Quote:
Originally Posted by 1stLand
I disagree.
Working for a Land Development company for two years taught me the real costs of development. Infrastructure isn't cheap, and if you think the city builds roads, sanitary and storm sewers, electrical cables, then you are sadly mistaken. These are developer responsibilities.
The farther out you go from the core, the more expensive these utilities cost.
The cost of land acquisition alone is astronimcal, as speculators have bought up parcels and acerages and driven up the price of raw land.
Developers make a handsome profit, so do homebuilders as it stands now. But if you think their profit margins are anything over 20%, you are probably wrong. Tradesman and the cost of materials have already adjusted their prices to reflect the recession and a further drop in the cost of these components is unlikely.
Couple that with the city of calgary proposed levy of $10,000 per new house built and you have a fairly high cost to build.
Therefore, new housing and new housing prices can't go down much further, and if the market doesnt support bringing on new developments or projects, developers will mothball new phases/developments and sit and wait until it comes back.
As for your comment about builders having the capacity to build 20,000 - 30,000 units per night (should there be demand).....I hope you are kidding.
There is a process developers have to follow in terms of getting subdivision approval, development approval, servicing agreements etc.
It takes over a year in some cases to bring on a new phase, more if its a new development altogether.
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Wow, how did I miss this post...
This is exactly the type of thing a realtor would say. It makes sense on the surface but does not stand to much scrutiny. (And I too have worked in/with land bankers, developers and commercial real estate types - although funny enough they are generally the last people I would go to as experts on the matter.)
These developpment costs are constant in all home markets around the world yet Calgary now has some of the more expensive homes in North America. This despite no limit on land, a massive oil/gas funded road infrastrucutre already in place, etc. I see very little reason why a prolonged deflation could not push new homes into the $260,000 range.
This is not to say that there are no costs of development but there is plenty of room for prices to drop. Right away as prices fall and demand plummets, speculative land bankers take a huge hit, labour costs plummet and material costs plummet. Deflation means that the profit margins stay the same but those with huge leveraged home loans fall further behind, having already borrowed/spent dollars that are gaining, instead of losing, purchasing power.
More importantly, and also addressing your comments about some new world where dual income allows more expensive homes, there is a huge inventory of homes already built. The cost of construction is a sunk cost and is now seperate from the bottom in the market. There is no reason why home prices could not go below there repalcement cost as they have in almost all of North America. Baby Boomers are passing their peak earnings, they will start saving and rationing far faster than the generation behind them can ramp up spending. With more supply of homes (as they die, down size, sell second, third, forth properties, etc) and less demand lonf term prices have to fall regardless of what it costs to build a new home.
I am not anticipating a huge drop from where we are now, but saying that it is expensive to build/develop new homes is in no way an argument for buying a home in this market. There is simply very little potential upside and there is subtantial potential downside...
I am sure there are plenty of people in Japan who thought 20 years ago there was no way you could build an apartment for the cost they do today... they have simply rented from the bank for twice the cost that they could have rented from a desperate 'real estate investor'/Japanese baby boomer.
And the last few years in Vegas or Phoenix should tell anyone how much construction costs matter in terms of a bottom in housing prices....
Claeren.