Goldilocks

Do you buy this?

“After a two-year descent, Canada’s housing market is landing gently,” says a big bank (the blue one). “But the takeoff will also be subdued and won’t create much turbulence.”

With big, juicy, numerous rate drops off the table for 2024, the meme among economists is that real estate’s probably bottomed, won’t blow up taking GDP with it, and a new normal is dawning. In that world (which starts soon) demand will slowly ramp up, prices will creep forward and there’ll be nary a boom nor a bust. Goldilocks.

First, why do they think real estate will not crash and burn?

Because (a) interest rates will eventually fall. Just a mater of time. (b) The Canadian economy will get better, whether Trump (if elected) starts a new trade war or not. (c) Demographics for real estate are improving. “The population is both growing and skewing younger,” say the bankers. “The median age (41) is falling as Millennials surpass the Boomers as the largest generation. The oldest Millennials (43 years) are moving into bigger homes, while the youngest (28 years) are pining to get a foot in the door. Their task will be lightened once rates start to fall, likely this summer.”

Okay. All that’s reasonable. But the last time rates fell, buyers went nuts and housing went ballistic. Why gentle this time?

Because the economy is weak and will take time to strengthen as more people lose work, we’re told. At the same time, rate cuts will be slow to happen and the cost of money will never sink back to Covid levels. “The Bank of Canada is expected to reduce its target rate from 5% to 3% over two years.”

Also, the population surge is set to end as immigration is curtained. Growth will drop dramatically – by two-thirds – along with demand for rentals and purchases. And while this is happening, more units are being built (governments are literally throwing money at this) while a slew of investors dump their precon condos because they can’t afford to close or want to beat the capital gains Hoovering. So, prices are falling, rents are declining, equity is vanishing and the stress test hasn’t budged.

In short, the bankers say this is the floor. The market grows from here. Implied is that the current buyer’s market will not last.

But wait. Others think the light at the end of the tunnel is a CN freight train. Anyone making an offer at the moment might end up as goo on the locomotive windscreen.

For example, here’s crusty mortgage dude Ron Butler forecasting “the perfect storm of disaster” for anyone with a Toronto condo who needs to bail.

“Are the prices of tiny rental condos DOOMED in Toronto?” he asks. “Likely they are.” And the reasons include a collapse in the assignment sale market (no escape), massive mortgage rate hikes, empty DT office towers, paused immigration, Airbnb crackdown and more rentals being built

“In so many ways this is a textbook Bubble description,” he says. “It will take time to play out even as we watch price reduction pressure build today. Barring radical mortgage rate reduction back to 2021 rates (not likely) there’s really no escape from what will happen.”

Data analyst and realtor Scott Ingram’s stats bear out this scenario of impending Condopocalypse. In Toronto condo listings just hit two worrisome milestones, he says, as listings in 416 alone surge past the 6,000 mark. Never before at this time of year have so many owners scrambled to become sellers.

An explosion in condo listings…

Also bad news: listings are not only stacking up, they’re languishing. Months of inventory (MOI) is swelling. “Other bad milestone for Condos was MOI went over 4 (was 3.95 last week). First time since Jan 31 (when it was on its way down from end of year highs). Freehold MOI is on a similar slow-creeping upward climb too.”

And here is how that looks when charted.

…leads to a glut of unsold inventory

“I don’t see this turning around in the near term – especially condos,” says Ingram, stating the obvious. It takes a long time for any market to absorb such a glut of inventory, and we’re not yet (likely) at the peak. It also makes you wonder about governments spending billions and billions to fast-track new construction when 6,000 resale units and 21,000 new ones sit unsold and unloved in a single market. How does any of that make sense?

Well, anyone who really, really, really needs real estate can buy now and pray the bank is right. Or stand aside and wait (maybe) for blood in the gutters.

What would you do?

About the picture: “First the obligatory flattery,” writes Nathan. “Thanks all of your ongoing work in financial education! I’ve found it immensely helpful over the years. And here’s a picture of Pancake looking for belly rubs (which she got).”

To be in touch or send a picture of your beast, email to ‘[email protected]’.