Canada's 'housing bubble' deemed close to bursting

[travis3000]

Originally Posted by goodgrowth

I'd be willing to bet actual affordability in places like BC and Ontario will not change much.

First of all rising interest rates are going to offset some of the drop in price. Would a new mortgage payment be much less with the added interest?

Second there is still significant housing scarcity issues in BC and Ontario combined with an aggressive immigration rate. This is going to continue to drive demand.

How are the rental markets? Prices coming down? Units available?

This obsession with interest rates as a cause and cure of all housing issues is too narrow a view.

In Southern ON, rent is currently at all time highs! I have a single family investment property in London, ON for example. When I bought it in 2017, the going rent was $1600/month. The going rate is now $2500/month for the same unit.

Im seeing the same everywhere right now whether it be London, Toronto, Barrie, etc. Condo rents are at all time highs in Toronto, and the situation is similar everywhere.

[lio45]

Originally Posted by travis3000

In Southern ON, rent is currently at all time highs! I have a single family investment property in London, ON for example. When I bought it in 2017, the going rent was $1600/month. The going rate is now $2500/month for the same unit.

Im seeing the same everywhere right now whether it be London, Toronto, Barrie, etc. Condo rents are at all time highs in Toronto, and the situation is similar everywhere.

Same here. In Sherbrooke, rents have basically doubled.

My analysis is that unlike speculative real estate prices, rents on the other hand rarely fall once they've been widely accepted as normal. Which is why I'm not in selling mode (which I would be, if I identified an obvious peak / bubble). In any market where the recent spike in values is backed by a proportional spike in rents, I don't see values in those specific markets deflating.

i.e. if a cheap new build in Welland with crooked steps used to rent for $5k a month before Covid and now easily rents for $10k a month and we have had occasion to notice over the last couple years that everyone who rents in that area accepts that and pays that, then I'm perfectly confident that kind of property will continue to be worth $1M.

[Coldrsx]

Here in Canmore I am awaiting significant rental increases given housing prices and inflation; I would not be surprised to see 10-20% or more.

[Coldrsx]

https://www.linkedin.com/company/canada-...tainer&lici=Z2Jn88Y48GsXyrNOlpO8hw%3D%3D

[thewave46]

Originally Posted by suburbanite

Looking at your home from the perspective of a place to live and not an investment, I would almost always rather be going into the market with lower asset prices and higher interest rates/relative holding costs than vice versa.

Absolutely.

Being on the wrong side of leverage sucks. This will drag on economic growth - as fixed mortgages renew at higher interest rates, it will vacuum cash out of homeowners' pockets.

We've just had the opposite situation for those who bought in the late 1990s to early 2010s: Relatively low-priced assets and declining interest rates, and is partially why we've had such an economic boom.

Anyway, this whole 'primary residence as investment' mantra has led us down an idiotic road. Here comes the hangover.

[thewave46]

Originally Posted by travis3000

In Southern ON, rent is currently at all time highs! I have a single family investment property in London, ON for example. When I bought it in 2017, the going rent was $1600/month. The going rate is now $2500/month for the same unit.

Im seeing the same everywhere right now whether it be London, Toronto, Barrie, etc. Condo rents are at all time highs in Toronto, and the situation is similar everywhere.

I would be curious if rental construction picks up, especially in the cores of secondary cities.

There was a big shift towards rental tower construction in the 1970s. Now that new SFH construction is extremely limited and is nearly impossible to achieve at a scale required by population growth, perhaps rental towers may fill in that demand gap.

[lio45]

Originally Posted by Coldrsx

https://www.linkedin.com/company/canada-...tainer&lici=Z2Jn88Y48GsXyrNOlpO8hw%3D%3D

That can't be correct. If ~40,000 new units get started every month in Toronto, that's ~500,000 new units added to the supply per year. At that pace, Toronto will soon have a glut of unwanted/unneeded housing, if it doesn't already.

[lio45]

Originally Posted by thewave46

I would be curious if rental construction picks up, especially in the cores of secondary cities.

That's what I've been observing in my hometown.

Makes perfect sense: in the current environment, rents at project-completion-time are easier to forecast than condo values at project-completion-time.

[suburbanite]

Originally Posted by lio45

That's what I've been observing in my hometown.

Makes perfect sense: in the current environment, rents at project-completion-time are easier to forecast than condo values at project-completion-time.

Most builders are only selling <15% of their units after substantial completion. In normal times, profits can be substantially crystalized by the time construction is above-grade. You typically only get screwed over when you started building before some massive transitionary period, ie. the last two years as costs have skyrocketed and fixed contracts cannot be honoured.

It's very hard to make rental construction more attractive than condo development except to the deepest-pocketed, long-term institutional investors.

[thewave46]

Originally Posted by lio45

That's what I've been observing in my hometown.

Makes perfect sense: in the current environment, rents at project-completion-time are easier to forecast than condo values at project-completion-time.

Indeed.

There's a lot of land in prime corridors that small-to-midsize multiplexes might fit well on. It's not land good for SFH because it is on arterial roads, but is serviced for larger commercial developments and is along major transit routes. Smaller plots could have 6-8 unit buildings on them, larger abandoned places (see: Dead Malls of Canada) probably could have tower blocks.

No, it won't be Le Plateau style, but it will be much more dense and make better use of space without the need to build new services.

[lio45]

Originally Posted by suburbanite

It's very hard to make rental construction more attractive than condo development except to the deepest-pocketed, long-term institutional investors.

I am guessing it's easier to move forward (getting the financing) on a rental building project right now because it's basically guaranteed to be all rented at predictable prices right after it's built, versus needing to have most of the condos presold in order to be able to proceed.

Anyway, the reality is that what's getting built here nowadays is nearly all rental, while a few years ago all new builds were almost automatically condos (you couldn't justify rentals back then for new construction, rents were too low and the vacancy rate too high).



(Also, in ultra-low-cap-rate markets (Toronto and Vancouver), you would be totally right, obviously. Those markets weren't what I was talking about.)

[casper]

Originally Posted by suburbanite

Most builders are only selling <15% of their units after substantial completion. In normal times, profits can be substantially crystalized by the time construction is above-grade. You typically only get screwed over when you started building before some massive transitionary period, ie. the last two years as costs have skyrocketed and fixed contracts cannot be honoured.

It's very hard to make rental construction more attractive than condo development except to the deepest-pocketed, long-term institutional investors.

City of Vancouver has certain programs that waves a number of development fees and conditions if it is 100% rental building vrs Condos. That has been the case for several year.

I suspect we are going to need the government to step in with preferential discounted loans to get more of these projects going.

[thewave46]

Originally Posted by suburbanite

It's very hard to make rental construction more attractive than condo development except to the deepest-pocketed, long-term institutional investors.

There are pension plans that require assets that generate lots of continued cash flow.

The long-term outlook for rentals seems pretty bright, all things considered. Constructing SFH/condos and selling them at a price point required to turn a profit is getting more difficult as cities pile on development charges, interest rates rise, and approved areas for development shrink.

Population growth is strong; people need place to live. There are fair chunks of land available in our secondary cities that still are decent for non-SFH development. Cities tend to look more favourably on rental development when vacancy rates are extremely low as they are now and will likely waive development charges, especially on existing plots. Construction costs are high, but the slowdown in condo development might free up some labour there.

The biggest risk is future rent controls and tenant-friendly landlord laws.

[lio45]

Originally Posted by thewave46

The biggest risk is future rent controls and tenant-friendly landlord laws.

That's what I always liked about Quebec when I first decided to invest there (I also happened to live there, which helped ): those factors are so bad that they can only go in the right direction in the future.

[Nouvellecosse]

Originally Posted by lio45

That can't be correct. If ~40,000 new units get started every month in Toronto, that's ~500,000 new units added to the supply per year. At that pace, Toronto will soon have a glut of unwanted/unneeded housing, if it doesn't already.

Why would we assume that it happening in one specific month means that it happens every month?

[whatnext]

Originally Posted by travis3000

In Southern ON, rent is currently at all time highs! I have a single family investment property in London, ON for example. When I bought it in 2017, the going rent was $1600/month. The going rate is now $2500/month for the same unit.

Im seeing the same everywhere right now whether it be London, Toronto, Barrie, etc. Condo rents are at all time highs in Toronto, and the situation is similar everywhere.

Again, this is why the Federal gov't needs to step in forcefully with a program similar to the one that created so many rental units in the Seventies. Why are they dragging their feet?!

[someone123]

Originally Posted by lio45

That can't be correct. If ~40,000 new units get started every month in Toronto, that's ~500,000 new units added to the supply per year. At that pace, Toronto will soon have a glut of unwanted/unneeded housing, if it doesn't already.

The record high nationally is about 330,000. So the entirety of Canada has never averaged 40,000 on a monthly basis for a year.

I suspect the housing start data is pretty noisy on a monthly basis and may not be consistent across municipalities. Not sure what the standard is. You could imagine something like a multi-phase development that "starts" on a given year but isn't completed until years later or may never be completed. Different kinds of development also span different periods of time, often multiple years.

[suburbanite]

You don't really break ground on new construction between November-March in Canada so starts are not going to be evenly distributed throughout the year.

[casper]

Originally Posted by someone123

The record high nationally is about 330,000. So the entirety of Canada has never averaged 40,000 on a monthly basis for a year.

I suspect the housing start data is pretty noisy on a monthly basis and may not be consistent across municipalities. Not sure what the standard is. You could imagine something like a multi-phase development that "starts" on a given year but isn't completed until years later or may never be completed. Different kinds of development also span different periods of time, often multiple years.

The key think is the overall number. So 330,000 per year corresponds to housing for 834,900 people based on the average of 2.53 persons per household.

That is positive. It means we can make sold inroads in increasing housing for those already here as well as accommodating and even larger increase to new immigration numbers to address our labour shortage.

[ssiguy]

Originally Posted by travis3000

In Southern ON, rent is currently at all time highs! I have a single family investment property in London, ON for example. When I bought it in 2017, the going rent was $1600/month. The going rate is now $2500/month for the same unit.

Im seeing the same everywhere right now whether it be London, Toronto, Barrie, etc. Condo rents are at all time highs in Toronto, and the situation is similar everywhere.

That is normal at the start of any housing crash.

As you know, price increases & decreases always start at the top price level {usually SFH} and work there way down from there.

We are already seeing this as SFH are currently taking the biggest hit in terms of both sales and prices. As this continues, many people who could afford a townhouse are beginning to be able to buy as SFH. Likewise, those condo owners now see town/rowhomes within their grasp and as they move, all those current renters who couldn't afford a condo move out of the rental market and rental supply increases and rents correspondingly decline.

This is why cities with high real estate prices ALWAYS have the highest rental rates as well................the high real estate prices keep people, even with good incomes, stuck in the rental market.