OUR HOUSING CRISIS: WHY ARE SO MANY NEW BUILDINGS GOING BUST?

A housing development in Kitchener, Ontario was planned to add more than 500 residential units to an area with a tight housing market. The project initially seemed promising, with city approval granted in 2020. The first tower was scheduled for completion by 2024, but this didn’t happen. Only one of the four towers began construction, and it remains unfinished. This project is just one of over 200 housing developments that went insolvent last year alone. The insolvency rate is nearly 50% higher than the 10-year average. Many of these developments are large, with the potential to house thousands of people, and the real estate market is suffering as a result. The situation is expected to worsen at a time when housing demand is critical.

So, what’s going wrong? Typically, a developer buys land, drafts plans, and gets city approvals. Before construction begins, they start selling units, usually requiring buyers to pay 20% of the price upfront. Developers need to pre-sell at least 70% of the units to secure the bank loans necessary for construction. Reaching this pre-sale threshold is a crucial milestone. If all goes well, construction moves forward, buyers close on their sales, and the bank gets paid back with profits. But in recent years, developers have faced a perfect storm of challenges, leading to many lucrative projects becoming unviable.

First, the pandemic. The surge in demand and skyrocketing prices were beyond expectations, creating immense pressure. Between 2020 and 2023, building in Canada became more expensive than ever. According to RBC economists, industry costs increased by more than 50% across the country. For example, the cost of concrete rose by 55%, and structural steel by 53%. The entire construction ecosystem was stretched thin trying to keep up with demand.

Labour costs also spiked, with wages increasing by nearly 10%—double the pace of other industries—as construction companies competed for a limited pool of workers. In 2022, more than 28,000 construction jobs went unfilled in Ontario, a 33% jump from the previous year. These shortages caused significant delays, especially for projects that began before the pandemic. As a result, developers who couldn’t finish their projects on time faced massive cost overruns.

On top of rising material and labour costs, developers were hit with increasing fees and taxes. In 2019, development fees for a two-bedroom apartment were around $45,000 per unit. By 2024, those fees had jumped to about $69,000 per unit—a 51% increase in just five years. For a large building with 500 units, this increase can amount to nearly $10 million in added costs before a single shovel hits the ground.

And then there's interest—a dreaded topic for any homeowner, let alone a developer. A half-million-dollar mortgage at 6% or 7% interest is daunting enough, but imagine interest on $30 million or more. The compounding effect of rising costs for materials, labour, fees, taxes, and interest has driven many projects to a breaking point.

When a project fails, buyers who have already put down deposits can lose everything. Unless another developer steps in to rescue the project, there’s often little that can be done to recover. Meanwhile, inflation has driven up the price of individual units, so theoretically, developers could charge more to compensate for the higher costs, right? Not quite. The problem is that most of the units have already been sold at 2020 prices to secure the initial financing, leaving only a small portion of units available to sell at higher prices.

In some cases, developers try to sell the remaining 20-30% of units at 30-40% higher prices to recoup their losses. However, it’s difficult to sell those remaining units at such inflated prices, especially when they are much higher than what earlier buyers paid. According to Urbanation, a real estate consulting firm, new condo sales in the Greater Toronto Area fell by 57% in the first half of this year compared to the previous year, and they are 72% below the 10-year average. This makes it almost impossible to sell the remaining inventory at higher prices.

People tend to forget that there is a breaking point where buyers simply won’t pay inflated prices. This affects developers at every stage of the project. During the early pre-sale phase, developers could theoretically price in worst-case-scenario costs. But with interest rates so high, who’s buying at those prices?

So, while it’s often said that the solution to the housing crisis is to build more supply, the reality is far more complicated.