TorontoRealtyBlog

Spoiler alert: Bruce Willis was a ghost in “The Sixth Sense.”

But if you haven’t seen the movie by now, I don’t feel guilty for spoiling the ending.  It’s almost a quarter-century old.

Not only that, the lyrics to a very famous Andy Samberg song, the title of which isn’t appropriate for this blog, also spoils the ending.

My wife is one of those people who wants to know the ending of a book, show, or movie before we watch.

Personally, I think attempting to figure out the twists and surprises is half of why we watch.

I knew that Brad Pitt was actually Edward Norton’s alter ego about thirty minutes into “Fight Club.”  But I’ll be honest and say that I didn’t realize that Bruce Willis was a ghost until near the end of the movie when his wife’s ring dropped out of her hand and rolled across the floor.

This past week, a blog reader emailed me with the following:

“Canada’s affordability crisis may be an unintended consequence of record international inflows layering on top of peak domestic demographic demand, both of which are combining to pressure a construction industry already near full capacity. The catch is that driving down prices will incent less supply; and at the same time, heightened immigration flows designed to ease labour supply pressure immediately add to the housing demand they are trying to meet. The infrastructure in place and the industry’s ability to build clearly can’t support unchecked levels of demand, so the affordability conundrum continues…”

But it was her subject line in the email that really got me:

“I guess we’re all screwed?”

How do you not read that email first on a Thursday morning, right?

She said in her email, “These guys write like you do.  They use those ellipses; the … at the end of a sentence for full effect, and it works!”

She’s not exactly wrong there.  I mean, I do use a lot of ellipses…

But she’s also not wrong in noting that this was done for effect.

“So the affordability conundrum continues…”

The ellipses add a certain level of hopelessness that might not have been clear in that sentence or the preceding paragraph.

This paragraph, by the way, is from a “BMO Economics” publication from last month, which you can read in full HERE.

It also happens to be the last paragraph of the report, which of course, means that I read the ending before I laid eyes on the beginning.

But maybe that’s helpful, in this case?

Instead of ruining any movie by M. Night Shyamalan and thereby removing any incentive to watch the first 98% of the film (I’m always looking at the clock, waiting for that “gotcha” moment…), in this case, we can use the condensed “conclusion” of sorts as an introduction to much longer explanations of each concept.

Just look at that last paragraph again.  There are so many discussion topics within:

1) Record international inflows, ie. immigration

2) Peak domestic demographic demand

3) Pressuring a construction industry already near full capacity

4) Driving down prices will incent less supply

5) Heightened immigration flows add to Housing demand, even if the immigration is designed to ease labour pressure

6) Our ability to build cannot support current levels of demand

Wow.

A lot to unpack in one single paragraph, right?

My reader said, “So I guess we’re all screwed?” but then added, “This should been titled ‘The Real Estate Market Is Hopeless’ and it would have been more appropriate.”

Perhaps she’s not wrong.

The actual title of the BMO Economics report is, “Catch-23: Canada’s Affordability Conundrum”

It certainly lessens the blow a little, but if you read the entire report, it does little to alleviate the hopelessness.

I love reading the economic reports from the major banks and I often don’t care who writes them.  Douglas Porter, Benjamin Tal, or even David Rosenberg, who’s successfully predicted eleven of the last two recessions…

The best part about these economic reports, or any reports on real estate, the economy, monetary policy, et al, is that they’re free.  They’re posted online and readily available.

So let’s look at some of the other points made in this report and discuss them.

“While most will argue for a supply-side fix, our longstanding view has been that it’s wishful thinking to believe that an industry, already running at full capacity, can simply double output in short order, flood the market with new units and bring prices and rents down.”

Well, so much for the theory that Appraiser and myself have been advancing for years!

Before it was en vogue to suggest “we need more supply to help the issues in the housing market,” everything was focused on demand.

Every measure that the CMHC or Bank of Canada took was aimed at reducing demand.

We saw amortization periods shortened.

We saw down payment requirements increase.

We saw CMHC premiums increase.

We saw stricter rules on the purchase of investment properties.

And eventually, we saw the advent of the mortgage stress test.

Every single “solution” for the housing market was aimed at reducing demand but nothing was aimed at increasing supply.

Then, perhaps four or five years ago, pundits began to clue in.  Economists, politicians, the mainstream media, and everybody who wanted to discuss real estate started shouting, “We have a supply problem!”

Now, BMO is telling us that we can’t implement a supply-side fix-all.

(cue sad trombone)

The logic isn’t flawed, however.  “An industry running at full capacity can’t double output.”  They’re right about that.

But I still think that more supply would ease housing woes.  We’re not talking about “bringing prices down 30% to make houses more affordable,” and while the online peanut gallery still holds out hope that this is the “plan,” I think those sentiments are long gone.

As for why there are fewer listings in the market, the report gives us this:

“Among the factors holding back listings are potential sellers not wanting to let go in a down market; not having to let go because of a strong job market and built-up liquidity; less mobility if they’re locked into an attractive mortgage; and, a strong rental market for investors to lean on.”

Very prudent.

I had lunch with one of Toronto’s more prominent listing agents the other day (I don’t ‘do’ lunch but this was on the books for months), and he told me that no fewer than three active sellers, all with condos in the $1.5M – $3.5M range, have decided to take their properties off the market and lease instead of sell.

Why?

Because they can.

People who don’t “need” to sell aren’t selling.  And even those who have seen their properties double or triple in value are feeling hard-done-by because their properties are worth 5% less today than at the peak last spring.

Being locked into a great mortgage rate is another good point.

A client of mine has a mortgage rate of 1.6% and forty months left on the mortgage.  He’s moving to Los Angeles for work, for a minimum of five years, and is now considering what to do with the property.

“With prevailing rates at least 4% higher, and with the potential for them to be 4.5% higher by the fall, I can’t just give this up,” he told me.

So he’s actually thinking about keeping the house, even though he’s never going to move back into it, leasing it out, and taking one more property out of the resale market.

Here’s another nice piece of insight worth discussing:

“…the structure of Canada’s mortgage market has blunted the impact of higher interest rates with many variable-rate holders seeing amortizations stretch out, rather than payments rise in real time. OSFI has also stress-tested most buyers such that even those that took out mortgages at the low for rates have proven an ability to pay in at least the 4.75%-to-5.25% range.”

So for all of us who said, “What in the world is the point of this mortgage stress test?” back in 2017, now we know.

The reason that the market hasn’t been flooded with properties by owners who are defaulting on their mortgages is that the CMHC planned for this “rainy day” six years ago.

Bravo.  And I rarely give kudos to the CMHC or BOC, but, bravo.

Another set of thoughts on supply as a “cure” for the housing woes:

“But there are at least three reasons why we simply cannot rely on supply alone to do the job. First, and most obviously, housing supply can only respond gradually, and is essentially fixed in the short run, whereas demand can change in a moment. Second, even over a more extended period of time, there are clearly limits to how quickly supply can respond, given Canada’s existing skilled trade workforce, availability of serviced land, and materials. Third, and perhaps more subtly, any success in improving affordability (i.e., lower prices) will sow the seeds for less building in the future.”

Three very good points and while intertwined, they all have different takeaways for me.

The “gradual” increase in housing supply is at odds with what every politician, at every level of government, has promised us.

The stupidly-named “More Homes Built Faster Act” will look really silly in a decade, but some of the government initiatives already do…

“No New Affordable Units Built Linked To Toronto’s Housing Now Plan, 4 Years After Inception”

Ouch!

To quote Lisa Kudrow from Neighbours, “That’s a really, really bad headline!”

Creating supply in the market has proven really, really difficult.  It doesn’t matter if you’re a the public or private sector, or a joint venture between the two.  We’re not building as fast as we want to, set out to, or promise to.

The second point about the “existing skilled trade workforce” is a whole other story, and I’m contemplating a separate blog post about that, since CIBC Economics issued a really great read last week about the labour shortage in the construction industry.  But it seems that all the economists are looking at the labour market as a major problem as far as future supply of housing is concerned.

The last point about the dichotomy between improving affordability and providing less incentive to build in the future is a great example of why BMO titled this report “Catch 22.”

If properties were actually worth less and selling for less, then builders wouldn’t be as interested in constructing new units.  Especially with interest rates where they are.

I’ve talked in the past about how I work on land consolidations and I can tell you that this completely dried up at the start of 2023.  A lot of developers rushed for the sidelines and felt absolutely no desire to start shelling out $60 Million for a raw, unzoned future condo site.

So, yeah, BMO is right.  Lower prices in the short term (which I don’t see happening, but they’re using this as a theoretical example) could disincentivize developers.

And here’s a more disheartening point:

“Moreover, note that the marked deterioration of affordability in the past few years has come at a time when new homebuilding has surged. For example, housing starts in 2021 and 2022 were the strongest on record for a two-year period, averaging 267,000 units, or 40% above the 50-year average pace (Chart 4). True, a much greater share of this new building is aimed at condo construction than in the past, with single-family homes accounting for less than 30% of starts in 2021/22 versus a long-run average of just above 50%. This is significant because condo towers take longer to build, and tend to house fewer people per unit. But even completions were at 40-year highs in the past two years, and dwellings under construction are running at a record 1.5 years’ of supply (at 378,000 units). The point is that supply has indeed responded in recent years, and yet the affordability needle has barely moved.”

Uh oh.

This is about where my TRB reader must have concluded, “I guess we’re all screwed?”

But as bad as this all sounds for housing affordability, we haven’t even touched immigration yet.

“Canada’s 2.7% population growth in 2022 was the strongest since at least the 1970s, with more than 1 million people added to the country (Chart 8). This comes at a time when domestic demand for housing is just about peaking, with the crest of the Millennial cohort around 32 years old, or right in their household formation and family building years. So, with the construction industry already building at full speed to satisfy domestic demand, we clearly don’t have the infrastructure or ability to meet the additional demand created by historic immigration levels.”

No kidding.

So let me ask the readers this: How do you feel when you see the sentence, “…we clearly don’t have the infrastructure or ability to meet the additional demand created by historic immigration levels”?

Does xenophobia take over?

You don’t have to be honest in the comments section, but you sure can look within and be honest with yourself right now.

Being “pro-immigration” used to mean something very, very different.  But the country, it seems, used to be in a very different position to accept new Canadians every year.

This is another Catch-22, because we all know that young Billy and Susie, who grew up in midtown, don’t want to do the jobs that millions of immigrants do, so we clearly need them.  But at the same time, we complain that the record number of immigrants is exacerbating the problems in the housing market.

This is the most interesting economic report or bulletin I’ve read in quite some time, and as I said above, these are all free and all readily available.

Instead of reading headlines from BlogTO and learning about interest rates from checking out Instagram, I wish everybody would bookmark BMO Economics, CIBC Economics, and the like.

I’m sure many of the TRB readers read these, or will now that I’ve provided the link above, which I’ll provide again HERE.

There’s a lot happening in our economy right now as well as our real estate market, and sadly, I don’t think “affordability” is on the horizon, at least not by the historical definition.

That BMO report was bleak, but necessary.  And it’s tough to ignore once you’ve had a chance to absorb it.

Kind of like how in “The Village,” when you realize at the end that it’s 2004 and not 1894, you want to unsee it, but you can’t.

Tell me that any of you saw that plot twist coming, and I’ll ask you to predict the average home price in 2029 to the exact dollar…

The post Monday Morning Quarterback: “I Guess We’re All Screwed?” appeared first on Toronto Realty Blog.