The lockdown

What’s the greatest threat facing our nation? Trillions in personal and public debt? Climate change and wildfires that eat places like Jasper? Houses nobody can afford? Shania Twain in peekaboo garb at age 58? A population explosion? Chrystia?

Well, forget all that. Some people insist we’ve created a property crisis with enough leveraged potential to whack us good. Recession? That would be mild, they say. This runs deep.

A major bank just issued a stark condo warning, while a Vancouver conference shocked many who were there listening to Precondo founder John Scrinko. “Any units purchased between 2020 and 2022 are underwater. My back-of-the-napkin math is that this could mean there are anywhere between $8 billion to $16 billion of unrealized losses in consumer pre-construction freeholds and condos. Fast-forward five years to late 2024, early 2025 is where things start to get really hairy.”

Eight to sixteen billion in losses. Who absorbs that? And isn’t this the same timeframe when $220 billion in existing residential mortgages come up for renewal at higher rates?

“This is the biggest challenge facing Canada’s economy right now,” says Daniel Foch, an economist at RSRE Real Estate. “It is one of the biggest challenges we’ve ever faced. There are BILLIONS of dollars in unrealized losses in the condo pipeline that will be absorbed by retail investors. Many buyers don’t want to take possession of the units they committed to purchasing. Just as many can’t afford to.”

Fixing this, they say, could take decades. Absent some kind of government action to soften the blow, the condo biz will be crushed (think of China) and the banks seriously stressed. Foch argues CMHC should absorb these units and get them into the rental market. “It’s easy to say speculators, or developers shouldn’t get a bailout, but it may be necessary to save Canada’s economy from serious pain in the coming years. Watch this closely.”

As we’ve reported, more than 21,000 new condo units sit unsold and unloved in the Toronto market alone. Thousands of investors were lured two or three years ago, never suspecting they’d face closings that were impossible. Many thousands more now own units which are cash-flow negative, losing equity daily and in the midst of a glutted market when selling is impossible.

Quelle mess!

CIBC economist and real estate guru Benny Tal is blunt. Condo conditions, he says, are “deteriorating to levels not seen in decades.

“The GTA condo market is in a state of economic lockdown. The math doesn’t make economic sense from both the demand side (investors) and the supply side (developers), leaving the market at a standstill. Prices are too high for investors to buy given current-resale prices, rents, and interest rates, while developers can’t lower prices due to high construction costs. As a result, new condo sales — the primary driver of new home construction in Canada’s largest market — have dove off a cliff to their lowest level since the late 1990s.”

82% of owners losing money – almost $600 a month

The following numbers are hard to fathom, but here we go. It’s a harsh lesson for everyone who said to their spouse, ‘Heya, honey, let’s buy an investment condo. I mean, what could go wrong?’ As it turns out, everything.

In just four years the cost of owning a rental investment condo has swollen by almost 60%. Last year alone overhead jumped 21% (to $3,250) while rents increased 8% (to $2,700). And guess what that means…

• Of all the condos completed and closed last year, 58% had a mortgage and were cash flow negative.
• Of just those which were mortgaged, 77% were in the red monthly. (The year before was the first time a majority – 52% – had negative cash flow.)
• In 2024 so far, 82% of mortgaged rental condos are losing their owners money.
• The average monthly loss is $597 – 2.5 times higher than two years earlier. In 2020-1, investors were making money on rentals. Those days are so gone.

There are implications.

First, renters are winning and landlords are getting it up the derriere. There is no question tenants’ living costs are being subsidized. They would not be able to live in the same place for the same outlay if they owned. (And that does not even factor in the lost investing power of a downpayment.)

Second, most money-losing investors who think they can write losses off income are in for a surprise. The CRA is methodically disallowing these claims. If there is “no expectation of profit” from a piece of investment real estate, the loss will be tossed.

Third, jobs. As Tal says, every crane represents 500 workers. In the GTA alone over 75 projects have recently been shelved. The hit is approaching 40,000 paycheques – one good reason our national unemployment rate is bubbling higher.

And, finally, there is that $8-16 billion economic shock yet to come. Will scads of precon buyers run scared from their own cash-flow-negative future? Will lenders be left to sift through the rubble? Will losses like this drift through to higher loan rates for everyone?

Three years ago, in the boom, I read on a pathetic blog that ‘this will not end well’.

Weird, eh?

About the picture: “This is Matcha,” writes Brandon, in Kitchener. “She’s a 3 year old Pomski who loves everybody. She’s slightly crazy, but she’s definitely a heartbreaker. This is her telling me to stop reading your blog because it’s past my bed time.”

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