Developers paying more for land and materials
Derrick Penner
Sun
Vancouver‘s soaring new home prices are being mainly driven by escalating construction costs, a factor that is increasing the risks that developers assume, a real estate market research firm says.
Jennifer Podmore, managing partner of MPC Intelligence, said consumers should realize the prices developers charge closely relate to what it costs to build them, rather than market demand.
“It means if they’re paying more for land and more for construction, their return margins are the only thing [that can] shrink,” Podmore said.
“They’re still making a healthy profit, it’s still worth it for them to build,” she added, but developers will start to take more time before deciding to buy land and nail down construction costs before starting new projects.
Podmore said the quantity-survey firm BTY Group estimated that overall construction costs increased eight per cent in 2005 in the Lower Mainland.
However, some individual components of that figure increased by much more. Podmore said window and curtain-wall construction costs increased 10 per cent and the prices for concrete form work escalated a whopping 35 per cent.
Michael Audain, chairman of Polygon Homes Ltd., said his firm has shaved points off its profit margin to accommodate increasing costs, though he wouldn’t reveal what Polygon “considers an acceptable margin” to be.
Audain added that Polygon has also lost out on bids for development sites because its equation for construction costs, plus land costs, plus profit margin equalled a selling price that was too high.
“I’ve never known a time since I’ve been in business when it has been so difficult to forecast what your costs are likely to be six-12 months out,” Audain said.
Audain added that with crude oil hitting prices over $70 US a barrel, which will increase the prices of petroleum-derived materials and transportation costs, he doesn’t believe estimating costs will get any easier anytime soon.
Bosa Development Corp. is currently building only one development in Vancouver, but Eric Martin, the company’s vice-president, development, said he is not unfamiliar with the cost and price squeeze.
“Prices are plateauing, [but] costs keep going up and margins are shrinking,” Martin said. “That’s exactly what’s happening. It’s very similar to other markets we’re working in.”
Martin added that the situation is also similar to the early 1990s. In the late 1990s, Martin said Bosa stopped building in the Vancouver market for three years because costs would have exceeded profit.
Hani Lammam, vice-president for Cressey Development Corp., said his firm has seen even more dramatic increases in costs, such as an almost 50-per-cent rise in concrete form work in the last 12 months.
However, Lammam also believes the steepest of increases could be behind the development sector as construction prices, particularly labour, have caught up with the market.
“Construction trades went through a very long period of lean times [when] they were just paying the bills,” Lammam said. “Now they’re making some money.”
Lammam added that Cressey hasn’t reduced its profit margin on any projects because the market has been strong and it locks in its costs before going to the market. The company would not proceed with a project, he said, if it couldn’t achieve its margin.
Lammam doesn’t believe prices can go much higher either because “we are reaching the limits of affordability.”
Audain added that the lack of affordable housing for younger and first-time buyers could limit the region’s economic growth potential.
© The Vancouver Sun 2006