Sometimes, new is better.
Why Canadian buyers should consider new home developments.
Sometimes new is better. Think bike helmets, swimming trunks, or running shoes. Sometimes, old is better. A fine wine, a broken in ball glove, or an aged Canadian cheddar come to mind. Annnd, now I’m hungry.
But what about homes? Where do they fall on the new vs. old debate?
Since 2005, the Canadian housing market has seen a steady increase in the average price of homes. From condos to townhomes, duplexes to single-family detached homes, over the long term almost everything has trended upward. Real estate has been a worthwhile investment for most Canadians, to put it mildly.
Those entering the market might be surprised by what they find. There are plenty of neighbourhoods in BC where you can find homes built in 1975 listed for well over $1 million. To be more specific, we’re talking about almost every city in Greater Vancouver. Though that’s a great fit for many Canadians who love a renovation and can afford the headaches and costs that come with it, there’s another group of buyers who are looking for something more “move-in-ready” and less “pass the Advil.” This is where new homes become attractive.
The CHBA estimates that 25% of all homes purchased annually are newly built. Do one in four buyers know something the rest of us don’t? This guide was built to answer that exact question.
Let’s walk you through the entire process so you can better understand why a new home development might be right for you and your family.
Break out your flashcards.
Before you dive into your first new home development, it’s helpful to understand some of the key terms. Don’t worry, this won’t be on the test.
First, know that “new home developments” is a broad term that applies to any newly built property that has not been lived in.
You also have “pre-builds” and “pre-construction” homes within that category. These homes will eventually be new home developments, but buyers purchase the property before or during construction.
For stand-alone family houses, it’s most common to find projects that are newly built and looking to sell to a buyer. These are projects where the developer builds a home and sells it at completion for a current market price. In comparison, apartments, condos and townhouses typically go the “pre-build” route so the developer can finance the project and collect some income while the property is under construction.
Tick tock.
Timing is everything. If you need to move into a place next month, putting a deposit down on a unit that’s currently a construction site probably isn’t the best idea, unless you love the sound of heavy machinery at 6am. When time is of the essence, consider opting for a new home development that’s move-in ready.
For buyers with flexibility, a pre-build home can come with many benefits. Just remember that pre-builds can often take between one to three years to complete, and construction delays do happen occasionally.
Take it to the bank.
Pre-construction developments have several financial benefits that make them appealing, especially in the increasingly competitive and expensive Canadian housing market. Imagine if you bought a pre-build condo at last year’s prices, or the year before that’s prices…you get the idea. This is how investors have taken advantage of a hot market over the past few years.
Here are a few of the major benefits of buying a pre-construction property:
Pay your deposit in installments: A pre-build will require that you put some money down upfront, with the remaining amount due on a payment schedule. So, if your pre-build will take two years to complete, you might only be required to put a five percent deposit down every six months, totalling up to 20 percent. This schedule allows you to save up for each deposit without draining your bank account all at once.
Warranty: Unlike purchasing a resale property, your new home will come with a warranty. Developers need to stand behind what they build, and a typical warranty covers the property for the first one to two years. If anything breaks down, it (most likely) won’t come at a cost to you.
No power drill required: As homeowners are well aware, even a five-year-old property can come with renovation requirements. When you buy new, you know that everything will be fresh, modern and working properly. You’ll sleep well knowing that there are no cracks in your foundation, rot in your fence posts, or pipes about to burst.
Increased equity: People often purchase a pre-build during the early stages of construction and then can’t move in for a few years. With pre-construction properties, you buy the home at the current market price, which means you will likely see an increase in your property value while you wait.
Not to rain on your parade, but of course, there are some financial considerations that are drawbacks with new home developments that you should know:
The taxman cometh: Unlike a resale property, new homes are typically subject to GST/HST tax. However, many provinces offer rebates on a portion of this tax.
Higher deposit: With a resale home, you can secure the sale with as little as five percent down. However, a typical pre-construction will require a 10-20% deposit.
Additional fees: There are also some unique additional closing costs for a new home development that you wouldn’t typically see with a resale purchase. You may have to pay for utility meter installations, use of the electronic land registration system, and more. Your developer should give you a clear estimate of all these costs so you’re not caught off guard.
Practical benefits & considerations.
Of course, not everything about the home buying process is about money. There are some other practical considerations to keep in mind when considering new home developments, such as:
Customization: You can often work with the developer to create customizations in your home. Even if the house is complete, you may be able to ask the developer to add on some additional features or amenities. This will make your home feel custom and save you from embarking on future renovation projects.
Delays: It’s important to be realistic and know that the project may not complete by its estimated deadline. You should be prepared for this and have the flexibility to live in your current place longer if needed.
Market changes: A significant benefit to a new home development is that it’s likely to increase in value as it’s being built. And while this is probably the case, there is no predicting the market, and there’s a chance the home could be worth less than you paid for it by the time you move in.
Mortgage challenges: Mortgage lenders allow you to lock in a mortgage rate when you put down your initial deposit on a pre-construction home. This rate is locked in for two years. Unfortunately, if your build takes longer than that, you’ll have to secure a new rate, which could potentially be higher.
The search for new.
Looking for a pre-build or a new home development is quite different from resale searching. Often, developers will market their projects to real estate agents, inviting them to showings and relying on them to spread the word. As a result, it can be incredibly beneficial to reach out to a local real estate agent to get a sense of the new home developments in your area.
But wait, there’s more.
Here’s a quick rundown of some essential things to look out for with your new home development purchase:
Developers: Do some research into your developer and the projects they’ve done in the past. Make sure you like their style and they don’t have any outstanding complaints against them.
Payment schedules: The deposits on pre-construction homes aren’t regulated, so developers can ask for however much they want. Ensure you fully understand a payment schedule before committing to it. And, read the fine print, so you know what happens if you make a late payment.
Assignment fees: If you change your mind about the pre-construction property, or want to sell to realize gains before the project completes, you’ll usually have the right to sell your spot to another buyer. Review your contract and understand the assignment fees that may apply. Often, reselling includes an assignment fee that gets paid to the developer that can range from a few hundred dollars to a percentage of the total purchase price of the property. Keep in mind that if the market has gone up enough, you can still walk away with a hefty profit even after all the fees.
A growing opportunity.
Approximately 268 000 new homes are built every year in Canada. New homes add more inventory to the market and help to keep up with the growing demand for real estate. The fact is that Canada remains, and will continue to remain, a desirable place to live - and supply just hasn’t met the growing demand.
For the right buyer, new home developments offer up a lot of opportunities. Along with some clear financial benefits, it’s comforting to invest in a new, modern home that will require minimal upkeep for many years. New home developments have historically seen a quick return-on-investment and have had lucrative resale potential. Though there’s still limited inventory and the process may take longer than expected, new builds might just be the answer for a good portion of Canadian buyers.
Information obtained from rew.ca and Justin Kerby