Canada's 'housing bubble' deemed close to bursting

[someone123]

There's no inherent waste advantage or disadvantage to capitalism or socialism overall; it depends. There are wasteful private industries, competitive industries, wasteful government projects, really good government projects. If you start out with an assumption about profit being bad, or government being bad, you will tend to make bad arguments.

Housing prices have shot way up but it's unclear that this is being captured by developers (maybe it is; that would be a better argument if true). Development fees are way up and capital gains for some owners are way up. If there is alarming profit accruing it's happening through the taxation system which is the opposite of unbridled capitalism.

I don't think the housing market in Toronto is very capitalist and the municipality arguably (and maybe by extension province) has a lot more impact than the federal government on the housing side of things. Collectively, the provinces usually outspend the federal government. On some level it makes sense that federal housing schemes will be kind of lame if they don't also connect properly with provincial level planning.

[thurmas]

Toronto home sales down 41% in June compared to last year due to borrowing costs in the financial post this morning

[suburbanite]

Originally Posted by someone123

Housing prices have shot way up but it's unclear that this is being captured by developers (maybe it is; that would be a better argument if true). Development fees are way up and capital gains for some owners are way up. If there is alarming profit accruing it's happening through the taxation system which is the opposite of unbridled capitalism.

Developers absolutely capture the excess profits when home prices increase between the time they purchased the land and the time they sell the serviced lots to homebuilders. Given how long the planning and development cycle typically is in Canada, there are subdivisions coming to market now that were originally purchased in 2005. If you buy a piece of land in 2005 for $15 million expecting to get 400 lots selling for $300,000 each, and by the time you service and subdivide the land the market prices for said lots is $1,000,000, then the developer is capturing that windfall. It's the homebuilders who are typically locked in to a 10-18% profit margin since they are buying the lots from the developer at the same time that they are securing a fixed purchase price from a home buyer. Their final revenue is fixed, their land cost is fixed, all that can change the margin is an increase or decrease in the actual construction costs over the ~8 month construction period.

Given that these days probably 90% of homes (at least in the GTA where I'm most familiar with) are built by fully integrated developers who service the land and pass off the lots to their own homebuilding division, they have all made astronomical profit margins on anything purchased more than 10 years ago.

[swimmer_spe]

Originally Posted by thurmas

Toronto home sales down 41% in June compared to last year due to borrowing costs in the financial post this morning

Interesting how 1% can scare that much out of people.

[someone123]

Originally Posted by suburbanite

Developers absolutely capture the excess profits when home prices increase between the time they purchased the land and the time they sell the serviced lots to homebuilders. Given how long the planning and development cycle typically is in Canada, there are subdivisions coming to market now that were originally purchased in 2005.

But this is from the land speculation and resale component of their business, not the development portion. A pig farmer (actually anybody who has money at the right time) can buy land and find that it goes up in value. As you suggest it could be corrected by speeding up development or could be corrected through the land taxation system (claw back a portion of the appreciation of the land specifically; governments already assess this value over time). It's a separate issue from the role of the government in improvements on the land which was the topic of that article.

As a side note when developers make money it can be more or less arbitrarily clawed back through development fees, so if you want to look at real profit you need to account for this.

[Truenorth00]

Originally Posted by swimmer_spe

Interesting how 1% can scare that much out of people.

No. Expected. You should see what those few percent are doing to qualifying rates and subsequently prequalification. Sellers just haven't adjusted to the new reality. Hence the drop in volume. We'll start seeing volumes go up again. One way or another.

[rbt]

Originally Posted by swimmer_spe

Interesting how 1% can scare that much out of people.

In January 2022 variable rate mortgages were 0.85% and now they're 2.5%; a 300% increase over 9 months should make buyers have a few second thoughts.

Interest rates equal to 2019 should see housing prices adjust back to values not far from prices at that time too; wages haven't increased much since then so what the typical buyer can afford is roughly the same.

[ssiguy]

Canada NEEDS a housing crash to get our economic growth model away from real estate speculation to productivity gains.
As far as people who bought in the last 2 years as an investment, my sympathy level is somewhere between zero and nil.
In order to get real estate prices back in line with local incomes, Vancouver needs to drop 70%, Toronto 60, Victoria/Hamilton/KWC/SCN/Ottawa/London/Halifax/Windsor 40, Montreal 30, Calgary 20, Edmonton/Winnipeg/10. Most other major markets are relatively in line with incomes.

[swimmer_spe]

Originally Posted by Truenorth00

No. Expected. You should see what those few percent are doing to qualifying rates and subsequently prequalification. Sellers just haven't adjusted to the new reality. Hence the drop in volume. We'll start seeing volumes go up again. One way or another.

Oh I know they will be on the way up, however, that interest rate and the prequalifications are showing how fragile the market really is.

Originally Posted by rbt

In January 2022 variable rate mortgages were 0.85% and now they're 2.5%; a 300% increase over 9 months should make buyers have a few second thoughts.

Interest rates equal to 2019 should see housing prices adjust back to values not far from prices at that time too; wages haven't increased much since then so what the typical buyer can afford is roughly the same.

The thing is, if an increase of a few percent on their mortgage is enough to really freeze the large markets, it points to a much bigger issue. I'm more interested what the long term effects of the bump in interest rates cause. You cannot have that bump cause a major drop and ignore it. I don;'t expect the federal government to push for a rate decrease, regardless of who gets in. Regardless, these next few years will be interesting when it comes to real estate sales.

[Truenorth00]

• Video Link

[swimmer_spe]

Originally Posted by Truenorth00

• Video Link

Canada's housing will never be affordable.....
I am not watching that.

Anyone who uses that narrative is not someone to listen to. First off, it has been said for decades that housing isn't affordable. Yet somehow people are buying. That is in part due to a variety of factors including lower interest rates and higher wages. Reality is, right now, things have gotten unaffordable, but the market is cooling.

[casper]

Originally Posted by swimmer_spe

Canada's housing will never be affordable.....
I am not watching that.

Anyone who uses that narrative is not someone to listen to. First off, it has been said for decades that housing isn't affordable. Yet somehow people are buying. That is in part due to a variety of factors including lower interest rates and higher wages. Reality is, right now, things have gotten unaffordable, but the market is cooling.

Perhaps we have a slight affordability problem. A year or two like this will correct that.

What we also have is an expectation problem. The expectation that a middle class way will get you a McMansion that can be paid off in a few years is not reasonable.

I was raised in a middle class household with a typically Vancouver bungalow that was built in the 1950s. We were unusually in having three bedrooms on the main floor. Most of the other bungalows from that time were on slightly smaller lots and had two bedrooms on the main floor. Anything beyond that was something you got building out the basement. Perhaps a carport in the back and maybe a one car garage. Today this would be a condo or small townhouse.

Our expectations have increased and now we are talking about unaffordability?

[kwoldtimer]

Originally Posted by casper

Perhaps we have a slight affordability problem. A year or two like this will correct that.

What we also have is an expectation problem. The expectation that a middle class way will get you a McMansion that can be paid off in a few years is not reasonable.

I was raised in a middle class household with a typically Vancouver bungalow that was built in the 1950s. We were unusually in having three bedrooms on the main floor. Most of the other bungalows from that time were on slightly smaller lots and had two bedrooms on the main floor. Anything beyond that was something you got building out the basement. Perhaps a carport in the back and maybe a one car garage. Today this would be a condo or small townhouse.

Our expectations have increased and now we are talking about unaffordability?

Are developers anywhere in Canada still building the kind of 1950s houses you describe. A two or three bedroom, one bathroom, 1000 or so sq ft bungalow or 1.5 storey roughed in for a finished basement including a second bathroom? That seems to fall short of what many people would consider a "starter home" nowadays, unfortunately. Expectations have increased, as you say, but developers have a vested interest as well.

[Truenorth00]

Originally Posted by swimmer_spe

Canada's housing will never be affordable.....
I am not watching that.

Anyone who uses that narrative is not someone to listen to.

I wish you did watch the video. They use actual sourced statistics to point out that we are not building enough housing to keep up with population growth. This is the root of the housing crisis.

And it's going to get worse because about 30% of the construction sector is boomers about to retire.

There's also the issue with cities piling on development fees. Look at what is happening in Toronto for example. That was also covered in the video.

So while we may end up in a downturn with some cheaper real estate for now, until we change the reality of having the least housing per capita in the G20, affordability will not improve. And if we keep underbuilding, it will only get worse.

[Truenorth00]

Originally Posted by kwoldtimer

Are developers anywhere in Canada still building the kind of 1950s houses you describe. A two or three bedroom, one bathroom, 1000 or so sq ft bungalow or 1.5 storey roughed in for a finished basement including a second bathroom? That seems to fall short of what many people would consider a "starter home" nowadays, unfortunately. Expectations have increased, as you say, but developers have a vested interest as well.

They kinda build this with condos these days. The video hints at why developers won't do this. High land cost and high development fees mean that they can't get a decent return unless they build a huge mansion or a building with dozens of shoebox condos.

In the 1950s, land and construction was so cheap and fees so low, that there are times where's car might cost more than a house. This is not the case anymore.

[someone123]

Originally Posted by kwoldtimer

Are developers anywhere in Canada still building the kind of 1950s houses you describe. A two or three bedroom, one bathroom, 1000 or so sq ft bungalow or 1.5 storey roughed in for a finished basement including a second bathroom? That seems to fall short of what many people would consider a "starter home" nowadays, unfortunately. Expectations have increased, as you say, but developers have a vested interest as well.

Maybe if they stopped buying so much avocado toast they could afford those 2,000 square foot starter homes they demand!

Here in Vancouver I don't know anybody under 40 who has more square feet of living space than the equivalent of a 1950's bungalow with unfinished basement. Actually I know 0 under 40's who own any kind of detached house, a couple who own condos, and a lot who rent. Probably half or more live with roommates. Most have university degrees and are above the median for income, although maybe not when you subtract the student loan payments out which the 1970's era high school grads with bungalows did not have.

[swimmer_spe]

Originally Posted by casper

Perhaps we have a slight affordability problem. A year or two like this will correct that.

What we also have is an expectation problem. The expectation that a middle class way will get you a McMansion that can be paid off in a few years is not reasonable.

I was raised in a middle class household with a typically Vancouver bungalow that was built in the 1950s. We were unusually in having three bedrooms on the main floor. Most of the other bungalows from that time were on slightly smaller lots and had two bedrooms on the main floor. Anything beyond that was something you got building out the basement. Perhaps a carport in the back and maybe a one car garage. Today this would be a condo or small townhouse.

Our expectations have increased and now we are talking about unaffordability?

Most people entering the market usually are looking for enough bedrooms for the couple and the number of kids. Canada has an average of 2.5, so that would mean a 3-4 bedroom home or bigger is needed. Also, working from home is becoming more and more a thing that will be permanent, so add another room per person that works from home. Now you are pushing 5-6 bedrooms.

What is really needed is better public transportation options to places that have a lower cost of construction. Take a major city such as Toronto, Vancouver and Montreal. Communities within 200-400 km of them should have a variety of options to get to/from them by car, bus, air and rail. Build that and then approve as many permits in those locales and watch the prices stable.

https://www.oecd.org/els/family/47710686.pdf

Originally Posted by kwoldtimer

Are developers anywhere in Canada still building the kind of 1950s houses you describe. A two or three bedroom, one bathroom, 1000 or so sq ft bungalow or 1.5 storey roughed in for a finished basement including a second bathroom? That seems to fall short of what many people would consider a "starter home" nowadays, unfortunately. Expectations have increased, as you say, but developers have a vested interest as well.

The problem is that no one wants a 2 or 3 bedroom home. Even single people or newlyweds without kids want 3-4 at least. Two bathrooms are a minimum if you have more than one person in the household. Doesn't mean 2 4 piece bathrooms, but 2 toilets in the house is a minimum.

Originally Posted by Truenorth00

I wish you did watch the video. They use actual sourced statistics to point out that we are not building enough housing to keep up with population growth. This is the root of the housing crisis.

And it's going to get worse because about 30% of the construction sector is boomers about to retire.

There's also the issue with cities piling on development fees. Look at what is happening in Toronto for example. That was also covered in the video.

So while we may end up in a downturn with some cheaper real estate for now, until we change the reality of having the least housing per capita in the G20, affordability will not improve. And if we keep underbuilding, it will only get worse.

I hate things with words like "never". That is sensationalizing something that needs better understanding.
Yes, there is a problem. It can be fixed if the politicians at all levels want to fix it.

[casper]

Originally Posted by someone123

Maybe if they stopped buying so much avocado toast they could afford those 2,000 square foot starter homes they demand!

Here in Vancouver I don't know anybody under 40 who has more square feet of living space than the equivalent of a 1950's bungalow with unfinished basement. Actually I know 0 under 40's who own any kind of detached house, a couple who own condos, and a lot who rent. Probably half or more live with roommates. Most have university degrees and are above the median for income, although maybe not when you subtract the student loan payments out which the 1970's era high school grads with bungalows did not have.

You can eat your avocado toast and save all at the same time. A, financial advisors explaining the ins and outs of saving money with avocado toast.....

• Video Link https://www.youtube.com/watch?v=DMtthYqroR0

[thebasketballgeek]

Originally Posted by swimmer_spe

Most people entering the market usually are looking for enough bedrooms for the couple and the number of kids. Canada has an average of 2.5, so that would mean a 3-4 bedroom home or bigger is needed. Also, working from home is becoming more and more a thing that will be permanent, so add another room per person that works from home. Now you are pushing 5-6 bedrooms.

Right but when did it become the standard for homeowners to completely skip the starter home phase of their life? Why do you need 3-4 bedrooms instantly when kids can share a bedroom for the first 12 or so years of their life? The only reason that one would ever need so much space for their first house is if they live in a multi-generational household like most South Asians. In fact the pooling of money and support system of multi-generational households should start getting promoted in Canada instead of our typical western bias of “individuality” but that’s a whole other can of worms.

Originally Posted by swimmer_spe

What is really needed is better public transportation options to places that have a lower cost of construction. Take a major city such as Toronto, Vancouver and Montreal. Communities within 200-400 km of them should have a variety of options to get to/from them by car, bus, air and rail. Build that and then approve as many permits in those locales and watch the prices stable.

There are cities that already exist that have public transit and much lower costs of construction outside of the big 3. Unfortunately, the surrounding communities of Toronto and Vancouver have virtually 0 areas that truly have a lower cost of construction. When house prices in goddamn Barrie are more then double the price of houses in places like Calgary and Winnipeg the outer communities of our large cities just haven’t shown any initiative to cool their housing markets. Which is why suburbs like Brampton are about to get a rude awakening.

We also have to consider that despite all the economic benefits of making a move, it’s just that people aren’t willing to move to the prairies where housing is actually affordable for a plethora of reasons. If people want affordable housing just move to Edmonton lol. But of course it’s never that simple because it requires risk and most people simply don’t have a high enough risk tolerance to make certain steps in order to improve their quality of life. There even was a NY Times article that explained why children of immigrants climb up the economic ladder simply because they are more willing to take risk of moving to places to better their financial security.

https://www.nytimes.com/interactive/2022/07/11/opinion/immigrants-success-america.html

Originally Posted by swimmer_spe

https://www.oecd.org/els/family/47710686.pdf

Really interesting article, but the first thing that jumps out is that the areas with the lowest child poverty rates also have the smallest household sizes. Canada has roughly an average household size and as a result with our unaffordable housing has an above average child poverty rate of OECD countries. This seems to be another argument confirming that supply is still the problem as mentioned in the video and by myself and other posters numerous times on this forum.

Originally Posted by swimmer_spe

The problem is that no one wants a 2 or 3 bedroom home. Even single people or newlyweds without kids want 3-4 at least. Two bathrooms are a minimum if you have more than one person in the household. Doesn't mean 2 4 piece bathrooms, but 2 toilets in the house is a minimum.

And I want a 2,500 sf single-detached home in the inner city on a main arterial that has a walk score > 90, protected bike lanes, and rapid transit while at the same time having no traffic. However, we can’t conform to the unrealistic expectations of Canadian families. If these selfish homeowners want a bunch of useless space than we have to make sure their whole lifestyle isn’t subsidized like it currently is today.

Originally Posted by swimmer_spe

I hate things with words like "never". That is sensationalizing something that needs better understanding.
Yes, there is a problem. It can be fixed if the politicians at all levels want to fix it.

Yes I despise hyperbole as well but the video creator explicitly stated a minute into the video that the title was purely click bait to generate views because it’s YouTube after all. The problem of housing affordability can be fixed, it’s just that there isn’t much political will to take the appropriate steps to curb housing prices. Interest rate hikes are actually a good start, but the root cause of this issue will always be lack of supply relative to increased demand.

[Coldrsx]

1% isn't the end of the world, but it certainly is being purported as such today on the morning news.