Purchasing a pre-construction property can be anxiety-inducing, even under normal market conditions. Pepper in the challenges of COVID-19, and buyers have the potential to experience a whole new level of pressure as uncertainty looms.
And though that uncertainty has lessened in recent years, it is unfortunately still present for those considering purchasing a pre-construction property.
Adding Definition to Pre-Construction
Before we dig into the reason for the wrinkles, let’s get on the same page about what we mean with the phrase “pre-construction property” and some of the general triumphs and challenges associated with them before we add the complexity of COVID-19 into the fray.
Purchasing pre-construction is when an investor or private citizen(s) purchases a property before it is built based on the plans and promises made by the builder or developer. The builder or developer will often, but not always, enlist the help of a real estate salesperson to assist in the marketing of the units for purchase. Generally speaking, the units are in the form of townhouses, condominiums, or detached, single-family homes.
For a piece on pre-construction, it only makes sense that we would enlist the help of experts in pre-construction, so we turned to Toronto Realty Boutique to leverage their expertise. We asked Romey Halabi, Founder and Broker of Toronto Realty Boutique, about his thoughts on why people gravitate towards pre-construction.
“Buying pre-construction in Toronto is one of the best ways to enter the real estate market and begin to grow a long-standing wealth plan. Getting into pre-construction doesn’t have to be complicated, and working with a well-versed agent who can help you navigate the process while examining the numbers will put buyers in a good position from the get-go.
Pre-construction is a natural first step for any investor, as the deposit structures are typically spread out over a number of years and months. This allows payments to be planned out and saved for over time, versus paying 20% on a typical resale purchase.
The numbers in the Toronto condo segment prove that it is one of the best and safest investments anyone can make in real estate, and with the future projected population and immigration growth, demand for this type of real estate property will only increase.”
Taxes and Schedules
The three (okay, let’s say two and a half) major disincentives of purchasing pre-construction properties are as follows:
The process of pre-construction can feel one-sided for some. In terms of deposits, you’re providing sizable ones to the builder in regular and unmovable timeframes. Since builders and their agents are extremely transparent about this, it’s hard to fault the process. However, the feelings of one-sidedness come into play when the buyer needs to make timely deposit payments and the builder, seemingly not held to the same standard, is experiencing delay on top of delay. It is for this reason that we recommend that you work with a reputable REALTOR® for the purpose of this transaction. And know that this reputable REALTOR® may or may not be the same one working on behalf of the builder. That is a decision you have the freedom to make as a consumer.
The second oft-spoken criticism of pre-construction (or “new builds” as they’re also sometimes referred to) is that, unlike residential resale, in Ontario, they are subject to Harmonized Sales Tax (HST). There’s no beating around the bush here; paying 13 percent on hundreds of thousands of dollars is a tough pill to swallow. Albert Camus would agree with this sentiment as he is famously quoted as saying, “…it is no more immoral to directly rob citizens than to slip indirect taxes into the price of goods that they cannot do without.”
Perhaps developers of late have been channelling Camus as the vast majority of pre-construction have the HST included in the purchase price from the developer. Although paying tax is not fun for anyone, it’s an easier pill to swallow knowing that in many cases, it’s not the purchase price plus HST and you’re just paying for the proverbial “ticket price.”
The last disincentive is the half disincentive. It’s half because it only applies to part of pre-construction property purchases, and that is a lack of autonomy. We note that it only applies to half because a pre-construction purchaser of a detached home has significantly more freedom of choice than an individual purchasing in a townhouse complex or a condominium.
While those negatives of pre-construction may seem insurmountable, keep reading! We believe depending on the client profile, the positives far outweigh the drawbacks of buying prebuilds.
Pursuing the Positives of Pre-Construction
First, if you’re a first-time homeowner, it’s often a bite-size way to get into the market. If you have the flexibility of dealing with a builder’s schedule, the staggered deposit methodology may prove to be the payment plan you provide stepping stones instead of one big leap into your first home purchase. This also means, proportionally speaking, the financial burden of the actual home purchase is lessened at the time of closing as compared to that involved with a pre-loved home (otherwise known as a residential resale).
Another way that pre-construction may feel more manageable to the first-time home buyer is that there is very little chance that you’re inheriting someone else’s lemon. Since everything from the construction material to the mechanicals to the appliances to the light fixtures is virtually brand new, the anxious new homeowner can breathe a sigh of relief, knowing they’re not looking down the barrel of a costly furnace or roof replacement in the very near future.
Further reassurance that first-time buyers have when purchasing a pre-construction property comes in the form of the Tarion Warranty. We couldn’t do a better job of summarizing the Tarion Warranty than they do, so here is an excerpt from the organization’s website, “By law, all new homes built in Ontario are provided with a warranty by the builder, this law is called the Ontario New Home Warranties Act & Regulations. Tarion’s role is to ensure that purchasers of new homes receive the coverage they are entitled to under their builder’s warranty. For more information on the act, visit the Ontario New Home Warranties Plan Act Webpage.”
COVID-19’s Impact on Pre-Construction
Like the proverbial wrench in the gears, the global pandemic caused a great deal of disruption to many aspects of our daily lives, both locally and globally. Perhaps this was felt most significantly in the construction sector.
National lockdowns hindered industry because they slowed or even completely blocked the movement of raw materials and manufacturing critical for new home construction. For supply chains overall, the epidemic hasn’t necessarily brought forth any new challenges. It revealed previously hidden deficits in several areas impacting construction, such as skilled labour shortages and significant part shortages due to manufacturing closures. The outcome of which is pent-up demand and increased costs due to scarcity.
Another issue stemming from the global pandemic is inflation. Be you an investor or a family, no borrower is immune to interest. The cost of borrowing increased as a result of eight interest rate hikes in close succession.
We leaned on Romey Halabi, of Toronto Realty Boutique, for his insights into the unique impact that these increases to the interest rates had on the pre-construction development process:
“During the global pandemic, we saw a massive drop in interest rates to aid in stimulating the economy. This tactic by the Bank of Canada almost worked too well. We saw bidding wars, inflated pricing in all Toronto market segments, and a general feeding frenzy within real estate.
Those looking at the increase in rates right now should know that this is short-term pain in a long-term strategy within the market. We saw eight interest rate hikes in a row, but most recently, we saw a hike of .25% on June 7th. This means the Bank of Canada has confidence in what they are doing and they are keeping things in check before the market frenzy begins again. This most recent hike isn’t a cause for alarm – slight fluctuations are something we should be prepared for over the next several months. We’re seeing normalized pricing within the resale markets, and pre-construction condo sales are taking off once again.
Interest rates will not have any impact on the population growth and immigration numbers that are headed to Canada. And this means that demand for condo suites, which are the main entry point for rentals, will see demand unlike anything the city has ever seen, making pre-construction buying a top strategy for building wealth within real estate in Toronto.
It’s not a bad news story, though. The pandemic also forced supply chains to develop new agility to carry forward, resulting in a high-performing supply chain that is now perceived as a competitive imperative. Renewed government focus and subsequent investment in training skilled trades will help, although notably, it’s a long-term remedy.”
As the adage goes, hope is not a strategy. Although COVID-19 has thrown the pre-construction industry a curve ball, it appears to be the living embodiment of a prolific notion coming out of the pandemic: the need to pivot.