Happy Monday Morning!
The hits keep coming. October housing data just dropped for many major metros across Canada, highlighting the continued slump as we head into the winter months. In the GTA, home sales fell by 49% on a year-over-year basis during the month of October. This comes on top of last weeks newsletter where we noted new condo sales had plummeted 89% year-over-year in September. In other words, buyers remain on the sidelines and prices continue to inch lower. For the first time in four years, the benchmark price of a home in the GTA declined on an annual basis, slipping 1.34%.
It’s a similar story in Greater Vancouver. Home sales fell 45% year-over-year in October. It was the slowest October since 2008. In other words, we have sales running at levels last seen during the depths of the global financial crisis. Lehman Brothers collapsed in September of 2008, nearly taking down the global banking system with it. So sales volumes have collapsed, the only difference today is that inventory is HALF of what it was in October 2008.
The shortage of new supply coming online is definitely providing support for prices. Both buyers and sellers apparently aren’t excited about transacting in current market conditions.
Sellers are praying for another short lived housing correction, as they’ve been trained to believe for more than two decades now. Of course this largely depends on the path for inflation and thus interest rates. If you look at recent mortgage data, many borrowers are also betting on short term pain. At last count in August, almost one in five borrowers (19 per cent) chose a one-year or two-year fixed. That’s up from just 8 per cent a year ago. In other words, an increasing number of borrowers are choosing to lock in short term fixed rates and hoping for lower rates in a couple years. We shall see.
As of right now there appears to be very little relief on the interest rate front. More issues will bubble to surface in the year ahead, particularly for those playing in the alternative and private lending spaces. According to National Bank, Home Capital borrowers could face up to an $1190 increase in their monthly mortgage payments over the next 12 months as ~66% of its borrowers will need to renew their mortgage within 12 months. We’re also hearing of issues with MIC’s (Mortgage Investment Corps) trying to roll loans. Remember these are largely one year loans.
So here’s the summery. Sales are in the dumps, many sellers are choosing to just wait it out and rent their property. This is fine for many investors in the resale market but rarely an option for developers who not only need to sell their product but don’t have much room to reduce prices either. There’s very little liquidity which is creating issues for private lenders who are struggling to get their cash back. More pain to come in the months ahead.
If you’re looking further out, i’m talking five years, the Federal Government just handed out another cookie to Real Estate investors. The Canadian government announced another increase to its immigration targets. Canada will target 485,000 new immigrants in 2024. Then 500,000 new immigrants in 2025. Huge.
Remember, there is a complete lack of coordination between the federal, provincial, and municipal governments. The federal government funnels people into the country and then leaves it up to the municipal governments to figure out where to house these people. Sure, new immigrants likely aren’t buying new housing, but they’re definitely providing a floor under the rental market. Those rents are future cash flows used to determine cap rates and property values.
These new immigrants might be providing more than a floor under the rental market if they're climate immigrants from the drought stricken Colorado river States?
https://grist.org/drought/colorado-river-cuts-interior-department-reclamation/?fbclid=IwAR2KUFXlSRqdiInGWayTM6Y0gAwCHaLHqpeKW_RipVYMd-kmNi3aIWxCp5M
Worry about investors in the MICS, which do loans the banks won't touch, with high interest rates, a couple points in fees, often LTV ratios at the limit of prudence. Prepay interest and add it to the loan amount, so loans are always "current", even though foreclosure is the only exit. Loans renewing now on properties with falling values. MICs freezing redemptions