Bottom Picking
Happy Monday Morning!
BMO wrote two notes this past week that caught our attention. The first was titled, “Nation of Rentals” in which they note,
Canadian housing starts dipped for a third consecutive month to a still-solid 239k annualized units. That leaves the year-to-date average running at 248k, and the latest 12 months averaging 256k.
The most noteworthy story in Canadian homebuilding is the ongoing, and widening, split between construction of homes for ownership, and those for rental.
Across major CMAs, combined housing starts of condominiums and for homeownership have now fallen to the lowest level since the 2009 recession, and the mid-1990s recession before that; while rental starts continue to run near record highs.
Indeed, rental housing starts are now outpacing home ownership starts. This is something our good friend Ben Rabidoux of Edge Analytics also flagged on our Loonie Hour Substack.
Rabidoux notes, “homeowner” housing starts (ie condos + single-family) have fallen to the lowest level since 1997.
As we have emphasized for a couple years now, the pre-sale market is dead and it’s not coming back anytime soon. This has forced developers to pivot to purpose-built rentals, which are ultimately financed/ insured via CMHC. It’s the only thing keeping the fee machine churning, just enough to keep the lights on and some of the staff on payroll.
We have already flagged multi-decade lows in new home sales across both Vancouver and Toronto. However, it gets more interesting when you parse through the data further. For example, in Q2 there were just 62 pre-sale units sold in the Metro Vancouver area. Remember, a pre-sale is what leads to a housing start. Therefor, 62 pre-sale units sold in Q2 in a metro region of nearly 3 million people is really something to behold.
In other words, expect purpose-built rental construction to continue to outpace condos and houses. Not because the rental business is booming (vacancies are at thirty year highs, and rents are down double digits) but because rentals are just less bad than the pre-sale market.
We are becoming increasingly convinced the recent condo bailout is an admission from the government that the developers problems have become the banks problem, and the banks problem has become the governments problem.
Remember the old saying, “If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
So who does most of the construction lending in the Fraser Valley and interior of BC (the epicenter of the condo bust)? The BC credit unions. The same ones that have a 100% deposit guarantee backstopped by the BC government.
Things that make you go hmm…
This all ties into BMO’s other report, ‘Bottom Fishing in Canadian Housing.’
Canada’s housing market is stabilizing—dare we say bottoming—as this long cycle continues to evolve. In a nutshell, national resale volumes are stable, albeit at the lower end of pre-pandemic norms, new listings are also stable, and the broad market has come back into balance. With mortgage rates down, incomes growing and the economy holding in, prices look to be finding a floor. To be sure, there are pockets where weakness will continue well into 2027 (see the Toronto condo market), and we don’t believe that conditions will dictate a sharp recovery.
Are we bottoming? Does BMO have a valid case?
It seems logical to conclude we’re closer to a bottom than not. However, as BMO highlights, getting nominal prices back to their peak could take up to 9 years or more if history is any guide. Furthermore, inflation adjusted home prices will take even longer to recover. For example, it took over 20 years after the 1989 GTA housing peak for average home prices to fully recover after inflation.
As always, Real Estate is hyper local, and product specific. While we’ve flagged our ongoing concerns in the new condo market, we believe the single family market will be the first to recover. This isn’t a bold take, just one that’s backed by data.
Single family home building has collapsed to record lows.
A nation of renters that no longer builds houses because nobody can afford them.
If and when we bottom, you’ll see it in single family homes first.
Let’s watch.
You will own nothing and be happy....... hmmmm. This country's most fundamental economic and social cornerstone is owning your own home. This has been stripped away purposefully. Ask yourself, why does CMHC provide extraordinary mortgage terms to landlords but not to home owners ? If homeowners could obtain the same cheap 50 year amortizing mortgages as by the government to landlords buyers would appear in droves. BTW : most of the large credit unions in BC have recently and quietly become federally organized and are no longer insured by the province. WHY ?
Well on our way to a Feudal society