Here is a chart that we have all seen many times before. This one is from a recent New York Times opinion piece called, "America Needs to Build More Housing" and it shows the relationship between home prices (the price-to-income ratio) and houses built (average housing starts per 1,000 households). In this scatter chart, the four quadrants are as follows:
Cities that don't build a lot of housing and are expensive (San Francisco)
Cities that don't build a lot of housing but are still relatively affordable (Chicago)
Cities that build a lot of housing and are affordable (Austin)
Cities that build a lot of housing but are still relatively expensive (Hilton Head Island)
This last quadrant has the fewest number of data points and a number of the locations are resort or second-home destinations, which have their own unique market dynamics. Similarly, the lower-supply cities, like Chicago and Detroit, have managed to maintain some degree of affordability by virtue of the fact that their population and economic demand haven't grown as quickly as in other cities.
But generally speaking, the correlation is as one would expect: more homes equals lower prices. It is, however, worth pointing out that not all homes are created equal. The cost and time required to build a low-rise, wood-framed house in the suburbs is not the same as building a high-density, reinforced-concrete tower in the city.
Still, we know that all forms of supply ultimately improve affordability in a market. With this in mind, how might one describe Toronto today? We've been told we're in the midst of a housing crisis, and yet there are lots of available homes on the market, both to buy and rent. Indeed, it's a buyer's and tenant's market. So what's going on?
Well, it's important to keep in mind that a chart like this represents a long-term historical average and that building new housing generally takes a long time (too long, I might add). Right now, we could describe the Toronto housing market like the proverbial "pig in a python."
The market is in the midst of absorbing a huge influx of completed supply and, as our chart suggests, this is having a deflationary effect on home prices in the short term. However, once this pig gets digested, there's absolutely nothing next in the pipeline to digest, and according to basic economics, we know exactly what that will mean for the market.
Cover photo by Artem Labunsky on Unsplash
Chart via the New York Times
The conventional beauty of the internet and software was that it had effectively zero marginal cost. That is to say, it might cost you a lot of money to create something initially, but once created, you could scale it very quickly, more or less for free. This has been a great way to make money, and it's the opposite of something like real estate development where everything takes forever and costs too much money.
But the landscape has shifted rapidly. Dror Poleg wrote this week that intelligence, rather than software, is now eating the world. The fundamental difference is that while software had zero marginal cost, AI does not. When we ask AI something, it has to reason it out in real time, and in order to do that, it needs to consume lots of energy and compute.
As a result of the above, we are seeing something we’ve never seen before: Software demand is beginning to bump into physical constraints. The world is struggling to allocate sufficient land to build data centers and to produce and redirect the energy required to meet AI demand. Tech giants like Google, Amazon, Meta, and Microsoft are spending an unprecedented amount of money to build these new data centers, but they are approaching their financial limits. Google has recently partnered with Blackstone, one of the world’s largest landlords, to expand and expedite the construction of new data centers.
All this sounds like great news for real estate developers. Finally, order has been restored in the universe: If you want to grow your business, you need to pay more rent; the natural scarcity of land is asserting itself. Instead of software eating the world, it is now the world that is eating the free cash flow generated by software companies.
However, these specific dynamics may only remain true in the short to medium term. As dystopian as it may seem, there is indeed an organized and real effort to bring data centres into space. Some of the advantages of this include abundant, continuous energy and zero land-use constraints to fetter growth. Now, I don't know enough to comment on the feasibility or timing, but it certainly sounds like great fodder for a Black Mirror episode.
Jesta Group announces $30M bulk condominium buy in downtown Toronto
And a larger $500 million condominium program
Montreal-based Jesta Group has just announced the acquisition of a bulk condominium portfolio in downtown Toronto valued at $30 million. This also marks the launch of a larger $500 million program targeting more than 1,000 residential units over the next 12 months. Here's a snippet from the press release:
"Toronto's fundamentals remain strong and the current market environment has created a unique window to deploy capital at scale," said Anthony O'Brien, Senior Managing Director at Jesta Group. "We are aggressively pursuing opportunities that fit this investment ethos and encourage developers with qualifying inventory to reach out directly."
Anthony's email is aobrien@jesta.com.
Sentiment seems to be changing here in Toronto. Maybe it's because summer is coming and the winter was long, or maybe it's because our looming supply bottom is drawing nearer. Regardless, a $500 million program certainly suggests that somebody believes we are at or near the bottom.
Cover photo by Rodolfo Flores on Unsplash