Is there hope?

Early last summer there was a two-month supply of condos on Toronto’s resale market. Now available inventory has bloated to almost six months. It’s the highest level, says realtor and data freak Scott Ingram, since he started tracking those listing half a decade ago.

In all of the GTA, condo sales have tanked year/year by more than 24%. The average price is off about 2.5%. But the average box is still selling for more than $730,000 – compared with $1.5 million for the a detached in the whole region, and $1.8 million for urban Toronto. On an annual basis, freeholds in 416 are down in value 4.5%. In reality, the street price has dropped a little more than $200,000 since the peak a couple of years ago.

The mounting glut in available urban condos

Source: Scott Ingram

In other words, declining sales, gently falling prices and buyers in retreat. But no collapse. Yet.

Sellers, realtors, lenders, bankers, appraisers, renovators, insurers, lawyers and movers all hope and pray the lull will soon be over and demand will increase, rekindling sales. Buyers want exactly the opposite. They crave blood and revenge.

It’s interesting (and instructive) that Americans think they have a real estate crisis because the cost of carrying a house has just hit 35.1% of average income. Well, in this crazy nation – according to the latest RBC report – it’s 63%. And check out places like Vancouver and Toronto.. completely bonkers…

Source: RBC

So while ten interest rate increases and mortgages that went from 2% or less to 6% or more slowed real estate, this has not restored affordability. Now rates are on the other side of the mountain and will be declining – slowly – as the year goes on.

Lower rates will not make houses cheaper. Nor will building more of them – supply won’t increase in any meaningful way until about 2030. If prices aren’t dropping much now – with mortgages still in the high-5s, many months of inventory and listings swelling (actives are up 83.3% in the GTA) – you can forget about this happening when mortgages are back in the 3% range.

So what is the hope?

Two-fold, it seems. First, that this condo glut could knock an important leg out from under the entire market, especially as pre-con buyers come up to closings they can no longer afford at higher financing costs. After all, in Toronto alone, there are 22,000 new, unsold units languishing and per-foot costs are drifting down. Second, that a tidal wave of mortgage renewals over the next two years will bring a slew of distressed forced sales, helping to collapse prices.

Neither, sadly, are realistic.

As this blog detailed a few days ago, and as realtor John Pasalis has made clear, lenders have been quietly ensuring condo prices do not dive. Pre-construction buyers in 2021 and 2022 paid top-dollar for units which are now coming up for closing at average prices 20% lower on the resale market. If the traditional rules of financing applied, these folks would be pooched.

As we reported (from Pasalis):

“Normally, when a property declines in value between the time the buyer purchases it and the closing date, banks will only underwrite the mortgage based on what the property is worth (the appraised value), not what the investor paid for it. For example, if an investor paid $800,000 for a unit that declined in value by 20%, banks will only provide a mortgage of up to 80% of the appraised value of the property – which is $640,000. A buyer who planned to make a 20% down payment ($160K) based on the original purchase price would have found that their original down payment covers the decline in the property’s value. They would have to contribute an additional $128,000, which serves as the 20% down payment required based on the lower appraised value.”

But this is not happening as landers have opted to apply ‘blanket appraisals’ to entire projects or buildings assuming the units are worth what the buyers paid two years ago. No extra money required to close. Just sign here.

The lenders absorb the risk rather than passing it on to buyers, many of whom might default leading to distress sales and falling prices. Moral hazard, anyone? “Young potential home buyers have a right to be furious about these trends,” says the realtor. “The real estate playing field was already stacked against them, and by protecting investors from the consequences of their bad investment decisions, our government has transferred the costs of these mistakes to younger buyers in the form of condo prices that are higher than they otherwise would have been.”

Well, what about those renewals?

As the analytical site Wowa.ca reveals, monthly mortgage renewals will soar by 52% over the next two years. Five of the six big banks (RBC does not break down its stats) have $1.38 trillion in outstanding loans, of which almost $1.4 trillion is made up of mortgages. About 17% of those come due in the next 12 months, and almost a quarter in the year following. Lots of those folks took VRMs in the 2% range, and borrowed their brains out during the pandemic.

Well, just in time, it looks like rates will be significantly lower as that renewal wave hits.

CIBC economists, for example, are calling for three cuts by Christmas. They’re not alone. It’s predicted the CB policy rate, which topped at 5% a few weeks ago, will be down to 3.5% in about 18 months or less. This will also be somewhat concurrent with the next (expected) federal election in Canada. It means homeowners who owe billions, now at an average rate of 2.89%, will be able to renew in the 3-4% range. More costly? Yes. A disaster? Hardly.

So if you really want a housing crisis in Canada, replete with a sharp drop in GDP, higher inflation and a new rate flare, there is only one hope left. Guess.

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Source: https://www.greaterfool.ca/2024/07/03/is-there-hope/