Canada's 'housing bubble' deemed close to bursting

[travis3000]

Originally Posted by Truenorth00

Will inflation be fixed in a year and a half?

The Bank could have to pick a poison pill of stubbornly high inflation VS a severe economic downturn.

I personally think inflation will remain on the high side for the next two years or more. Its hard to just snap your fingers and go back to normal. Lots of economic shockwaves to work their way through the global economy. I think it will trend lower by early 2023 and might get back to the standard 2% by 2025 or so. But hey I don't have a crystal ball. Im just taking an educated guess.

Regardless, if we do go into recession then the bank will likely take a couple steps back. Not to pandemic lows, but I can envision some relief.

[Truenorth00]

My point here is that people are assuming that once the recession hits the BoC will back off. This assumption ignores the reality of inflation.

Personally, I think we're going to see another 50-100 bps before the year is out. And I don't think we see any cuts before 2024. They will want to make sure that inflation is truly dead and buried before the start cutting.

The recession will be painful. But it's overdue. Our household debt to GDP ratio is > 110%. Even during the Global Financial Crisis, the US and UK never broke 100%. The US is at 75% today. To make it worse 85% of all economic growth over the last half decade is reliant on housing or housing supported consumerism. The party is over. This will not be a short correction. I expect something like 89/90 recession and housing crash. It took 7 years for housing prices to bottom out then. And another 7 years to get back to pre-crash levels.

[casper]

Originally Posted by swimmer_spe

Which speaks louder to the lack of homes as the real issue.

absolutely. There are some days you can’t find a decent hotel room in Vancouver. Even that 1950s motel on Kingsway was well over $200 a night and most real hotels were sold out or well over $500 a night.

Not as bad as Manhattan but not far off. The airb&b have been proving if some capacity but jostle those should go back to being long term rental and we need more purpose built shorter term rentals such as hotels.

[thurmas]

Originally Posted by Truenorth00

My point here is that people are assuming that once the recession hits the BoC will back off. This assumption ignores the reality of inflation.

Personally, I think we're going to see another 50-100 bps before the year is out. And I don't think we see any cuts before 2024. They will want to make sure that inflation is truly dead and buried before the start cutting.

The recession will be painful. But it's overdue. Our household debt to GDP ratio is > 110%. Even during the Global Financial Crisis, the US and UK never broke 100%. The US is at 75% today. To make it worse 85% of all economic growth over the last half decade is reliant on housing or housing supported consumerism. The party is over. This will not be a short correction. I expect something like 89/90 recession and housing crash. It took 7 years for housing prices to bottom out then. And another 7 years to get back to pre-crash levels.

I would agree that's the more likely outcome

[swimmer_spe]

Originally Posted by casper

absolutely. There are some days you can’t find a decent hotel room in Vancouver. Even that 1950s motel on Kingsway was well over $200 a night and most real hotels were sold out or well over $500 a night.

Not as bad as Manhattan but not far off. The airb&b have been proving if some capacity but jostle those should go back to being long term rental and we need more purpose built shorter term rentals such as hotels.

I visited a few times, last was in 2020. The availability and cost was surprising. Why is there such a low supply? Can it be traced back to key reasons? How do we fix that?

[ssiguy]

Just because inflation may subside within the year, doesn't mean that the BoC will lower it's rates. Mortgage rates are also set by the bond market which is why mortage rates are rising faster that the BoC rate.
Also, the US$ is VERY strong and if the BoC reduces interest rates too soon after inflation begins to ease, it will put downward pressure on our dollar resulting in much higher prices for all imports and commodities which will restoke inflation.
Our central bank's decade long policy of printing free money has come home to roost and things are going to get sizably worse before they get better and especially in Canada were our household debt level is now a staggering 70% above US levels.

[someone123]

If you look at historical BoC overnight rates, we're still at some of the lowest rates of the postwar era. Inflation on the other hand is high compared to historic rates. During the 60's-80's, higher interest rates persisted for many years after suddenly going up and they peaked at just under 20%. That may be extreme but I don't think it is that far-fetched to imagine that we could enter into a higher interest rate regime for years. We experienced a shift in the 1990's as the Soviet Union collapsed, China opened up, and the world was unusually stable for a while.

As ssiguy points out Canada is exposed to external factors because we are so reliant on the US and global supply chains. External shocks often precipitate economic crises.

[Truenorth00]

I feel like there's a lot of copium going around.

Plenty of folks who have never seen interest rates this high (we're back to 2008 levels) just can't believe that the BoC will actually keep interest rates up. This is the prevailing narrative among RE bulls, that high interest rates are transitory.

On the flip side are those waiting on the sidelines for affordable real estate. They don't get it either. Higher rates don't make real estate more affordable. Not in an environment of low supply, that is about to get worse. Developers will cancel projects as they struggle to make financing work. And the recession will see unemployment go up and wage growth curtailed. Broke and unemployed people can't afford real estate. Sure, some people sitting on the sidelines with lots of savings will get in. But it's mostly the rich and corporate investors who are going to load up at a discount.

[suburbanite]

Developers have a lot of margin they can give back before projects become truly unprofitable. Some land that has been purchased more recently at $40,000 per lot front foot valuations may have a busted budget, but as I've said it's more likely that a development coming to market now was originally purchased before 2012 and the numbers would've worked at 2012 home prices.

The issue is that everyone has gotten used to fat profits, and they've all built up massive war chests over the past decade. The developers that I work with are all content to sit back for a year and see if the market fundamentals (population growth, lack of available land, etc.) can keep prices somewhat stable as everyone adjusts to the new reality. There are projects in Richmond Hill, Markham, etc. where 90% of the purchasers are Chinese and the more important determinant for whether those developments will bounce back is whether capital flows out of China start easing again, a local recession is almost irrelevant. For the most part, except for land purchased at the peak of the market in the last two years, there should still be profits to be made with a 20% pullback in unit prices. It's just that everyone can afford to speculate on a bounceback for at least the next year. Most of these guys survived the 90's and don't like chasing a down market.

My guess is there will be someone like Mattamy with a more institutionalized mindset who doesn't like to sit on inventory and would rather move into new projects even if it's at lower margins. They will set a new market if their current product doesn't start moving again this fall, and everyone else will have to follow or start bleeding more as they hold on to unproductive assets.

[swimmer_spe]

Originally Posted by Truenorth00

I feel like there's a lot of copium going around.

Plenty of folks who have never seen interest rates this high (we're back to 2008 levels) just can't believe that the BoC will actually keep interest rates up. This is the prevailing narrative among RE bulls, that high interest rates are transitory.

On the flip side are those waiting on the sidelines for affordable real estate. They don't get it either. Higher rates don't make real estate more affordable. Not in an environment of low supply, that is about to get worse. Developers will cancel projects as they struggle to make financing work. And the recession will see unemployment go up and wage growth curtailed. Broke and unemployed people can't afford real estate. Sure, some people sitting on the sidelines with lots of savings will get in. But it's mostly the rich and corporate investors who are going to load up at a discount.

What we really need is a "post war" housing boom a la the 1950s. The problem is, all the land that people could build something on is 🞵🞵🞵🞵 🞵🞵 in greedy developer hands that want to squeeze as much money from it as possible.

[Truenorth00]

Originally Posted by swimmer_spe

What we really need is a "post war" housing boom a la the 1950s. The problem is, all the land that people could build something on is tied up in greedy developer hands that want to squeeze as much money from it as possible.

Ummm no. The majority of land in our urban centres is tied up in single family housing that is blocked off to redevelopment. AKA "the yellow belt".

In a less constrained market, you would see a whole lot of small developers buying up those old bungalows with their large lots and putting quadplexes on them turning each lot from one home into four. We don't get this today because we've made it unprofitable for any developer to do this and explicitly prohibit it in many cases. If there's only a small amount of developable land left, this favours very large developers, since they are the only ones with the capital and skill to build high rises.

If you want to see how bad the situation is, just look at Toronto declaring several hundred properties along the Danforth line historical, preventing them from ever being redeveloped. And you want to see the excuses politicians come up with when told that development fees make housing unaffordable for young people? Watch this reaction from Mayor John Tory (start at 1:07:45):

https://youtu.be/ocwArOyP4zs

I spoke at Toronto's Executive Committee this morning to encourage the city to explore other ways to fund growth instead of increasing development charges by 46%.

I wasn't expecting just how defensive John Tory got at my remarks:
https://t.co/2MMjM5zZ1P

Tax talk is hard, especially when you're trying to build a big-tent coalition.

But there's a huge generational gap in how people see things like property taxes - and the gap will only become wider as inequality worsens.

I also didn't mean to annoy the mayor; he is good at appearing centrist and is someone who can be worked with. But if he's angered by my moderate criticism of his fiscal policy, that's on him.

Just compare my questioning to that of FoNTRA's deputant:
https://t.co/77Fzf4MIeg

When the 20-something who found some time before work to show up at City Hall gets a cold shoulder and debate-like questioning, while the long-timer gets a friendly treatment:

Are we really surprised so many young people and newcomers are disengaging from the process?

Aside: the speaker from FoNTRA admitted that their org misspoke when they said new housing should be limited to highways.

But then the same speaker said "one of the problems we have is we have a very high rate of immigration... that drives up land values"

https://twitter.com/bilal_akh/status/1546990576066859011?t=RaF38baaiBVWanIlrEMBUg&s=19




Nova Scotia has the right idea:

But while Ontario and British Columbia drag their feet, the Government of Nova Scotia has gone ahead and adopted sweeping changes recommended this year by its own Executive Panel on Housing in the Halifax Regional Municipality.

The three panels’ findings were similar. They all concluded that local land use and planning decisions have become a barrier to building enough housing and that housing approval processes are too slow. Each recommends that the provinces step in to ensure that municipalities aren’t preventing enough housing from being built. But rather than waiting for yet another staff report or commission Nova Scotia is taking immediate action.

Nova Scotia’s municipal affairs and housing minister has the authority to review and approve housing development proposals in nine “special planning areas” across the Halifax Regional Municipality. To date, projects amounting to more than 22,000 homes are to be “shovel-ready” between this summer and spring 2024. By contrast, since 2018 communities provincewide have issued building permits for just over 12,000 homes, which means the provincial government is well on its way to green-lighting far more housing in Halifax alone over two years than communities provincewide have in five.

Some may balk at the idea of a provincially appointed executive panel recommending that a minister supersede local councils to push through potentially unpopular housing developments. Fair enough. But it’s important to remember how we got to a situation where the country is short millions of homes, with countless young families and newcomers wondering how they will ever get on the housing ladder or even find a decent place to rent.

https://financialpost.com/opinion/opinion-want-to-boost-housing-supply-look-to-nova-scotia

Ontario's housing task force recently made a similar recommendation. Hopefully the Ford Government has the testicular fortitude to tell municipalities to go 🞵🞵🞵🞵 a bag of...lemons.

[swimmer_spe]

Originally Posted by Truenorth00

Ummm no. The majority of land in our urban centres is 🞵🞵🞵🞵 🞵🞵 in single family housing that is blocked off to redevelopment. AKA "the yellow belt".

In a less constrained market, you would see a whole lot of small developers buying up those old bungalows with their large lots and putting quadplexes on them turning each lot from one home into four. We don't get this today because we've made it unprofitable for any developer to do this and explicitly prohibit it in many cases. If there's only a small amount of developable land left, this favours very large developers, since they are the only ones with the capital and skill to build high rises.

If you want to see how bad the situation is, just look at Toronto declaring several hundred properties along the Danforth line historical, preventing them from ever being redeveloped. And you want to see the excuses politicians come up with when told that development fees make housing unaffordable for young people? Watch this reaction from Mayor John Tory (start at 1:07:45):

https://youtu.be/ocwArOyP4zs



https://twitter.com/bilal_akh/status/1546990576066859011?t=RaF38baaiBVWanIlrEMBUg&s=19




Nova Scotia has the right idea:



https://financialpost.com/opinion/opinion-want-to-boost-housing-supply-look-to-nova-scotia

Ontario's housing task force recently made a similar recommendation. Hopefully the Ford Government has the testicular fortitude to tell municipalities to go 🞵🞵🞵🞵 a bag of...lemons.

I do not necessarily mean SFH, but I do mean we need to build like crazy. All housing projects should be pushed through and should have a requirement that they must start construction within a year and be done within 5 years. Any vacant buildings you hold that you will be converting into housing must be started this calendar year. Prime example is the old hospital in Sudbury that Panoramic owns. It has been vacant for years and hs become such an eyesore they decided to paint a mural on If you can't/won't build this year, you must sell the property to someone that will.

[WarrenC12]

Originally Posted by Truenorth00

The recession will be painful. But it's overdue. Our household debt to GDP ratio is > 110%. Even during the Global Financial Crisis, the US and UK never broke 100%. The US is at 75% today. To make it worse 85% of all economic growth over the last half decade is reliant on housing or housing supported consumerism. The party is over. This will not be a short correction. I expect something like 89/90 recession and housing crash. It took 7 years for housing prices to bottom out then. And another 7 years to get back to pre-crash levels.

Pre-crash levels not counting for the inflated dollar. I think real values didn't return until around 2012-3.

I agree we'll probably see another 100bps but perhaps not much more. The debt levels of Canadians are such that they will be cripplied at 5%, we won't see 15-20 like before. Spending will completely dry up.

I'm curious how bad unemployment will get, given the current massive labour shortage.

[Truenorth00]

Originally Posted by swimmer_spe

I do not necessarily mean SFH, but I do mean we need to build like crazy. All housing projects should be pushed through and should have a requirement that they must start construction within a year and be done within 5 years. Any vacant buildings you hold that you will be converting into housing must be started this calendar year. Prime example is the old hospital in Sudbury that Panoramic owns. It has been vacant for years and hs become such an eyesore they decided to paint a mural on If you can't/won't build this year, you must sell the property to someone that will.

It's called land banking. And it's a concern to be sure. And we could probably tax it away. However....

1) The shortage of construction personnel and the Boomer wave in that group cycling out means that developers couldn't develop most land if they wanted to. They are just about building as fast as they can today.

2) The amount of land that is banked by developers pales in comparison to both the quantity and quality of land that is locked up in the yellow belt. A single family home in the 416 that can be redeveloped is worth more than a lot at the edge of Oakville in so many ways. Less fiscally burdensome (uses existing infrastructure). More profitable to the developer. Better quality of life for residents. And better for the environment. Probably cheaper for the families too.

[lio45]

Did rents also go massively up with inflation in markets like Toronto and Vancouver, or not?

In both my markets, rents went up a lot, thus most of the crazy gains in real estate values is actually sound, and not bubbly/speculative.

In my experience, rents, once widely accepted at a given level by the populace, pretty much never go down. I consider that to be in the same category as, say, the price of a TTC subway ride for example: whenever that goes up, AND users continue to ride it, you can consider it went up permanently; there won't be any spontaneous reduction in fare even if there are operating surpluses someday.

(Exceptions of course for monoindustrial cities or mining towns, etc. but I'm talking about economically diverse cities midsize or larger.)

[swimmer_spe]

Originally Posted by Truenorth00

It's called land banking. And it's a concern to be sure. And we could probably tax it away. However....

1) The shortage of construction personnel and the Boomer wave in that group cycling out means that developers couldn't develop most land if they wanted to. They are just about building as fast as they can today.

2) The amount of land that is banked by developers pales in comparison to both the quantity and quality of land that is locked up in the yellow belt. A single family home in the 416 that can be redeveloped is worth more than a lot at the edge of Oakville in so many ways. Less fiscally burdensome (uses existing infrastructure). More profitable to the developer. Better quality of life for residents. And better for the environment. Probably cheaper for the families too.

1) That would see something that is needed.... a hike in wages, and employers having a reason to take on as many apprentices as they can. Why did I leave the automotive industry and join the navy? No one wanted to sign up apprentices. When I looked other work, you needed 10 years experienced and licensed in that trade. If there were places that would take on someone that wanted to be a carpenter, electrician, plumber, etc, I would have switched to that and not saw the world.

2) What about a near tax. So, vacant land would be taxed as though it was built up like what is near to it? That would put a sting to the cost of banking the land.

[lio45]

FYI, that's called LVT, and there are good arguments in favor of it.

https://en.wikipedia.org/wiki/Land_value_tax

(It would be really bad for me personally, I'm sitting on a lot of under-utilized real estate, but I don't deny it would be better for the greater good. It would likely push me to develop.)

[theman23]

IIRC, rents are up 20% YOY in Vancouver.

Don't think anyone expects that (or any of the inflated price of goods and services we're seeing this year) to ever go down.

[swimmer_spe]

Originally Posted by lio45

FYI, that's called LVT, and there are good arguments in favor of it.

https://en.wikipedia.org/wiki/Land_value_tax

The only real arguments against it are from people who want to sit and wait for it to be worth more.

[lio45]

Originally Posted by swimmer_spe

The only real arguments against it are from people who want to sit and wait for it to be worth more.

AND who are dishonest enough to refuse to admit it would make sense from society's point of view

(see my edit above, which you likely missed)