The Cure for High Prices

Steve Saretsky -

Well, it didn’t take long. Canadians confidence in the Real Estate market has returned to pre-pandemic levels. Bloombergs often quoted Nanos Research survey shows 45% of respondents now believe the value of real estate in their neighborhood will increase over the next six months, that’s the highest reading since the country implemented rolling lockdowns.

Naturally, that optimism is showing up in the latest sales figures across major metro cities. Early reporting out of Vancouver, Toronto, and Calgary suggest national home sales and prices will continue their bounce higher. In Vancouver, home sales in October jumped 29% year-over-year, it was the busiest October since 2009. In Toronto, the average sales price hit a new record high, up 13.7% from last year. Even the depressed housing market in Calgary received a COVID boost with sales up 23% and the MLS benchmark price increasing 0.6% year-over-year, the first annual increase in three years.

Of course it’s not all butterflies and rainbows, despite recent optimism. The housing boom has been uneven, creating obvious winners and losers. A glut of condos is quickly building across the nation, potentially putting the cinderella story of an impenetrable housing market in jeopardy. With people fleeing condos for more space, and immigration temporarily on hold, condo inventory is swelling.  Vancouver condo inventory has jumped to a six year high. In Toronto, active listings soared by 173%. Calgary apartment inventory continues to build, growing by 9% and now sitting at a whopping 7 months of supply.

This has ultimately resulted in higher vacancy rates and falling rents, and putting some landlords in a financial pinch. While the Trudeau government is doing everything they can to stem the tide, including handing tenants CERB cheques, ramping up immigration targets, and fast tracking permanent residency applications in order to stem further outflows, it still might not be enough. There’s a tsunami of condos under construction, 196,000 units to be exact, being built across Canada’s major metro cities right now. That’s nearly double our previous cycle high of 104,000 units back during the depths of the financial crisis in 2008.

As the saying goes, the cure for high prices is high prices. Developers reacted to a housing boom by aggressively getting shovels in the ground, and raked in record profits in the process. When there’s a shortage of supply, nobody ever questions if you’re building too much. Now that the music has stopped, we are left to ponder, did we build too much? Of course that depends on who you’re asking, for Canadians desperately seeking affordability the answer is probably a no. For developers and investors trying to maximize profits, its probably a resounding yes.

Three Things I’m Watching:

1. Condo units under construction sits at record highs across Canadian cities.

2. Confidence in higher real estate prices reaches pre-pandemic high across Canada.

3. Toronto condo inventory for sale has exploded higher since the pandemic.

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The Canadian Economy

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The Saretsky Report. December 2022