Real Estate

What will happen to pre-construction houses when there is price correction?

  • Last Updated:
  • Apr 13th, 2017 11:42 am
Newbie
Apr 14, 2016
35 posts
3 upvotes
Toronto

What will happen to pre-construction houses when there is price correction?

Usually pre-constructions houses are booked by
Person A - family who wants to upgrade to bigger house, by selling his primary residence.
Person B - investor who reassign to potential buyers before the closing date.

There may be much more cases like preconstruction booked by first-time buyer or speculator for whom it may be 2nd, 3rd or n-th pre-construction. These are the extreme case.

Lets talks about the impact of person A and B after a year. As of today Bank of Canada says, there is no change in interest rate of 0.5%
2 replies
Deal Fanatic
Dec 5, 2009
5768 posts
3612 upvotes
Your subject line and post are talking about different things.

Assuming you are asking about a crash or some sort of signification price corrction. What happens is people walk away from their deposits and the houses either don't get built or they go back on the market at a lower price.
Deal Addict
Oct 29, 2010
4475 posts
811 upvotes
Depends on the size of the correction.
If prices drop 20% which is a very extreme case which I doubt will be even close to reality then you need to look at the difference between the purchase price on paper vs value at closing day.
If you assume that it takes 2 years to build those houses, that means 2 years of year over year appreciation in price.
In the last 2 years prices for houses went up 30% in the GTA, so even if you make a more conservative calculation and say it will go up 20% per year then you can look at something like that:
Purchase price on paper at 2017: 800k.
Value at 2018: 960k.
Value at 2019: 1152k.

So then you're saying there will be a price correction of 20%, so let's say at 2019.
Value at 2019 after price correction of 20%: 1152k - 230k = 922k.

So in case A there is no impact and in case B there is also no impact.
The only "impact" is probably going to be psychological in my opinion which can lead to interesting things.

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