I recently joked that, because of AI, everyone now sends you a 50-page PDF for review. Of course, what we all do next is just ask AI to summarize it and help prepare a response. So, the net effect is AI talking to AI.
We're all becoming a kind of intermediary because the volume of information is simply too great for any human to reasonably process. In many ways, this can feel overwhelming. It also makes me feel like it's becoming harder to maintain a long attention span.
But this appears to be where the world is heading. Eventually, we are going to have what is known as Artificial General Intelligence (AGI), and that is going to have a profound impact on our lives.
Venture capitalist Albert Wenger has been spending a lot of time thinking about what an AGI-level economy might look like, and he recently published a post where he modeled some of the possible scenarios.
I will give you the spoiler here: His intuition is that we're going to need to create an economy that combines competition and redistribution (also referred to as a Negative Income Tax, which provides people with a basic income).
Because without competition, productivity gains will be captured as rent, rather than resulting in lower prices. And without redistribution, we are likely to see an untenable increase in inequality.
If you're interested in this topic, I would encourage you to check out his post.
Cover photo by Alex Knight on Unsplash
Urbanation just released its Q2-2024 condominium market survey for the Greater Toronto & Hamilton Area (GTHA), and we should probably talk about some of the data:
The new condominium market reported 1,688 sales in the quarter. Outside of Q2-2020 (the pandemic), this is the lowest in the past 20 years. Note: This number is self-reported by developers.
Of the 3,625 homes launched for pre-sale during the quarter, only about 17% got absorbed/sold. That's about ~616 homes, which isn't very much when you spread it out across the region's projects.
Unsold inventory increased to 25,893 homes. Urbanation equates this to 34 months of supply, versus a more "balanced level" of 10-12 months. This number breaks down to 15,157 homes in pre-construction projects, 9,788 homes in projects under construction, and 948 homes in recently completed buildings.
This is higher than Urbanation's 20-year average, but the way I see it is that the ~15k homes in pre-construction projects could very quickly evaporate. If those projects don't get to construction (and most probably won't in the short term), then that inventory will disappear from the market. On the other hand, the ~11k homes under construction or recently completed is a hard number. These homes exist, or will soon exist, and they'll need to get absorbed at some point.
There are also going to be homes that are currently sold, but where buyers ultimately say "yeah, I'm not going to be able to close." So there will be some non-zero percentage of homes that will need to be reabsorbed. I don't know what this percentage will be, but if it's something like 5%, that's not nothing. (See below for the number of condominiums under construction right now.)
Not surprisingly, average asking prices for unsold homes only declined about 2.6% over the past year. Prices have remained markably sticky. And this is how you know that development happens on the margin. Because developers are infinitely better off selling homes and starting construction, compared to holding lots of unsold inventory and starting construction, whenever. The fact that developers aren't dropping prices to sell more homes demonstrates that they can't. They're hitting the floor of financial feasibility.
Finally, last quarter saw 727 new condominium homes start construction. In theory, this could have been a single tall building, though that probably wasn't the case. As new starts fall, the number of condominiums under construction will naturally also fall. The current number is 87,508 homes, which is almost 19,000 less than a year ago. I expect this number to keep coming down.
As of November 2023, it was estimated that there were 988,000 homes under construction in multi-family buildings containing 5 or more units. This is in comparison to 680,000 single-family homes, according to US Census data. (Looking at the below graph, it's also interesting to see how the supply of single-family homes dropped off after the global financial crisis and multi-family apartments took off.)
All of this means that in 2024, the US is on track to complete more apartments than it has in many many decades. In fact, exactly similar to what we experienced here in Toronto, if you want to find a comparable multi-family supply number, you need to go as far back as the 1970s (see below). Of course, the US had fewer people back then, and so on a per capita basis, it was building more housing.
Still, all of this new supply is having an impact. Apartment List recently published its national rent report, over here. And overall, it found that:
Rent increases are currently being moderated by a robust construction pipeline expected to deliver a decades-high number of new apartment units in 2024.
More specifically, they found that the cities with the most supply are now seeing the largest rent declines:
Many of the steepest year-over-year declines remain concentrated in Sun Belt cities that are rapidly expanding their multifamily inventory, such as Austin (-7.4 percent year-over-year), Raleigh (-4.4 percent), and Orlando (-3.9 percent).
If you're an apartment developer, this is not what you want to see. It means that increased competition is creating downward pressure on rents and that vacancy rates are probably rising. But if you're someone looking to rent an apartment, this is exactly what you want to see. You want more affordable housing. And so, as a consequence, you want more homes to be built. Because when supply outstrips demand, this is what you get.
Charts: Apartment List