The long descent

Confusion reigns in the Kingdom of Houses. Buyers have been on strike waiting for the price of properties, and mortgage rates, to plunge. Sellers aren’t budging for they believe the becalming of real estate will be temporary. Meanwhile inventory continues to pile up. In some cases, historicallty.

So, something’s gotta give.

The smart (but usually incorrect) guys at Capital Economics are calling for price drops in the final months of 2024. “We think elevated housing unaffordability and the growing strain on households from the wave of mortgage renewals will cause listings to grow faster than demand in H2 (second half) this year,” they say. Toronto prices will be 7% lower and values fall by 10% in Van by Christmas, they figure.

But even so, homes won’t be affordable. The average detached in 416 is $1.65 million and in YVR, just over $2 million. To afford either you need hundreds of thousands in cash and an income north of $400,000.

Will cheaper money help?

As reported here, many economists (notably working for CIBC) think rates will crash from the current BoC level of 4.5% down to 2.5% in 16 months. By this December, we’ll be in the mid-3% range, they say. Increasingly, however, observers believe even this will not turn a current buyer’s housing market into a new FOMO fest.

“It will take deeper rate cuts to meaningfully reduce ownership costs and stimulate homebuyer demand more broadly,” says RBC’s economists. “Supply, on the other hand, continues to grow. In some cases, such as in Toronto, it reflects the completion of many newly built units (mainly condos) that owners (mainly investors) are looking to offload. In other cases, it could be sellers betting lower rates will spur buyer interest and improve sale outcomes. In some, it may be a sign of homeowner distress arising from high rates.”

The media ascribed that ugly ‘distress’ to the seller of a condo in Toronto’s over-populated entertainment district the other day. He dumped his unit after too-long on the market and some failed offers for $320,000 less than the purchase price. “The condo market is clearly in recessionary territory with conditions deteriorating to levels not seen in decades,” says a report from Urbanation.

But the unit here sold for $1.23 million, which was 20% below what the owner paid in 2021 – the very tippy-top of the pandemic-crazy real estate boom when mortgages were 1.2%. Given that home loans are now over 5%, the discount is reasonable. Besides, how many people can (or want to) pay $1.23 million for an apartment on the 37th floor in the midst of a cacophonous urban jungle?

As we’ve reported, the condo market is either an outlier, or the canary in the coalmine. Either way, it is sick, moribund, stagnant and almost comatose. Sales have dropped. Listings have jumped. There’s a six-month supply of units on the resale market and another 17,000 unsold new-builds in Toronto alone.

Problems abound.

At almost $750,000 (resale) or $1 million (new) the average condo cannot be afforded by the average newbie buyer who brings no real estate equity to the table, and faces 5% financing. Concurrently, investors have disappeared. Over 80% of those who bought recently are in negative cash flow, a situation faced by 70% of last year’s buyers. They are dropping an average of almost $600 a week in negative cash flow. Last year condo costs jumped 21%. Rents increased 8%. These guys are dying.

So without first-time end users or small-time landlords making offers, inventory grows. Active condo listings in Toronto are up year/year more than 80%. While politicians keep telling us we have a housing crisis based on too few homes, the numbers say otherwise. There’s an ocean of homes to choose from. The problem is, prices are staying sticky and people cannot afford to buy.

Why the standoff between owners and potential purchasers?

“A big reason why investors in Toronto are slow to dramatically reduce their prices is that most are optimistic that the condo slowdown we are experiencing is a short-term trend that they need to wait out,” speculates realtor John Pasalis (who still hates me). “Since most of the inventory buildup is due to very low sales volumes, many feel that upcoming rate cuts will move buyers and investors from the sidelines to buy a condo which should improve market conditions.”

Will that happen, as brokers like Pasalis and bank economists hope?

As the labour market weakens, it looks less likely. Unemployment is north of 6%. We lost net jobs last month. Joblessness among youth and recent immigrants is elevated. The forecast is for more positions to be shed by the end of 2024 and even (gulp) a short-lived recession. There’s increased economic volatility ahead with the crazy US election, wars in Gaza and Ukraine, uncertainty about NATO and the polarization of global politics. Plus, the climate is pissy.

Best to expect more deadlock. Prices are not going to drop in a meaningful way (that would be 40%, not 7%). Sales will probably stay anemic. Interest rates will fall, but not plunge. Income gains are already being reduced. And this means those who cannot now afford to buy won’t be doing it next year, either.

The dam may burst. If it does, it will be on those 500-foot micro-condos that so many investors plucked. So, if you succumb and buy one, downgrade to a cat.

About the picture: “Enjoy your blog every day I have internet,” writes Ed, out there somewhere. “Since I don’t have a dog as we live on our sailboat I thought I’d send you a pic of our resident seadog as usual sleeping on the rocks in the mid day sun. Melanie Cove, Desolation Sound BC.”

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