Are Construction Costs Killing Real Estate ?

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate

[00:00:06] the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] Welcome back to the podcast which has been described as our listeners as amusing and insightful

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[00:00:59] You are welcome.

[00:01:00] And thank you for the support.

[00:01:02] My name is Daniel Foch.

[00:01:04] And I'm Nick Hill and we are both real estate investors, professionals and lucky enough to be

[00:01:11] the host of Canada's number one real estate podcast.

[00:01:15] And today we are talking about construction costs.

[00:01:21] In today's environment there are numerous obstacles to commercial real estate development

[00:01:27] opportunities and within commercial real estate I'm talking multi-family and larger multi-family

[00:01:32] as well.

[00:01:34] These obstacles include escalated borrowing rates, stricter banking regulations, increasing

[00:01:39] insurance costs, geopolitical risks, different policy changes just to name a few.

[00:01:47] And additionally a significant constraint to development is the rising cost of construction

[00:01:54] and construction materials.

[00:01:56] This upward trend of construction spending can be attributed to various factors you've

[00:02:01] probably heard us mention some of them on the show before.

[00:02:04] The production labor expenses, higher insurance material costs and even the ridiculous expenses

[00:02:12] associated with getting a permit.

[00:02:15] Now is the cost of construction continues to rise.

[00:02:18] Developers are faced with the challenge of delivering high quality buildings on schedule

[00:02:24] and within budget.

[00:02:26] Now to preface let's just remember a couple of things.

[00:02:30] So number one we have a massive housing shortage by millions of units and projected to

[00:02:34] be up to 4 million units by 2030 according to CMHC which is Canada's housing ministry.

[00:02:39] We have a massive skilled trade shortage example only 455 skilled trades came out of the

[00:02:47] 500,000 new immigrants last year so we talked about zero point zero one percent or less

[00:02:52] was that I mean zero point zero three but yeah it was not good.

[00:02:55] And then I think 3% of temporary foreign workers work in construction whereas 8% of the

[00:03:01] general population works in construction so obviously a mismatch there as well.

[00:03:05] And deals aren't penciling out due to construction materials like material costs are way up.

[00:03:10] So on the purchase side developers can't build new units because there's not people lining

[00:03:15] up to buy them and on the rental side and a lot of those projects can't just switch to

[00:03:19] rental because they don't rent for high enough to substantiate the per square foot construction

[00:03:23] costs. Remember urbanation came out with that report that said 50% of condo owners were losing

[00:03:28] money on those deals so when they were buying those units and so in the absence of all of those

[00:03:35] condo owners lining up to be cash flow negative in hopes of getting capital appreciation where do we

[00:03:41] go from here. Great question. Well we don't know but we are here to talk about it and explore as

[00:03:49] we always are. Now it's obviously worse in some areas of the country than others but construction

[00:03:57] costs have risen dramatically in Toronto over the past couple years and we're going to look at a new

[00:04:04] global ranking that shows just how bad it's gotten here. Yeah so this is a service that this

[00:04:10] price comparison service from fellow Commonwealth housing crisis country that might have an understanding

[00:04:16] of this kind of thing called compare the market in Australia and they use data from construction

[00:04:22] tenders to calculate the cost of building materials in various global cities and found that cost

[00:04:27] in Toronto spiked 40% between January 2020 and August 2023. pH floor on Twitter who does the show.

[00:04:35] Great friend of the show helps us a lot with the newsletter and charts and stuff like that.

[00:04:38] Yeah we're going to be revamping the newsletter a little bit by the way and making it very

[00:04:42] show focused lots of charts so we'll probably post actually everything I'm going to mention today

[00:04:47] on today's show will post will get you a visual so make sure you subscribe to the newsletter

[00:04:51] which is linked in the bio but not the bio what do we call it. Show no it's time like I wait

[00:04:56] and the 2015 Instagrammer over here Lincoln bio yeah so you know he used stack-and-data to show

[00:05:04] that construction costs are up like 71% since 2015 feel like like 2015 to 2017 it was like 11%

[00:05:09] and then from there like literally after 2017 just skyrocket so anyway it's insane to see like

[00:05:17] how does anything work if it's gone up for I mean if you're looking at hey like return on investment

[00:05:22] 40% in three years well now we're talking if you're looking at cost of goods cost of a commodity

[00:05:29] and like absolutely necessary to combat the housing crisis costs have gone up 40% in three years

[00:05:36] and then you know possibly up 70% in the last years. What do we do right it's ridiculous so

[00:05:43] back to let's let's look at this because this this is an illustration of how ridiculous

[00:05:47] things have gotten here Toronto ranked second in a study of 25 cities only losing to Prague in the

[00:05:56] Czech Republic where costs are up 49.3% so basically up 50% Singapore ranked in third where building

[00:06:05] costs were up almost 33% and let's remember that Singapore is one of the most expensive place to live

[00:06:12] in the world so let's look at these top cities for construction cost and you want to go one for

[00:06:18] one here yeah let's do it so number one Prague Czech Republic I guess it says Czechia here I don't

[00:06:24] know if the republic is an outdated terminology I don't know it makes dating myself I just think

[00:06:29] hockey right because like yeah well if we have I know we have a couple of years from from Czech

[00:06:35] Czechia so correct us if we are wrong there. Construction costs from pre-pandemic to present day

[00:06:41] is up almost 50% 49.3% Toronto we just said 40.5% increase in construction costs from 2020 to 2023

[00:06:52] Singapore 32.8% increase since the beginning of 2020 since pre-pandemic.

[00:07:00] Auckland New Zealand which we did a full episode on which actually had a similar housing crisis

[00:07:05] and really did a different strategy through the pandemic than we did and if you want to

[00:07:11] camera what episode that was but we had Graham Graham on who provided some great insight actually

[00:07:16] from New Zealand developer van koever now so some really cool stuff there but Auckland New Zealand

[00:07:21] construction costs drastically as well over 30% and then just behind that back to Canada

[00:07:27] Calgary up 28.5% and you know Calgary is often set aside in the context of the housing crisis

[00:07:35] discussion or was until probably this year last year as being capable of building up with their

[00:07:40] demand being capable of building really well they're only ones they could for a short period of time

[00:07:45] yeah and being able to keep construction costs down as a result of not being oversubscribed and now

[00:07:50] this has obviously changed quite a bit because everyone ironically flocked there because of

[00:07:54] housing affordability and now it's just ruined you're hearing about people being like oh yeah

[00:07:59] it's actually not that affordable in Calgary like maybe just move back which is I mean just ironic

[00:08:04] purely ironic yeah horribly ironic actually and then from Calgary you don't hear that you don't

[00:08:08] hear Calgary and New York mentioned in the same sentence often but hey they said a bunch of people

[00:08:12] are like oh yeah Calgary the New York of Canada said by no one ever so New York is next on

[00:08:19] the list at 26% followed by Washington at 20 just under 25% Phoenix 23% LA 23% and then all the way

[00:08:30] back over to New Zealand 22% so outside of Chekia and Singapore it's basically Canada the USA

[00:08:39] and New Zealand that are having the biggest issues with construction costs just skyrocketing

[00:08:46] yeah so the writer of this report compared the market report James McKay attributes surging

[00:08:52] construction costs to supply chain challenges hatched during the COVID-19 pandemic which is why

[00:08:57] they're using 2020 as a baseline and I think a lot of these indexes kind of use like I use

[00:09:03] I published it today the SRA office occupancy index in Toronto they use same thing pre-pendemic

[00:09:11] baseline so 2019 is your 100% what's the percentage of that for sure it makes sense that was a

[00:09:17] one yes there's something happened in history at that point in time where you can say before and

[00:09:22] after right yeah so you know he states that these challenges these affordability challenges and

[00:09:28] the supply chain disruptions pose a huge barrier to getting new construction projects including

[00:09:32] and especially housing projects in Canada off of the ground in cities across the world

[00:09:38] yeah now let's look at what James McKay again the writer of this study said specifically about Toronto

[00:09:46] he said that the building costs in the city have been steadily increasing since 2018

[00:09:51] the rise of such costs is linked directly to borrowing costs and labor shortages yeah so he

[00:09:59] in quotes construction costs sort of construction issues in Toronto from 2020 to 2023

[00:10:05] may also relate to how bidding works for construction projects Toronto doesn't allow open bidding to

[00:10:10] all constructors and only to a select few meaning construction prices remain high McKay ads

[00:10:16] it's just funny because you know we're known for comparative to Australia we're known for a closed

[00:10:21] bidding on real estate and they're known for open bidding on real estate so that's it's just a

[00:10:26] fascinating economy because Australia is more warm Canada right yeah like warm funnier Canada I guess

[00:10:32] yeah with I guess a much more dangerous wildlife yeah yeah we don't have spiders that they can kill

[00:10:39] the geese here are being but geese yeah so Calgary was the only other Canadian city to make

[00:10:47] the rankings rankings that we don't necessarily want to be on and again construction costs in

[00:10:53] that city are up to almost 30% yeah so although Toronto and Calgary were the ones featured in this

[00:11:01] ranking the rising cost of raw materials labor etc all of the things I mean like there's no like

[00:11:08] there's nothing that isn't inflationary and in the if you're to take the cake of building a house

[00:11:12] it's like none of the ingredients have gotten less expensive and and we'll get to why because it

[00:11:17] becomes quite clear but yeah right it's just inflation built up on inflation you know to inflation

[00:11:23] page to inflation yeah I mean and these are things that really do benefit or not benefit but they're

[00:11:28] very impacted by inflation this is why we talked about this in the inflation hedge episode but

[00:11:34] you know people consider real estate inflation hedge because everything that goes into making a

[00:11:38] property a house is inflate is super inflationary and so if you get it at today's value then

[00:11:44] you can later sell the house when all of those inflation is taken place and you can benefit from

[00:11:49] that inflation because you you've locked in today's value and so anyway they the article goes on

[00:11:55] to say that it's obviously a can of wide concern and they quote a couple of Canadian economists

[00:12:00] who present similar data as to why this is taking place yeah so we've got RBC's assistant chief

[00:12:06] economist Robert Hogue who we've quoted a few times in the last 160 plus episodes and he was

[00:12:14] assisted by economist Rachel Bataglia and they explained in their report from this past summer that

[00:12:22] Canada's residential construction price index has climbed 51% overall since the start of the first

[00:12:28] quarter in 2020 and they note that the index has been driven up by in quotes dramatic jumps

[00:12:36] in prices of concrete structural steel that are up 55 and 53% respectively since Q1 of 2020

[00:12:45] and the soaring prices of lumber in 2021 and in 2020 you remember those good old days day and it was

[00:12:52] like two by fours and toilet paper baby that was like that was like gold back then I remember contractors

[00:12:58] literally buying lumber like to stock up because they thought that the prices were going to keep running

[00:13:04] up and actually when that took place it was pretty much the top for lumber at this point you're not

[00:13:09] a commodity straighter yeah like chill like I was doing a basement renovation at that point and obviously

[00:13:14] I needed studs yeah and there my contractor literally he was able to pull a favor and drive somewhere

[00:13:20] deep into Quebec to to get some from like a rona or home deeper something there but like he was telling

[00:13:26] me that they were actually asking and like checking drivers license and like checking who was one

[00:13:32] pack one two by four per house literally they were like literally looking at who was buying the

[00:13:36] stuff and where it was going because they didn't want people driving different places and taking

[00:13:40] their lumber and then taking it back to another you know town or city and building there so I mean

[00:13:45] it got crazy it was just here yeah that was definitely an interesting time the the surge in raw

[00:13:52] material prices the article goes on to say together with ballooning population is also accelerated

[00:13:57] increases in the development fees and levies imposed by municipal government so governments also

[00:14:02] want to be a beneficiary of this inflation and so they you know they realize that the market's still

[00:14:06] willing to pay and so they've just put their hand out say hey man I have some of that more of a

[00:14:11] fist it seems than a hand yeah you don't have a truly sear again yeah they say these fees have

[00:14:16] surged as much as 30% annually I think Toronto's went up like was it 54% and then like just before

[00:14:21] that it was up like 101% I mean DC's are like the big question marking Canada right now from my

[00:14:27] perspective because they talk recently whenever the other government I think is really communicated

[00:14:31] and this is actually one of my forecast and I'm writing this into the course right now because I'm

[00:14:34] literally writing the location the the location slides for the course and it's like okay Canada's

[00:14:41] right now like the primary investment thesis in Canadian real estate is we're in a housing crisis

[00:14:46] okay so we're in a housing crisis what do we need to do that we need to be in the business of

[00:14:50] creating housing to maximize value how do you know if you're a business you're in any other

[00:14:56] business let's say you're not creating housing let's say you're creating toys for kids right you

[00:15:00] want to go to a place that's going to allow you to create toys for kids right so and you know

[00:15:04] any other municipality that's maybe not going to want a plastic factory in their town you're not

[00:15:07] going to go there right so municipalities have this really unique opportunity where if your

[00:15:14] Toronto as an example and you're just increasing development charges by 101% or 54%

[00:15:20] and there's somewhere else in the GTA that's you know like it's obviously not going to you

[00:15:25] know missus auger is not going to be Toronto right but it's it could be missus auger and have slightly

[00:15:30] cheaper development charges you know and you're starting to see this would like Vaughan as an example

[00:15:34] where like Vaughan we saw this big acceleration and in per square foot costs in Vaughan because they

[00:15:39] were crushing high rise like and all of those buildings in the new Vaughan Metropolitan Center look

[00:15:43] unreal yeah not like developers are incentivized to build there because they like they can design what

[00:15:47] they want they don't have a like crazy to like the downtown design review committees in the city of Toronto

[00:15:52] so anyway go ahead and then I want because I was crazy to think that developers are building where

[00:15:59] there's incentives yeah what a thought yeah yeah well and this is the thing it's so I think

[00:16:04] that municipalities really have a unique opportunity where things are not penciling from an MLA

[00:16:09] perspective right now and like from from C and HC but if the odd municipality is they don't even

[00:16:14] have to remove the DCs they can defer them and add them to the cost structure over time right it's

[00:16:19] like okay you can pay them out over 20 years and now that build is built into the cash flow

[00:16:23] structure and all of a sudden the project becomes viable for the developer and I think whatever

[00:16:28] municipalities start doing that are going to be the ones that that builders are going to flock to

[00:16:33] and those they're going to be able to grow as a result of this and that increases their tax base

[00:16:38] which increases what they're able to do from commercial retail services perspective it's just good

[00:16:43] overall yeah yeah that's just economic yeah one oh one yeah and so I think in the short term like

[00:16:49] it's easy to be like okay in the short term you know this town is not allowing any housing so if I

[00:16:55] can build a house there it's gonna be scarce and so it'll go up in value and probably in the

[00:16:59] short term you're not wrong because you'll own a scarce asset but in the in the long term that

[00:17:03] municipality will likely not benefit from having too much scarcity it will atrophy right it won't

[00:17:08] grow so they the areas that are really really really adopting this policy and pushing it and I would

[00:17:13] focus your attention on these because there's some really interesting charts I'll we'll bring them up

[00:17:17] on another episode but I've been like pulling out doing a lot of research on this like fastest

[00:17:21] building permits in Canada which we've been through I think Edmonton's the fastest from building

[00:17:26] development etc anyway I think that there's a case to be made for investing your energy in the

[00:17:32] place it's going to allow you to create and deliver value as quickly as possible which is take a

[00:17:37] piece of land and convert it to a house the faster you can do that cycle the more the more

[00:17:44] torque let's call it you're gonna get which is the word chuckloafs to use yeah on on your like

[00:17:48] you know the more the more you're able to realize your investment like that's couldn't agree more

[00:17:52] and and like here quick example we're already seeing it with a place like Windsor for instance right

[00:17:58] which which doesn't have development charges and we've seen a ton of investors flock there yeah I mean

[00:18:05] why wouldn't you there's an extra 20 30 percent on the table to be realized right I mean it just

[00:18:10] makes complete sense yeah and when you're dealing with like a decentralized workplace and

[00:18:13] and a competition for talent like businesses will relocate to places where they can if people can

[00:18:19] afford to live somewhere they don't have to charge as high to sell their labor right and so Windsor

[00:18:24] all of a sudden becomes a compelling place for businesses to move because there's a cheaper labor pool

[00:18:27] and like the way that urban economics works it's it's like not really not that complicated you just

[00:18:31] have to think about like the second order of facts no what you got to do is you got to go watch

[00:18:36] raid all those how the machine works under to spend 35 minutes doing it will be the best 35 minutes

[00:18:41] you spend this week I guarantee it other than of course listen to this podcast at least twice

[00:18:46] so going forward uh the expectation unfortunately is that a lot of these costs the labor cost

[00:18:53] the construction materials etc will escalate further as the country ramps up to uh ramps up their

[00:19:00] home building to meet the updated supply targets again remembering what you said at the top of the

[00:19:05] showdown we need between 3.5 million mill four million homes on top of what we're already building by

[00:19:12] 2030 according to CMHC so more housing starts required to deliver a badly needed expansion and housing

[00:19:19] but there will be a boost for demand for materials which will put upward pressure on costs once again

[00:19:25] this is the report I'm referencing by um by the RBC economist continue to focus on higher

[00:19:31] density development in very tall structures for example we'll push demand up for cement

[00:19:35] potentially straining production capacity limits and well the launch of the express entry

[00:19:43] process for skilled trade newcomers could help grow the construction labor force and bring down

[00:19:48] the cost of hiring hog and battalia caution that it remains to be seen if this program or other

[00:19:56] provincial programs designed to entice people to come in and work in the construction work in the

[00:20:02] trades will that curb costs or have a meaningful effect on that issue in any way so Dan tell me a

[00:20:11] bit more about this express entry system yeah so this is what we're referring to when we're talking

[00:20:18] about the 455 so only 455 people went through the skilled trades express entry system although I

[00:20:23] think they just issued a handful new permits the the government did in this process but anyway

[00:20:30] the government of Canada has introduced a new category based selection process for its express

[00:20:35] entry immigration system it prioritizes immigrants with training in in demand vocations

[00:20:40] the preferred applicants include skilled trades people such as carpenters plumbers electricians

[00:20:44] well there's contractors and residential and commercial installers previously express entry was

[00:20:49] used for individuals applying for permanent immigration through the federal skilled worker program

[00:20:54] the federal skilled trades program in the Canadian Canadian experience class however in June 2022

[00:21:00] the federal government amended the immigration refugee protection act to allow immigrants to be

[00:21:06] selected based on attributes that align with economic priorities so I mean pretty much what we've

[00:21:12] been talking about on the show and what a lot of people and this is where I think a lot of people

[00:21:16] talk about they're being a bit of a risk for now all of a sudden you're approving all these units

[00:21:20] you have hundreds of thousands of units getting approved because the federal government's going

[00:21:24] around and asking municipalities to up zone now you've just basically moved the bottleneck from

[00:21:29] planning to construction because now you've got if you're if you're a construction company

[00:21:34] and all of a sudden you're the number of people asking you to build their high rise building went

[00:21:39] from 100,000 units to 200,000 units now all of a sudden you can charge a lot more because you've got

[00:21:43] to line up out the door and so and that's that's great in theory but if you need you know 50 people

[00:21:50] or 150 people to build those 100,000 units and you've only got 45 and half of them are retiring

[00:21:57] soon and you've you know your your ability to build or the request to build the need to build just

[00:22:03] doubled well that's great from one sense but how the hell do you fill that yeah I don't think you

[00:22:08] do so yes so it says the the chosen I guess this is this is how this is the answer to the question

[00:22:13] well I mean I sure hope so yeah the chosen categories were determined through extensive

[00:22:16] consultations with provincial and territorial partners stakeholders and the public as well as a review

[00:22:21] of labor market needs perhaps a little too late yeah that seems to be a bit of a theme here so let's hope

[00:22:27] we see some action on that side of things there's a massive potential for trades here we've said

[00:22:33] it so many times there's also a ton of money to be made in the trades and you know we've we've

[00:22:38] mentioned that report from our BC a few times I wanted to pull it up and and kind of go through it

[00:22:42] a bit more exhaustively good look at the highlights and and kind of summarize some of the stuff

[00:22:46] that they have in here because it's a really great report so I'll start us off with the with the

[00:22:51] summary here Canada's residential construction price index sword 51% since the start of the pandemic

[00:22:58] putting you know way more pressure on the affordability crisis a shortage of workers particularly

[00:23:05] in the skilled trades right so these aren't just construction laborers these are you know red seal

[00:23:10] plumbers concrete guys like the the people that have the skills here there we just simply don't

[00:23:17] have enough of them tie that with a supply chain issues with raw materials and we've exacerbated

[00:23:24] that problem development charges of also spite the alongside higher material costs and increases

[00:23:29] in population growth more housing housing starts a required to deliver a badly needed expansion but

[00:23:36] these will boost demand for materials which puts upward pressure once again so the bottom line is

[00:23:42] longer range problems would continue to challenge the efforts to expand Canada's housing stock

[00:23:46] amid construction supply constraints governments will need to keep policy in line with the broader

[00:23:52] goal of improving housing affordability now then this next piece I'd love you for you to go through

[00:23:57] it because it touched on construction for you to go through it okay let's not get it carried away

[00:24:01] here I just say I love you too man not on the show yeah come on so this this piece here touches

[00:24:08] on construction costs and the relationship with CPI so walk us through this so construction costs

[00:24:15] have gone through the roof is what it says it's a pretty simple heading it says the cost of building

[00:24:19] in Canada has reached record highs since the start of the pandemic it's a big question from my

[00:24:23] perspective whether or not we're going to see this come down as we start to see like unemployment

[00:24:26] ramp up we're hearing about project cancellations I was I was actually at my daughter's birthday party

[00:24:32] over the weekend and two guys in the in the construction space like nobody's building anymore

[00:24:36] might be might have our days reduced to from five to four days a week yeah so and site supers saying

[00:24:42] you know like this is the stuff we're hearing now in the midst of like we need way more housing we need

[00:24:47] millions but if you can't make the numbers work like what nobody's doing this for charity right

[00:24:51] like the governments aren't even doing it for charity everyone's like oh the government should

[00:24:55] be building housing it's like okay cool like they aren't though so you know and they only will do

[00:24:59] it by making money because they make more money off of a house than anyone else does already yeah

[00:25:03] and the builders you know it's like it's so funny right Jordan's Grinco is like really like he's

[00:25:08] one of my favorite commentators on the industry that someone's like oh like realtors are so greedy

[00:25:12] like they are only in it for the money it's like well like as opposed to everyone else and the world

[00:25:17] who does their job for free yeah my account is like I'm greedy doll stacks really does he just love

[00:25:22] so much you dollars for every year for me for free yeah it's like all like these developers are so

[00:25:26] greedy like they just they just did it for the money it's like yeah the really greedy other

[00:25:30] 11% yeah yeah yeah it's okay well yeah like I mean we could create an alternative financial system

[00:25:35] where they're not incentivized by money which is true like you could do like you want to you want

[00:25:39] to go about that one giver but I'm gonna stay in this one where that we have to incentivize these

[00:25:45] people to be greedy to do their job for money and is it is it really consider greedy to take a ton of

[00:25:52] risk to solve a problem and expect a marginal return of between eight and 12% on it yeah and then

[00:25:59] everyone's in a while like that literally lose money like if people saw the actual razor thin margins

[00:26:04] on building and then like the amount of capital risk like these like you think when a project gets

[00:26:08] canceled like somebody's losing money millions right yeah yeah so anyway be nice to your developer

[00:26:15] your friendly neighbor a developer so I'm calling them greedy so they they they show a chart here on

[00:26:23] the on the S.R.B.C. report which is basically residential construction price index so CPI basically

[00:26:29] are inflation for the building of a house which increased by 51% in the time frame which was

[00:26:35] 2018 to present day so 151 if you're indexing it to 100 whereas in the in the same period of time

[00:26:43] from that from 2018 to present day CPI has risen 13% and so these like key building materials like

[00:26:53] you were mentioning in the in the summary there structural steel concrete etc and a lot of

[00:26:58] this is because they're over subscribed like there's too many people wanting them so imagine if we

[00:27:02] increase that demand you know demand more but have gone up like 50 over 50% in since since Q2 or

[00:27:09] since sorry since 2022 lumber prices we discussed it we know about this you wanted to build a deck

[00:27:15] or even a little Pinterest flower box you were feeling that inflation for sure I mean garden beds

[00:27:21] a lot of people were doing garden beds everyone's garden in making sourdough bread yeah yeah so

[00:27:28] population growth they call out here which is like that one's really under siege right now I would

[00:27:33] say by a lot of the economists and I think well the government just did some stuff about it we're

[00:27:37] gonna talk about it in the context of student rentals I think in an upcoming episode because that's

[00:27:41] really really a shake up in the student rental investing space and there's really no idea

[00:27:47] of an outcome yet I mean at least student rental investors have until probably this time next year

[00:27:51] to or until next September or summer I guess when everything's supposed to be releasing but

[00:27:57] just quick summary they capped the number of international students and then the province

[00:28:02] so the province of Ontario where the housing majority and well 51% of international students are

[00:28:08] in Ontario but the system is the most broken I would say and oversubscribed they Ontario made it

[00:28:19] so now the colleges have to provide housing for international students so I promptly sent an

[00:28:26] email to every CEO of every college in Ontario which if you are CEO of a college in Ontario send me

[00:28:30] a message back email me respond to my email please and I will help you buy all of those student

[00:28:35] rentals in your town that's probably the only way out for these anyway it's another episode

[00:28:40] we'll say if I get too excited yeah anyway so look construction costs went up way higher than

[00:28:45] right then cost of everything else that's the that's the long and short of it here so what's

[00:28:49] talk about yeah which is what we do here in Canada we talk about the weather yeah

[00:28:54] because it's Saturday it's sunny today fine first time this year finally yeah this must be

[00:28:59] part of that 30 hours we've gotten of sunlight so far this we're gonna bring it more sun today

[00:29:03] yeah seriously I was like just out for a walk but you got to be careful with that some because

[00:29:07] with sun comes extreme weather conditions in some case and those extreme weather conditions can

[00:29:14] lead to shutdowns which have impacted raw material supply so huge there was a huge surge in the

[00:29:20] development industry due to the low rates and the combination of low rates and population growth over

[00:29:26] the past few years that was then exacerbated by the pandemic and the desire for developers citizen

[00:29:35] developers real estate investors and just your average citizen to invest and or speculate on real estate

[00:29:42] however despite the high demand for raw materials production of critical goods declined

[00:29:48] between 2020 and 2023 so in that same period where the price of those commodities were skyrocketing

[00:29:55] they the production was actually going down so lumber production fell by 11% and lime no not the ones

[00:30:03] you cut up and put in a corona lime production a key input for cement dropped by 20%

[00:30:10] the decrease in lumber supply was due to environmental challenges like heavy rain flooding wildfires

[00:30:16] Dan you remember the crazy wildfires we had in the past few years that were like

[00:30:21] burning you know half of north or in Canada well that put a temporary shutdown on a lot of

[00:30:28] lumber plants and a lot of cement plants in in you know three major markets Ontario BC and

[00:30:35] Alberta they are all affected and their cement production went way down yeah and I think when

[00:30:40] you look at basically the two most major components of construction in Canada they wild yes

[00:30:47] she removed wood and cement from the supply chain it's basically impossible to build that

[00:30:51] yeah i mean i don't think i don't know i mean maybe there's i mean even a three printing

[00:30:56] those sheds from Amazon and Walmart or whatever yeah yeah maybe ship your stacks and shipping

[00:31:02] painters i mean you could do steel i suppose but like you still need cladding and

[00:31:06] i'm not i don't need there's no point in even trying to innovate here because it's not like never

[00:31:10] gonna happen we just double your construction costs exactly so so either builds tick-frame or you

[00:31:15] build that a concrete and steel there is modular but obviously it makes up much smaller market share

[00:31:22] yeah exactly and besides these challenges the construction industry is also facing disruptions

[00:31:27] in production due to their higher costs such as fuel and transportation additionally strong

[00:31:33] demand and shortage of workers have created imbalances in the job market labor costs have surged

[00:31:39] as construction job vacancies rates exceed overall since at least q4 of 2020 construction

[00:31:47] job vacancies have been higher than overall rates resulting in a 9.4 increase 9.4 percent increase

[00:31:55] in wages within the sector that's nearly twice the pace of other industries so Dan we've got a great

[00:32:01] very complicated chart here see if you can explain this one please before we do that i have to let

[00:32:07] this laugh out because like next talking and the you see that meme where it's like like no way

[00:32:13] and then it's like my printer and then it's like ad i was just cuz you're you're looking me right now

[00:32:17] trying to know like you know i can't like foray i'm it's like you remember when you had a printer in

[00:32:21] your room when you're a kid it's like foray i'm like let me see you this song of my people

[00:32:25] are you seeing that meme anyway as we just did printer just did i've got a printer beside me here

[00:32:30] it's two different and mid mid like the two times different something a year i don't i've never

[00:32:36] seen this thing work or turn on or anything it just turned on and sort of beeping and spitting out

[00:32:40] paper so if you can hear that my apologies you know we're just we're just meaming over here

[00:32:43] Dan back to the chart please try to take this seriously yes so the chart i was trying to print this chart

[00:32:48] here to read it says construction wage growth sores over other industries annual change in wages

[00:32:54] in 2022 so the 20 like measured to 2022 percentages all other industries wage growth was 4.6 percent

[00:33:02] construction great great year for you if you're in construction you would have seen your wages go

[00:33:06] up 9.4 percent and that's based on statistics candidate rbc economic so obviously there's some

[00:33:13] challenges in keeping cost structure down and the reason the reason that all of these employees

[00:33:18] can charge more is because there's not enough of them right so the and there and something like 20

[00:33:24] percent was it 20 percent of the construction workforce is estimated to retire within the

[00:33:27] next one was even more crazy like crazy it might have been like 28 like close to 30 percent which makes

[00:33:32] a lot of sense i mean Dan you and i both spent time on construction sites i remember back in the

[00:33:37] day when i was a young fresh-faced project coordinator and my job was to coordinate trades on

[00:33:43] site and i think i say coordinate projects that's like very met at the complicated yeah coordinate

[00:33:48] the trades on site and you know this is 10 plus years ago and back then these guys were all

[00:33:53] you know the the red seal plumbers the red seal hvac guys the pipe fitters the these guys were all

[00:33:59] in there you know the younger ones would be older than us right now and the older ones were

[00:34:05] in their 60s and you know they can't retire because they're getting begged by whoever you know

[00:34:10] whatever company owner like you can't leave right i don't have anyone else or like you've got to

[00:34:15] train these like six young guys before you leave but then you know you're training these six young

[00:34:19] guys it takes a long time to become an expert in you know an expert plumber an expert like

[00:34:24] Trishon right it's years of earning your red seal getting your hours on that note we got to we

[00:34:30] got a response i didn't message this guy back on instagram but remember like i think we made a

[00:34:34] comment that you and i could like GCF 4plex i'm sorry for the contractors that we offended in

[00:34:39] that i i didn't say we could do a good job at it i said that we could do it we probably would not

[00:34:44] deliver it on budget or on time or on time or properly it wouldn't pass but anyway and

[00:34:49] and the and the point is they're called skilled trades for a reason right so yeah i didn't want to

[00:34:53] do if it was unskilled trades day and you and i would jump right in and somebody message just saying

[00:34:57] you guys could not do that and i was like you're absolutely cruel real estate and don't you dare

[00:35:01] swing a hammer yeah you could you heard so i agree thank you for pointing that out and and

[00:35:07] sorry for offending you they weren't actually offended but um nice to get put in a place on

[00:35:12] my own on that note like it's it's crazy from my perspective so the one of the the

[00:35:16] property managers that we know both know very well connected them with another friend of ours who's

[00:35:21] actually gonna eventually come on the show to talk about construction especially like small just

[00:35:25] small renovations and stuff like that this guy can quote anything like just you bring in there he

[00:35:30] pulls out a tape measure he knows the cost per square foot of everything parts and labor and just

[00:35:34] yeah you know if you ask like a math wizard like what's 17,421 divided by 56 and they like

[00:35:40] split a number you know you don't even know if that's right or not because you're like i need it

[00:35:43] because like as long as those numbers are measured like in dollar side if it's like square feet

[00:35:48] and dollar amount boom there you go yeah so but anyway so i so i connected them and they were

[00:35:53] trying to figure out on this call like what what would the labor cost of just like a handyman in

[00:35:57] Toronto go for it because they're bidding on a huge property management contract and it was like

[00:36:04] and i texted a buddy to just see if i get a ballpark number who's do it who manages one of the

[00:36:08] biggest i want to get him on the show too he manages the biggest deal that was done this at the end

[00:36:12] of last year he manages it and he text me back right away he's like 60 to 65 bucks an hour yeah yeah

[00:36:20] i know screw this pocket man i'm gonna tell these old abuse up in like me and cornwall whatever

[00:36:26] that they're in the wrong town there's got to find a house here but yeah so anyway as a result of

[00:36:32] these things because we tend to ramble reducing construction costs is obviously not easy and as a

[00:36:38] result reducing affordability or creating housing affordability is not easy so short-term solutions

[00:36:42] like reducing home building resolving production issues that cement plants may provide temporary

[00:36:46] relief and so rbc expects a 10% decline in housing starts which could i mean you'll see that

[00:36:53] reduced material demand as well as labor demand which we're just mentioning in early an

[00:36:57] episode some of these high-rise construction what did you call yourself a facilitator or something

[00:37:03] that project coordinated right right so yeah have some respect yeah i can only imagine what you're

[00:37:08] linked in profile pic looks like at that point just me with a hard hat and a bunch of documents

[00:37:13] and plans and a ruler and a tape measure and stuff the guys loved it yeah for sure actually here's

[00:37:18] a funny story remember i got by so i was working at synovia past year at the time as a

[00:37:24] it's a french i don't know if it's french container just a french company anyway they make

[00:37:30] they're they're in like big pharma they make vaccines and all that kind of stuff i was on the

[00:37:36] capital projects there which means i was in charge of you know we talk about capaxe and opaxe

[00:37:40] i was in charge of literally not in charge i was on the team managing larger projects there

[00:37:45] and i remember my my supervisor the project manager at the time we carpooled a couple days a week

[00:37:52] and i showed up with my my hard hat and i've been on construction site for years before

[00:37:57] let's have a back on the construction but fresh hard hats aren't received well on construction sites

[00:38:04] especially by the guys that are actually doing the work to skill trade so i went out the night

[00:38:09] and threw my hard hat on the ground scratched it up got some dirt into the scratches so it just looked

[00:38:17] like you would do that so it looked like around for a little bit like again this is make like 15

[00:38:22] years ago okay like early 20s you're being very vulnerable and admitting that i'm gonna get

[00:38:26] some serious there's might be some there's some hate mail coming for me um anyways the best part

[00:38:31] of the guy taking selfies over the construction site is the best part is i went in the next day

[00:38:38] and the guy was like we just gave you that hard hat what happened and i was like oh my god so

[00:38:43] which they call i i dropped it and then i got called out on site too and one of the other guys

[00:38:47] kind of found out what i did because i admitted to my supervisor anyways didn't go over well but

[00:38:53] the guys gave me a hard time and anyways we patched it up and and got got a bunch of great jobs

[00:38:57] done together but uh yeah there we go there's uh don't do that if you're if you're young and

[00:39:03] entering onto construction site because they can tell there you go expert advice from neck hell if

[00:39:07] you're a finance guy who wants to go take selfies on a construction site with your hard hat keep

[00:39:12] clean don't do that or don't do the ball wants to go buy some uh don't do that she uh work roots

[00:39:18] and i'll do that either yeah no so look i mean efforts have been made to address the work

[00:39:24] of shortages but their impact on construction cost remain uncertain development fees

[00:39:28] and levy should align with the goal of improving housing affordability well facilitating

[00:39:34] municipal growth now there's one last chart here i want you to go over day and then i want to

[00:39:40] run through a quick list of kind of some solutions and some ideas that we've that we've put together

[00:39:46] here sure am i describing this chart or are you of course you're describing the chart this is

[00:39:50] housing starts drop to lowest level since the pandemic so and this is again a function of what

[00:39:56] we just we've been hearing it's funny because you hear like someone one minute here housing starts

[00:40:00] drop one minute here housing starts to down so on a one year moving average like Toronto is up

[00:40:04] but on it like generally um housing starts are down in in Canada this q1 2023 data now so

[00:40:11] i think probably now since this has come out i think they're starting to normalize a little bit

[00:40:16] better because mly select is really incentivizing a lot of people to build but there's a period of

[00:40:20] time where the build for sale was just fully broken and people couldn't deliver in it so anyway uh

[00:40:25] you just see this line basically dropped to about the level that it was at the beginning of the

[00:40:29] pandemic i'd say 2020 and so this is obviously a challenge right but the other challenge and

[00:40:35] they mentioned this is that either you're building a ton and it's inflationary or you're not building

[00:40:41] and your housing crisis is exacerbated so we really we've really messed this one up kind of stuck

[00:40:45] between a rock in a hard place as they say okay so that's it from the reports and from the studies

[00:40:52] and from the information we pulled now here's some ideas and solutions and i'm just going to

[00:40:56] rattle these off quickly and then we can have a quick uh i want to get your thoughts on them quickly

[00:41:00] then so the removal of development charges we've said that multiple times that's come up on panels

[00:41:06] that we've spoken on uh that seems to be a nice easy one and that can be done municipality

[00:41:11] minispelly changes in zoning we've started to see that i want to see more of that um but that also

[00:41:19] equals you know not just zoning but like let's get the planning department to push stuff through as

[00:41:25] fast as possible mandies for more trades right like we have to figure out who incentivize either young

[00:41:32] people to get in the trades the people that are in the trades now to stay in them longer or to

[00:41:37] train more people before they leave or we get more trades through our immigration process which

[00:41:44] seems to be one of the biggest misses that i've that i can see in the last couple years right

[00:41:48] which it does seem like they're they're they're making steps towards improving like again but is

[00:41:54] it too little too late at this point yeah like i guess i i guess no because you'll start filling up

[00:42:00] you know like you'll start getting more people in and gradually those costs should start to normalize

[00:42:05] it's just yeah like i don't i don't think it's going to solve the problem anytime soon like i think

[00:42:09] you know look if i'm just thinking about this purely from a political perspective because policies

[00:42:13] are really important part in in real estate investing if i'm like i think that the current government is

[00:42:18] doing the next government a ton of favors you know like they're doing things right now with a huge

[00:42:23] sense of urgency that most people really aren't going to care because they're not getting

[00:42:27] in or realize most people are like uh cool and like and it's funny like you see the sentiment send him

[00:42:31] and i think a lot of people are really just upset with the current government and so um they're like oh yeah

[00:42:36] you're just helping out developers like you know and it's like well yeah i guess they are but they

[00:42:39] have to to get housing built and and now this is going to get housing built like we're seeing it

[00:42:45] you and i have both seeing mli select is like fully over subscribed i can almost guarantee that

[00:42:52] extra 20 billion that they've that they've put out for it is probably already soaked up

[00:42:56] yeah i'm going to have to issue another 20 billion you know you're seeing again the skilled trade

[00:43:00] thing you're seeing things happen to the colleges all of these are going to have an impact on

[00:43:04] housing affordability they're just not going to have a impact on housing affordability

[00:43:07] today and if you're if you're yeah and if you were a government who needed to win an election

[00:43:11] in 2025 that's a bit of a problem and so i think it's great and i hope that they keep doing

[00:43:15] these things i just don't think that they're solving a problem for themself they're

[00:43:19] they're they're they're solving they're going to most of the policies that they're doing today are

[00:43:22] going to solve the problem in you know five years the next couple yeah and so it will look great on

[00:43:28] i mean if they win the election next time which polling doesn't indicate that they may

[00:43:32] then they would they would look good on them for a further election then but yeah you know

[00:43:38] so anyway i think it's it's good to see it i do think it's probably too late for that administration

[00:43:44] for given for for not not doing this sooner you know i think that you know

[00:43:49] i hope i know you can tell it's really trying to be athletic we don't have to be with

[00:43:53] we don't get political no but it's important to think about it just like purely like purely the

[00:43:58] mechanics of politics exactly you know if x then y and i think that i hope that i kind of

[00:44:04] described it relatively well but most of these things like i do think we will be able to achieve

[00:44:08] housing affordability in Canada within like a decade right but like and this will be looked

[00:44:13] back on and studied decades from now and there'll be two other younger versions of us talking about

[00:44:17] all the crazy stuff that happened back then referencing the amylized light program like we

[00:44:21] run to the merb program maybe yeah about be 40 years from now but yeah we'll see but uh

[00:44:27] but i think it is the interesting part is like they're trying and and and it's the most important

[00:44:33] issue right now and and so there's something to be found in that for for real estate investors for

[00:44:38] our audience to say okay you know and dc's is like the first thing on your list right i you know

[00:44:44] again i keep referencing the course because i'm doing a lot of content for the course right now but

[00:44:47] like in creating an investment thesis for the course if we say okay what's the most glaring

[00:44:51] opportunity to create an investment thesis for real estate in Canada right now create housing okay

[00:44:56] they have a line drawn right there's five units plus which is amylized select and that's where

[00:45:01] you get your benefit you get your benefit by the cheapest credit in the market the best loan

[00:45:04] to value in the market and the longest implementations in the market if you're using cmhc's

[00:45:08] amylized select program if you are using if you're below four units in a lot of cities you're

[00:45:14] getting removed development charges and what is you remove development charges create for you well

[00:45:19] like it's a literal arbitrage you know everyone uses like yeah and funny because i said course

[00:45:25] and now i'm saying arbitrage but everyone uses this word is like Airbnb arbitrage rental arbitrage

[00:45:31] blah blah arbitrage it's like okay what is an arbitrage let's actually look at the definition

[00:45:34] it's simultaneous buying and selling of a security or something like a product at different prices

[00:45:39] so you get to buy something and and so you're buying or you're you're able to build or buy that

[00:45:44] unit create that unit for less money than a developer who's building one more unit they do if

[00:45:49] they're building five units are paying DCs if you're building four or less units you're not paying

[00:45:53] DCs and and so the developer who's paying DCs is paying what 60,000 in in the GTA or like Edmonton

[00:46:00] who just did it or BC right 40, 30,000 dollars like 30 that's a material difference on on four

[00:46:07] five units so for sure 30,000 so you get a 30,000 dollar minimum discount up to a hundred

[00:46:11] thousand dollar discount on your unit and you're renting it for the same amount of money if not

[00:46:16] maybe more I think we just talked about this on the last episode or one of the last episodes

[00:46:20] that you recorded but you're renting them for the same amount of money one bedroom if you put

[00:46:24] it build a one bedroom unit you have no DCs they have DCs they could be side by side because that's how

[00:46:29] bad zoning is in most cities in Canada and and you can rent them for the same amount of money but

[00:46:34] you just got yours at a what I don't know what that would be on a percentage discount five 10%

[00:46:39] discount yeah and and again that makes that that can be the difference between a project penciling

[00:46:44] and not right so yeah I mean I think my closing or Mark here is this although grim presents a lot

[00:46:52] of opportunities for investors presents a ton of opportunities for existing builders and developers

[00:46:59] that have those crews that have access to those skilled trades and I think overall it presents

[00:47:05] the most opportunity for investors that are also trades people which we're lucky enough to work

[00:47:11] with a couple great people like that and you know again difficult times we this is when opportunity

[00:47:20] is is found and realized so I think there's a nuclear Hillary original for that tough tough times don't

[00:47:25] last tough people do something yeah that's a good one I should adopt that yeah that is mine actually yeah

[00:47:31] okay guys thanks so much for listening appreciate it hope you got a ton of value out of this

[00:47:37] leave us a review write us an email correct us on any of the stuff that we've said and we look forward

[00:47:43] to hearing from miss you on the next one the Canadian real estate investor podcast is for entertainment

[00:47:49] purposes only and it is not financial advice nick hill is a mortgage agent with premier mortgage center

[00:47:56] and a partner in the G and H mortgage group license number 10317 agent license m21004037

[00:48:07] deno foch is a real estate broker licensed with rare real estate a member of the Canadian Real Estate

[00:48:14] Association the Toronto Real Estate Board and the Ontario Real Estate Association