Duh. Obviously. Why even ask this question you idiot, of course a new home costs more than a resale home. Thanks for wasting my time and making me click something that anyone can figure out with a quick search on the MLS.
WRONG. This was my inner monologue as a I researched this topic and found what I thought to be some pretty shocking statistics. Let’s back track for a minute though and discuss why something that is seemingly so obvious is even worth thinking about in today’s market.
In case you have been living under a rock, housing in Canada is expensive and it will seemingly continue to get more expensive as time goes on. Why? Well, Canadians like owning their homes, investing in real estate and for good reason. That already high demand continues to grow as more and more new Canadians look to stake their claim in the real estate market as well. The answer to that runaway train would of course be to increase housing supply to temper pricing, especially after countless attempts to squash that demand have failed over the past few years. Okay, glad we got to that conclusion in under 300 words while it took the various levels of government in our country years to finally identify this simple and obvious fact “we need to build more housing”.
So now we see why today’s topic is so important. We as a country have no choice but to build more housing, like a lot of it, and fast. 1.5 million new homes in Ontario alone were called for by Dougie, all to be built within 10 years to combat our “housing crisis”. A lofty goal especially considering where our viable number of housing starts have sat for the past decade. Essentially we would have to double our average output for the next decade to meet that goal. There are of course a few hurdles in our way that could prevent us from accomplishing this feat.
Forget about labour shortages, lack of building materials, developable land etc and let’s focus on this: in order to build new homes, you need people to buy new homes. Being that we still live in a largely capitalist society (despite what many Canadians nowadays would prefer) we must rely on private companies to build these houses. And they won’t build without homebuyers in place ready to purchase. “If only the government could build every new Canadian a home using our tax dollars!!!!” Never gonna happen, so let’s continue with a logical conversation.
Unfortunately, if we look at the housing starts so far this year in Canada, we are not on pace to hit this goal. In fact, housing starts have regressed to pre pandemic levels and it is plain to see that new homes are far less prevalent on the MLS and new developments are nowhere to be seen. Apparently nobody is buying new homes, at least not to the levels that we need to build an adequate number of new homes, which is not a good thing. I have spoken with a few home builders that I know, agents that represent homebuilders and used my own eyes to see that there are far fewer sales happening. This is a fact and something that I can back up from real world examples.
So why aren’t people buying new homes? It’s actually a logistical problem, not a price problem. And here are the numbers to back it up.
I did a search for new homes available in London on our MLS and broke down some numbers:
56 total listings for homes built in 2023 or later
Average list price $1,107,534
Average square footage 2290
Price per square foot $485
It is also important to note that there is a fairly high floor for new homes. The cheapest new home in our area costs $731,000 and has fairly high monthly fees. The next cheapest new home is $799,900. There are a few new townhomes that have recently sold between $650-$700,000 so that is where I am going to set our floor for comparison sake. Logistical problem #1 which we will revisit in a minute. Also, there are no listings for new apartments in London, which is in line with logistical problem #1, so I am not going to include apartments in our search for resale homes.
Let’s look at the same stats for resale homes in London:
680 active listings
Average list price $1,116,604
Average square footage 2257
Price per square foot $500
These numbers were actually shocking to me when I first read them. I figured that new homes would have a serious premium attached to them which isn’t apparent just by these numbers. However, there are hidden costs baked into the purchase of a new home that do increase the price and upfront investment which brings us to logistical problem #2. If we look at properties that have recently sold, the numbers paint a very similar picture. Actually, the pending sales for new homes represent the lowest price per square foot at $443/sqft (only 35 listings).
So at a base level, new homes are not more expensive than comparable resale homes. I can find both new and resale homes that would be direct comparables, if not for the age of the home, that would be very similar price wise. Wow, colour me surprised.
Now, let’s look at these logistical problems as we take our analysis past surface level. First and foremost, as previously mentioned, home builders are private companies that are supposed to do one thing: make money. How do you make money when building homes? Build the biggest house for the least amount of money possible. Home builders build big homes, they are not in the business of building mini houses on big pieces of land. So that is the first logistical hurdle, there are minimum sizes and prices attached to new homes.
Keep in mind that this conversation looks completely different when we consider new condos, but there are none currently available in London and they are as a whole much less desirable in our area than detached homes, townhouses or semis, so we will move on.
Logistical problem #2: hidden costs. You buy a new home, it’s amazing, it’s shiny and it smells like a new house, which isn’t exactly like a new car, but you get the drift. The unfortunate thing is that your new house comes without some pretty important components that cost a decent amount of money. Appliances, window treatments, a garage door opener, a fence, a deck, landscaping, etc. While not all of these items are 100% necessary to live in the house, chances are that most resale homes will already have these things included. So there are some extra costs there that could add to the price of the home. This leads us to logistical problem #2.5 which is a continuation of the pricing and that is the large up front cost required to buy a new home.
Deposits on new homes can range from $50,000 to $500,000 depending on the builder and the price of the home. Then you have these other up front costs and you are wondering where the hell you are going to come up with this small fortune to hand to your home builder. Whereas, when you buy a resale home your deposit might max out at $50,000 in our area. Deposits between $10,000 to $20,000 are much more common. So that will take a lot of people out of the buyer pool for new homes.
Lastly, I want to touch on logistical problem #3 which deals with the time to build a new home. As mentioned earlier, there aren’t too many skilled tradespeople just sitting around these days and building material shortages to have contributed to longer build times. That is an extra wrinkle to consider when comparing new and resale. When do you sell your house? Can you wait a year for your new home? Plenty to consider and I have found that to be a pretty big turnoff to a lot of potential buyers when they think about a new home.
Wow what a journey. Thanks for taking all of that in, I understand it might have been more than you bargained for when you read the headline but it was an important discussion about a pretty major issue facing our real estate market right now.
Tl;dr- new homes don’t cost more on a per square foot basis than new homes, however there are extra costs that need to be considered along with other logistical challenges that limit a lot of buyers’ ability to buy a new home.
Comments