‘A critical moment’

Will there be a slaughter?

Some say yes. It’s inevitable. These days there’s a massive six-month supply of condos for resale in the country’s biggest market. There are almost 22,000 new, built or available units which sit unsold and unloved. Another twenty thousand are nearing completion, gobs of them bought by ‘investors’ who may not be willing, or able, to close.

Despite efforts by lenders to keep things on the rails with mortgages based on purchase prices, not current (lower) appraised values, these buyers never figured home loans would be north of 5.5%. The numbers don’t work anymore. They will never rent units out for enough to cover costs. Many will walk – unwisely.

“Things are approaching a critical moment,” warns mortgage broker and social media maven Ron Butler. “The rental condo crash seems to be inevitable at this point. So here we are: soon we will see pre-construction buyers walking away from deposits & refusing to close at scale. Unless we go back to 1.49% – 1.99% mortgage rates, and that ain’t happening next year. How far will prices fall? And will the falling price virus spread to Detached Homes?”

A key real estate metric is the SNLR – sales-to-new-listings ratio. It provides a snapshot of market health, marking the absorption of fresh inventory. These days it’s dismal, and getting worse. This, says data miner and realtor Scott Ingram, is the worst he’s seen since starting to track the ratio eight years ago. Just look at the decline from 2021. Down by almost half. 2022 was a bad year. This one is worse.

Source: Scott Ingram

As for total sales, they suck. Down in Toronto. Off in Vancouver. Even Calgary is in the tank. Ingram says GTA June deals were the second-lowest since 1996 in terms of a rolling 12-month average. But wait. In ’96 there were 4.4 million people in the hood. Today that number is 6.4 million – a 45% increase. And yet sales have choked.

As for prices, down but not reflective of market sentiment. The average detached 416 topped $2 million a couple of times in the last few years, and currently sits at $1.75 million. Two years ago condos averaged $840,000. Now we’re at $763,000.

Yes, that’s a 10% drop for urban condos, but the sales slide suggests it may only be the start. After all, at current rates a buyer wanting to avoid CMHC insurance must make a downpayment of $153,000 and afford a monthly of about $4,800 (mortgage + property tax + insurance + condo/strata fees). Adding in the lost investment income on the downpayment, the true cost is over $5,500 a month – for a box in the sky.

To afford this, by the way, requires an income of at least $180,000. Insane.

That should tell you all you need to know about the market decline. Prices plus mortgage rates equal unaffordability. Meanwhile inventory continues to stack up with the potential for another big bump as pre-con buyers default on closings. In addition, there are oodles of existing owners coming up for a mortgage renewal at higher rates – some of whom may bail and list. And at the same time governments at all levels are pumping billions into encouraging the mass and rapid construction of millions of additional housing units.

How does this possibly end without a significant correction from current levels?

Of course, that’s not what the feds want – even though they’ve let the kiddos think it. A collapse in residential real estate values would impact the entire economy and attack the biggest retirement asset in Canada. So many people have, foolishly, put so much of their net worth in a single asset.

Concurrently, did you notice what’s been happening with the S&P 500?

The main American stock market index has hit 36 new record highs this year. In 28 weeks. The gain has been more than 17% while inflation is around 3%. During this period of time, as you know, property values have been static or declined. Real estate ownership costs have escalated.

You should own financial assets as well as real ones. Without asking why.

About the picture: “I am urgently responding to your recent call for dog pics,” writes Mike. “Here’s my old dog Brody on a beach at Lepas Bay, northern tip of Graham Island, Haida Gwaii many years ago. He’d have that same look today wondering why the world is so upside down. Thanks for all you do!!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.