Quote:
Originally Posted by Claeren
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.
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When you say new homes can come down to $260,000 what types of new homes are you referring to?
You need to be more specific.
In 2008 a new home builder was selling a detached single family home with no garage on a small lot for $270,000.
Now that home is being Marketed for $340,000 (built new) - which I believe overshoots the real value of that home.
The reason for such a low price in 2008 was because of the widespread panic in the economy coupled with the fact that it was a newer phase and the developer gave a significant discount to the builder to get through their lot inventory.
I am not disputing that $340,000 could go down to $280,000 or $290,000.
But if you think a new built - in a nice part of the city that has a front attached garage and is a two-story building - will go down to $260,000......well I just dont agree with you.
But I appreciate your comments on this thread. It is good to have healthy discussion. I am not personally threatened by negative comments about the housing market and I am not working a war-room or running a progaganda printing press!