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This week it was announced that Canada's population grew by approximately 430,000 people over the last quarter (+1.1%). And that it represents the highest population growth rate of any quarter since the second quarter of 1957. Even more impressive, though, is the fact that in the first 9 months of this year we have already added over 1 million people in total. This beats all full-year periods since Confederation in 1867!
Here's what all of this starts to look like visually:
The unfortunate side of these records is that it is coming at a time where we're, perhaps counterintuitively, building a lot less new housing; which is to say that construction starts are declining. In fact, I was on a call this week where people who examine development and construction costs all day were predicting a 5-6% decline in hard costs in the Toronto region next year. And this is a direct result of fewer new projects getting started.
Broadly speaking, this is how things tend to work in real estate development: there are heavy lags between changes in demand and changes in supply because of how long it takes to build new buildings. But what's happening right now is more than this. Interest costs are impacting everyone. And investor interest in pre-construction homes has softened significantly, demonstrating how much our industry relies on individual investors. Many projects cannot go.
What I ultimately think this is going to do is exacerbate our current supply-demand imbalances. Meaning that when the market does come back -- and it of course will -- it's going to come back with a vengeance. And that's because it is going to need to catch up to all of the new demand that is accumulating as we speak.
About Here makes excellent videos about cities. Here's their latest about missing middle housing:
https://youtu.be/DX_-UcC14xw?si=xV99TXiMbuTQaEEH
In my view, there are two key takeaways.
The first is that cities need to spend way more time understanding the economics of missing middle housing. As Uytae Lee says in the video, our land use policies need to respond to real math and overall financial viability.
The second is that there's real potential here. Uytae gives the example of Auckland which, according to the video, managed to deliver 20,000 new missing middle homes in a 5-year time period.
This is meaningful! And, it is suggested that this has reduced rents in the city by somewhere between 13-35% compared to where they might have gone had this new housing not been built.
As I've said many times before on the blog, the devil is in the details. The headline may sound really great that some city is now allowing 4 or 6 homes on every single-family lot, but that doesn't necessarily mean that any new homes will actually be built.
It's important we change that.
P.S. Thanks to Michael Geller for sharing this video with me.
Last week was "forum week" in Toronto. (That is, it was the Toronto Real Estate Forum.) And as is the case every year, Benjamin Tal, deputy chief economist of CIBC, opened up the event with his usual macro view of the world. For those of you who missed it (as I did), here are some of his key points (via RENX):
The Bank of Canada's overnight rate will ultimately/likely settle into the 2.75-3% range (currently it sits at 5%). He expects rates to start coming down this summer.
Inflation is down, but we're not yet at the 2% target. The "last mile" is always the toughest.
But as we know, the BofC will take a recession over high inflation, any day.
The mortgage market has fallen faster than in the early 90s recession. Tal said that the residential real estate market in Canada is right now facing "the biggest test" since then.
Canada is in what he calls a "per capita recession". But for the million or so immigrants that the country accepted over the last year, we'd be in a full-blown official recession.
Finally, he called this correction in the housing market both "real" and "healthy"; he spoke about normalcy returning in 1-2 years; and he posited that the market will be "crazy" when it does return because of a supply deficit.
This last point is an important one. New housing supply is mostly shut off right now. I say mostly because there are obviously still projects under construction, and there have been and there will continue to be some successful launches. But by and large, most developers are waiting right now, principally because the absorption isn't there. They have no other choice.
But Canada continues to grow. People from around the world continue to want to move here. And there continues to be a need for a lot more new housing. So when the market does return -- and it, of course, will -- there is going to be a supply-demand imbalance. And as is always the case in real estate, there will be a lag in responding to this imbalance.
This is what Tal means by "crazy".
Photo by Wiktor Karkocha on Unsplash
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