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…
PAPA360
at 9:03 am
Trudeau in Iceland talking about Ukraine.. Yeah we are screwed.
hoob
at 9:10 am
Random… Given your Idaho digs and annual retreat, do you have any thoughts on buying properties in Idaho and western Wyoming? I was tripping in the area last year and really liked the Lander area.
I’m following the markets in the area if only for the dramatic contrast to the Toronto market. Then again, a lot problems overlap — not enough contractors and buildings in the low/middle end of the market, so demand exceeds supply for anything us soft city people might want. But no “condo” market at all.
David Fleming
at 9:45 am
@ hoob
Our house is in Victor, Idaho. It’s very close to the Wyoming border, so we can drive to Jackson in 35 minutes.
From an investment standpoint, Idaho/Wyoming has been tough to predict over the last 15 years. Prices dropped up to 70% in 2008 as the market had been driven up by rampant speculation. This could have been featured in “The Big Short.” At one point, arson was a huge problem as developers were torching houses for insurance money.
But like everything else, the market has come roaring back. I was offered three townhouses on Ski Hill Road (near Grand Targhee in Idaho) for $60K USD each, as they were about 80% complete but needed interior finishes. $180K USD back in 2008 was a lot for me, plus I didn’t love the idea of managing this from afar, so I passed. Those are $700,000 USD houses today. Le Sigh.
Lander is in the middle of nowhere but Jackson is way too expensive and Casper is too far. You could pick up a property in rural Idaho or Wyoming for next to nothing. The caveats are how long it takes to get there (two flights from Toronto and a long drive), plus services, amenities, and then taxation. I would imagine the Canadian government will be all up in our business very soon when it comes to any and all holdings outside the country…
The other issue with some of these rural places in the USA is, um, well, politics…
If you ever need an agent in Idaho, I’ve got a friend out there with his own TRB. “Teton Realty Blog.” 🙂
hoob
at 3:42 pm
I am, unfortunately, in the price bracket where “middle of nowhere-ish” is a mandatory attribute. I liked how Lander (and similar) are 4-5 hours drive from So. Much. Outdoors.
Was looking at a nice mountain house 15km outside of Lander that went for 450K. Same house anywhere close to anything would be 2X.
Jimbo
at 5:41 pm
Look at Utah just outside Ogden. Easier to get to, was and may still be cheap with a lot of skiing options.
PAPA360
at 9:23 am
Oh and Olivia Chow is in the batters box.. For sure we are screwed!
Libertarian
at 11:00 am
“…we clearly don’t have the infrastructure or ability to meet the additional demand created by historic immigration levels”
I’ll bite. To me, that comment isn’t about immigration. It’s about government failure. Toronto (all of Canada for that matter) was built like a suburb. Population was small, so everyone could have a detached house with all the fixings. So it’s all subdivision after subdivision (very low density). But then as our economy maxed out, everybody said we need to increase the population. But people weren’t having kids, so immigration had to increase. But because all the infrastructure is low density, we’re running out of houses. Young Billie and Susie expect to be able to buy a house because that’s what they grew up in. Immigrants want a house because that’s the sales pitch they were given.
People call Toronto a world-class city because it’s the financial capital of Canada, but it’s built like a suburb, not like a world-class city, and now we’ve run out of space to give everyone a house. I suspect that the immigrants will stop coming once this becomes common knowledge. And the Billies and Susans are going to have to accept living in a condo until their in their 50s. As long as Toronto culture is all about houses are better than condos, this trend will continue.
Marina
at 11:20 am
Some immigrants have already stopped coming.
A friend at work from India said that five years ago Canada was the #1 choice for Indian immigrants. Now it’s Australia and New Zealand. Then US. Canada is a distant fourth. Also many who do come are using it as a pit stop on the way to the US. And most of it is because housing is just too expensive and wages are not proportional.
David Fleming
at 11:24 am
@ Libertarian
You are right. I suppose it’s all in how you phrase it.
Then again, what is the vision for Torontonians? How do they view our city, town, or hamlet?
Those who suggest, “Tear down the Gardiner! It’s ugly! We should have ice cream stands on the side of the Lakeshore!” are ignoring that this is a metropolis, and not a quaint little town.
This city was designed to fail, in that it was never designed.
I’ve always maintained that when politicians, be it city councilors, mayors, MP’s or MPP’s, are elected for 4-year terms, nobody is going to enact a 30-year plan. And when you have new politicians undoing what old politicians had done, then it’s just a fantastic mess.
Toronto is London, England, fifty years ago. Today, you’d be laughed at if you said you wanted to own a house. Gen-Z and Gen Alpha will simply have to accept this as Londoners do today.
hoob
at 3:45 pm
I love the NIMBYs in my area who don’t want anything built along Kingston Rd. Because it’s not “in character” of the region. Well, the Kingston Rd corridor has had 80+ years to become something and I’ll tell you, mid rise condos are a big improvement compared to, say, The Aspen Hotel.
And notwithstanding that, an actual Ice Cream Shop recently opened on Kingston in the area anyway, soo…
Libertarian
at 9:42 am
Completely agree about city planning/design design stopped a long time ago. It used to be that the role of government was to build. They built the 401, subways, airports, bridges, roads, railways, etc. Then about 40-50 years ago, it changed to all social programs. The problem was we didn’t have enough infrastructure at that point.
As others have pointed out, there are no other attractive places to live in Canada because those cities don’t have the economic engine to make living their viable. So everybody wants to live in Toronto.
Unfortunately, I think we’ve passed the point of no return on the role of government. Everybody now just wants to get paid when they put their hand out.
Marina
at 11:16 am
Demand was never going to solve the problem, because demand for housing is inelastic. You have to live somewhere. So people will do anything they can to hold on to their housing.
That’s always been my problem with people arguing against landlords. Yeah, landlords can be bad, but even if you got every single landlord to sell their house, you are not actually creating new places for people to live. You are just shifting the problem.
And it’s not just about housing. We also need more hospitals (and the corresponding staff), more schools, more transportation. We need to shift our economic policy to incentivize higher paying jobs so our GDP is bigger than Alabama. These things can’t be solved unilaterally.
It will be interesting to see how the conservatives will shift things (I’m pretty far left but I don’t see a path for the Libs or NDP to win the next federal election).
Ace Goodheart
at 11:39 am
From what I can see, there are plenty of houses, and lots of space for everyone.
The “housing crisis” is a Toronto problem, not a Canada problem.
Go to Northern Ontario.
A house costs like 99k (or cheaper).
Go to Alberta, Saskatchewan, Manitoba.
Go live in Quebec.
Everyone wants to live in a small number of popular neighbourhoods in inner City Toronto.
When they cannot, they claim there is a crisis.
We should shut down immigration.
Force build more houses in remote locations where there is already plenty of housing and little to no demand.
Raise everyone’s taxes (because we all know that taxing something makes it cheaper).
Nutty. Toronto problems are not Canada problems. There are other cities you can live in.
Vancouver Keith
at 1:33 pm
We aren’t asking the question in the right way, which leads to moronic hopes of a big crash in real estate, or pretend lobby groups like Abundant Housing that claim if we rezone and lose the bureaucracy, enough labour and capital will show up fast enough to a drive down the rent party.
Not only is the construction industry flat out, there are developers that are holding onto upzoned land, every time interest rates go up. The idea that adding supply at current costs, which is replacing fifty to one hundred year old housing renting at rates that working people can actually afford will actually lower rents is laughable. When developers can hold land without going broke, you aren’t going to see significant affordability by zoning more supply. You will see declining livability.
Economics is the land of divided opinion. Increasing supply works, except when it doesn’t. Raising prices lowers the volume of sales, except when it doesn’t. Cutting taxes and regulation on business increases employment and working wages, except when it doesn’t. A rising tide lifts all boats, except when it lifts ten percent of them a bit and one tenth of one percent of them to the moon and beyond.
One of the biggest changes this century has been taxing housing in new ways, under the guise of raising money for affordable housing. Foreign buyers tax, empty homes tax, property transfer taxes, property taxes increasing at well above the inflation rate on and on – and rents have risen dramatically in Toronto and Vancouver.
Ace Goodheart
at 1:38 pm
I agree. I just watched them bulldoze another affordable old group of houses in Toronto to make way for more unaffordable condos.
What is the point of this? A bunch of tenants are now homeless and we get another shining new tower full of air bnbs
JL
at 4:52 pm
To me it seems like decision makers all want to grow economically at all costs but without an actual plan for doing so in a sensible and sustainable way. And so instead of growing by say innovation and increased productivity leading to more wealth and opportunity (pull), we’ve been finding various short cuts (push) to just keep fueling the economic fire (more debt, higher and higher immigration rates, etc) and all of this faster than we can actually manage the supports for it, happily sacrificing per capita for gross GDP, and completely without considering the unsustainability of it all, because as David points out, the decision makers don’t look beyond 4 years out.
Alexander
at 5:23 pm
I just walked on Marlee Rd. today and I see some notice boards with townhouses 3 fl high! They are 300 m from the subway. Until developers are prohibited from building anything less than 15 – 20 stores in the area next to the subway stations we are screwed. City and provincial governments are investing billions in transportation links and cannot utilize what they have already.
Jimbo
at 5:49 pm
I think the idea of immigrants coming here to do the jobs that Joe or Suzzie don’t want to do is dead or dying. Perhaps in areas like Moncton and Halifax, this can be the case because affordability is still there. However, the rise of the middle class in many other countries has created a lot of wealth for some people and they are choosing to come here for safety and security. Our universities are filling with students who can pay $45k plus a year for tuition and not blink. Nevernind the cost for housing, food etc that doesn’t really seem to affect them.
If we can’t build enough housing, Joe and Suzzie will get priced out and will be the new emmigrant if they can get the right education first.
Ace Goodheart
at 10:28 am
I read an interesting case study on the immigrants issue.
It is long so I won’t bore you with the entire thing here, but it went something like this:
Couple moved here from the UK. Both lawyers working for an international firm. Their firm just transferred them. They ended up on Bay Street working in one of the towers. They were ridiculously rich, so they bought a house in Baby Point, paying mostly cash. They plan on staying and getting CDN citizenship. They are white folks, both protestants. They grew up in France so English is their second language.
Second couple moved here from India. Same sort of situation, both well educated professionals, both working for an international company. Transferred to a Toronto office. They also were ridiculously rich, bought a house in the Beaches. They are brown folks, Hindu. They grew up in India so English is their second language.
Which of the above two are immigrants?
The case study had a picture of both of them. I think something like 99% of respondents said couple number one were NOT immigrants, and couple number two WERE immigrants.
It kind of plays with your perceptions, doesn’t it?
Both couples are clearly immigrants. Which one would you say shouldn’t be here?
CrabbyApple
at 10:21 pm
I did predict the twist, as the trailers started when I saw The Village in theatres. My friend was so mad at me when the movie was over. I don’t have the knowledge to pretend i know what house prices will be in 2029 other than to say that the average will be a bit more than today, but i don’t think it will be significantly larger.
QuietBard
at 7:43 pm
“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.”
OSFI is the bank regulator. It doesn’t care about supply, demand, affordability or anything like that. It only cares about the integrity of the banks and the banking/financial system. The stress test was created to protect the banks from interest rate shocks that would affect borrowers ability to pay the banks back and potentially default on their loans. This would be bad for the banks. Thats why OSFI cares.
As for you second point about why units are not flooding the market. This was not OSFIs doing. Interest rates rose so sharply it blew past the 5.25% threshold within 8 months. The real culprit was the Feds. In particular our Finance Minister, Chrystia Freeland who mandated that banks extend amortizations for VRM holders who were “distressed”. Some banks have over 30% of their mortgage business with amortizations over 25 years. In normal times, as rates rose VRM borrowers would have to increase their payments to keep the amortization in line. With the finance ministers new mandates those distressed borrowers just increased their amortization and voila the pain “went away”. Some have amortizations of 30, 50, 70 and even 90(!) years. Here’s the kicker. OSFI doesnt like that the banks have these mortgages with over 25 years amortization. It will start to mandate that at renewal these mortgages must be re amortized back to 25 years. Which would require either 1) a huge payment to reduce to loan or 2) Balloon the monthly payments. Again, OSFI doesn’t care about the borrowers it cares about the banks. This is why there are a growing group of people clamouring of a potential renewal bomb for 2025-2026 when most of the sub 2.5% mortgage folk + those distressed VRM borrowers will have to renew. Personally I have no idea what will happen, but it certainly is enthralling…