The Ontario government announced plans this week to increase penalties on real estate developers who behave in an unethical way, particularly as it concerns pricing on new condominium developments.
The proposed changes would double penalties for developers found to be acting against the provinces Home Construction Regulatory Authority’s Code of Ethics for builders. Those found in violation could face fines up to $50,000 for individuals or $100,000 for corporations on a first offence. Repeat offenders could face even higher fines or have their operating licenses revoked.
The change comes after widely publicized stories of buyers being asked to pay more than they expected for new condo developments after entering into preconstruction agreements with developers. These price hikes caught buyers by surprise and put them in a challenging position. Those who are unable or unwilling to pay the increases have their purchase cancelled and are abruptly forced back onto the market. Though they will get their money back, those who bought in years ago will now find their money doesn’t go as far in the current market.
For the developers, the hikes are explained as simply a result of increased construction costs. They are faced with a tough decision as well to ask for more from buyers or be forced to severely delay or even cancel the project entirely. It’s true that in the last two years, the costs of materials required for home construction have been particularly volatile, potentially exceeding the honest expectations of developers when planning the project.
You could also frame the price increases as price gouging on the part of the developer. In a market with such low supply, many have called for increased developments as a necessary need to help cool things off. If developers are allowed to freely increase prices on a whim, affordability remains incredibly hard to achieve and consumers bear the burden of corporate greed.
Whether or not a price increase is, in fact, a necessary result of material costs or an attempt to increase profits will vary from case to case, and in reality, could lie somewhere in the middle. Though measures are set to be put in place next month, the province will still have to undergo lengthy investigations and deliberation on a case-by-case basis to reach a clear decision on whether to impose penalties. Though investors in the preconstruction market may be happy to hear about increased protections for their purchase, it should also be noted that situations such as the ones that lead to these new regulator changes are really quite rare and are not something that most investors face.
Overall, consumer protections are a benefit to buyers. However, the actual impacts of such regulations rely on a proactive and diligent regulatory body and some have concerns on how stringently these new regulations will be enforced.