The simple answer is because they can and there are enough people who will blindly pay it. But do the math – from both potential buyers (just investors) and the developers’ point of view.
For investors, when they buy at $800 they are betting or guessing that resale prices will be at that level in four years. Currently prices are $500+. If you assume an average rate of appreciation of 5% then you will only get to $600+. At 7% (not likely) the number is $650+. If capital gains are not the reason that investors buy, then it must be rental income. The best returns are usually with studios. So take a 400sf studio costing $500,000. Assume it rents for $1400 (in four years time) and that taxes and condo fees combined are $300/mo. The return on your investment before financing is 2.6%! If you finance you have negative leverage! We know that many non-resident investors pay cash. But their bottom line is still 4%!
Now let’s look at the developer. We know he can build for $200+/ sf and soft costs (commissions to agents and other fees from architects to advertising) will come in at another $100+/sf. We are told that the culprit in rising prices is land costs. Take a parcel of land that will convert into 400 units at an average size of 700 sf. Land costs of $100/sf would translate into a purchase price of $28 million. At $200/sf, land costs would be $56 million. So the total cost to developers is $500/sf at the outside. To prove my point, Menkes bought 90 Harbour St. for $76 million and intends to build 1400 condo units on the site (plus a commercial tower). At $100/sf the price is $98 million and the commercial is free!!
Something tells me that if we could get pre-construction condo prices back down to $600/sf, everyone would be happy again. The market would continue in a healthy state for years to come. Investors would continue to buy, end users would not get priced out of the market, developers would still be making money (maybe not as obscene as before) and yes – Realtors (that’s me) would still have product to sell and resell!!