry such as construction, project launches, project completions and government approvals.
The year to year construction cost increases have long been a virus in and of itself to the developer. While developers have generally accounted for a year over year increase in construction costs, they usually buffered approximately 5%. However, in reality these numbers have doubled with 10% year over year increases from 2017-2019. What is accounting for these large increases? While there are many factors and nuances involved, the main culprits are: skyrocketing material costs, the depreciation of the Canadian dollar against the US dollar, and increased demand for construction labour that is not readily available. Pre-pandemic, 2020 was also on track to see a year over year construction cost increase of 10%, however now it is uncertain if this will remain unchanged or spike further. Most of our construction material comes from China. Canada buys over $500 million in electrical and electronics, plastics, iron and steel, glass and prefab building sectors. The construction industry also imports many materials such as windows from the USA. With the depreciating Canadian dollar and decreased trade of resources worldwide, the cost of these products will be driven up along with limited supply. Cheri Hanes states that this leads to a current situation where “it’s not only that materials will be unavailable, it’s that materials will be unaffordable.” This coupled with the certain increase in government infrastructure spending, formulated to keep the economy alive post-COVID, keeps the volatility of how high construction costs could climb up in the air; which could in turn place a further strain on how many developers can actually afford to follow through on already sold product and yet not commenced construction. This could lead to a further drop in available suites on the market.
Another factor for consideration is the flow of projects to market. Due to the pandemic, on April 4th, an order from the Ontario Government effectively halted the construction on residential projects unless: i. a footing permit has been granted for single family, semi-detached and townhomes ii. an above grade structural permit has been granted for condominiums, mixed use and other buildings, or iii. the project involves renovations to residential properties and construction work was started before April 4, 2020.
This pause in construction will contribute to a significant drop in released pre-construction units. In a year over year comparison of the number of released units in the first quarter, 2019 saw 4088 new units hit the market whereas 2020 only saw 2974. This represents a current 27.3% drop in available units on the market, and with the current situation as it stands, it is safe to assume the majority of project launches will be delayed into late fall 2020 or early 2021. This will lead to an approximate 60% drop in new suites released to market when compared to August 2019, which represents one of the largest reductions of pre-construction suites launched since the financial crisis in 2008-2009.
In addition to the stop in construction, the city planning department is not considered an essential service therefore most of its operations are currently on hold and new residential build approvals have been halted. Currently the city is not reviewing new planning applications, and all public meetings and consultations are suspended till approximately June 30th, 2020. The largest impacts felt from this will arise from the inability to schedule mandatory public meetings on proposed developments and make decisions on planning applications within the prescribed 180 day time frame, leading to more appeals to the Local Planning Appeal Tribunal. With approvals and appeals laying in limbo for months, many existing applications could be pulled from consideration and resubmitted due to changing market conditions. Developers may have to reassess the financing of some of the projects, the demand for new units or the price points or the finishing’s of certain projects, which could lead to the development needing to proceed in an entirely different direction. All this will put further strain on future launches. The same held true in 2008 as inventory for new construction units fell and within a year, the market heated up to record sales in new projects. The same scenario is looking to play out post-COVID.
This pandemic undeniably leaves a path of uncertainty in every industry with every passing day it lingers, but one thing is for sure; the supply issue that has lived in our market for years will continue to prevail and will be drastically impacted by this health crisis for at least the short term. Stay tuned to hear what role the pandemic will play on demand in the market.