This is an interesting chart from the Centre for Urban Research and Land Development at Toronto Metropolitan University (TMU).

It is based on recent population estimates from Statistics Canada, and what it is saying is that the Greater Toronto Area grew by 233,000 people during the 12 months ending July 1, 2023. If you include Hamilton, this number increases to 246,000. And if you include the entire Greater Golden Horseshoe, it increases to 340,000.

This is significantly more population growth compared to any of the six preceding years. And assuming this 2021 population estimate of about 9.8 million people is more or less correct, it represents an almost 3.5% growth rate. That's remarkable. It's also happening at a time when housing starts are declining.

Oftentimes, it feels like there is a perception that developers price new housing with the fattest of margins. Meaning, if only developers were less greedy, housing could be more affordable. But as we have spoken about many times before, real estate development is a competitive industry; therefore, projects happen on the margin.

Ordinarily, the prices you see are the result of a cost-plus pricing strategy. Developers figure out what it will cost to build and develop, they add on a margin that they think their investors will accept, and then they determine what sticker prices they need to make the project financially feasible.

I've been writing about this approach for many years, but today it's even more obvious. According to Urbanation's Q1-2024 condominium report, new unsold condominium inventory in the GTA is currently sitting at approximately 23,815 units. This is up 30% YoY and is equal to about 23 months of supply. Two years ago in Q1-2022, this number had reached an 18-quarter low of 8,726 units.

Developers are highly motivated to sell and move their projects forward. Time is a killer, especially today. So the logical explanation for this rising inventory is simply that they can't sell it. Their cost-plus pricing doesn't overlap with what most buyers in the market are willing to pay. Like I said, development happens on the margin.

In theory, there is always a price where buyers would be willing to transact. If I listed a beautiful condominium for $100k today, many people would want to buy it. Supply would quickly run out. The problem is that no developer can build for this. There is always a very real price floor and, right now, that floor doesn't seem to be low enough for many buyers.

Urbanation is forecasting that approximately 27,000 condominium suites will finish construction and be ready for occupancy this year in the Greater Toronto Area. This is some sort of a record, and is naturally the result of record pre-construction sales over the last cycle.

This number is going to come down given that construction starts are declining, but before that, these suites will need to get absorbed into the market. And that's why I think that one of the biggest risks for our industry this year is going to be closing risk.

In other words, you've got the pre-sales, but will the purchasers actually show up and close on their homes?

It is for this exact reason that most/all construction lenders want to see pre-construction purchasers pay at least 10% in deposits before they'll advance their loan. It is also why the most risk-averse developers won't start construction until they have even more than 10% sitting in trust. The more hard money a purchaser has paid, the more likely they are to close.

It can be easy to forget this when the market is on fire and you're more preoccupied with holding back inventory because you think that sale prices will be higher in the future. But it's prudent to remember these times. They are a naturally occurring part of real estate cycles.

The most risk adverse execution strategies will likely leave some money on the table in the best of times. You won't be profit maximizing. However, they'll leave you more protected in the worst of times. That's how risk and reward work.