Last month we spoke about how our current economic environment is going to negatively impact housing supply in the short-term. Now here's some further evidence for this argument (via Bloomberg):
“As rates started ticking up, the faucet started to turn off,” says Jonathan Gertman, senior vice president for development at the NRP Group, one of the largest multifamily housing developers in the country. “The number of projects starting this year already has been cut significantly. Anything that started in 2022, in most of the country, comes online 18 to 24 months later. So by the middle of 2025, you see that new supply start to go down significantly.”
This is also being reflected in Federal Housing Administration (FHA) loan applications for new multi-family housing:
Or put another way: FHA multifamily loan applications are on track to total as much as $18 billion for FY 2023, compared with $29 billion for FY 2022, $51 billion for FY 2021 and $45 billion for FY 2020.
The above article is specifically talking about a looming affordable housing shortage. But these exact same headwinds are also impacting new market-rate housing. Of course, there's always a lag when it comes to development. So it'll likely be a few years until we really feel the impacts.
Below are two interesting excerpts from this recent Globe and Mail interview with Tiff Macklem (the current governor of the Bank of Canada of the former dean of the Rotman School).
The first has to do with where he believes the "neutral rate" will be in the foreseeable future. He believes it will be higher than where it has been in the past:
We have different models we use to estimate the neutral rate [the central bank’s estimate of where its policy rate would settle if the bank were neither trying to stimulate nor restraining the economy]. … Those models, based on the data we have, still suggest a neutral rate in the range of 2 to 3 per cent.
When we look forward, and we look at a number of the forces, it seems more likely that the neutral rate is going to be higher than that … [rather] than lower than that. We don’t have that data yet. But there are a number of factors.
More people are retiring. The labour market looks like it could be sort of structurally tighter going forward. Globalization has at least stalled, if not reversed. That could create more cost pressures. We’re going to need a lot of new investment in cleaner technologies if we’re going to meet our emissions-reduction targets. When I say ‘we,’ it’s the world – so that’s going to affect global real interest rates.
Here's some data (via Jeremy Withers) explaining that a large portion -- about 61% -- of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower -- about 24%.
Now, the premise of Jeremy's tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don't think that a significant chunk of these homes are being left vacant. So isn't the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
Last month we spoke about how our current economic environment is going to negatively impact housing supply in the short-term. Now here's some further evidence for this argument (via Bloomberg):
“As rates started ticking up, the faucet started to turn off,” says Jonathan Gertman, senior vice president for development at the NRP Group, one of the largest multifamily housing developers in the country. “The number of projects starting this year already has been cut significantly. Anything that started in 2022, in most of the country, comes online 18 to 24 months later. So by the middle of 2025, you see that new supply start to go down significantly.”
This is also being reflected in Federal Housing Administration (FHA) loan applications for new multi-family housing:
Or put another way: FHA multifamily loan applications are on track to total as much as $18 billion for FY 2023, compared with $29 billion for FY 2022, $51 billion for FY 2021 and $45 billion for FY 2020.
The above article is specifically talking about a looming affordable housing shortage. But these exact same headwinds are also impacting new market-rate housing. Of course, there's always a lag when it comes to development. So it'll likely be a few years until we really feel the impacts.
Below are two interesting excerpts from this recent Globe and Mail interview with Tiff Macklem (the current governor of the Bank of Canada of the former dean of the Rotman School).
The first has to do with where he believes the "neutral rate" will be in the foreseeable future. He believes it will be higher than where it has been in the past:
We have different models we use to estimate the neutral rate [the central bank’s estimate of where its policy rate would settle if the bank were neither trying to stimulate nor restraining the economy]. … Those models, based on the data we have, still suggest a neutral rate in the range of 2 to 3 per cent.
When we look forward, and we look at a number of the forces, it seems more likely that the neutral rate is going to be higher than that … [rather] than lower than that. We don’t have that data yet. But there are a number of factors.
More people are retiring. The labour market looks like it could be sort of structurally tighter going forward. Globalization has at least stalled, if not reversed. That could create more cost pressures. We’re going to need a lot of new investment in cleaner technologies if we’re going to meet our emissions-reduction targets. When I say ‘we,’ it’s the world – so that’s going to affect global real interest rates.
Here's some data (via Jeremy Withers) explaining that a large portion -- about 61% -- of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower -- about 24%.
Now, the premise of Jeremy's tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don't think that a significant chunk of these homes are being left vacant. So isn't the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
Brandon Donnelly
Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly.
So when you look forward, it seems more likely that the neutral rate is higher, not lower. And the message is that households, businesses, governments, the financial system, they need to be prepared for that possibility.
The second is about his view on Canadian housing:
The fundamental issue in the housing market, and this has been an issue in Canada for 10 years, at least, is structurally the demand for housing is growing faster than the supply. And so yes, interest rates go up, the housing market will slow. But it’s only going to slow so much because there is a sort of structural shortage of supply relative to demand.
I think what you’re seeing is that with supply growing less than demand, the housing market has started to tick back up, housing prices have started to tick back up. That’s something we need to take into account in monetary policy. But we’re not targeting the housing market. We have one target: CPI inflation.
These two forces are opposing ones. Higher rates create downward pressure on home prices. But, as we all know, a structural housing supply problem does the opposite. Where these two forces balance out is anybody's guess. But as Tiff mentions above, his concern is not home prices; it is inflation.
I am not an economist, but my view is that the broader real estate market is still going through its reset. There will be more pain and less housing supply overall in the short-term. Risk and leverage are still being unwound and that takes time. It also sucks.
Because of this, I think if you ask most people today, they will likely tell you to wait: "We haven't yet hit the bottom of the market." This is likely true. But I have zero ability to time the bottom of a market. And at the same time, the future does feel a lot more knowable compared to a year ago.
My philosophy is more akin to what I blogged about earlier in the week: If it's cheap, if the thesis is sound, and if you have the ability to think long-term, then these downturns are when you want to buy. And that is how I'm starting to feel about things right now. This includes everything from real estate to NFTs.
Disclaimer: This is not investment advice.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren't for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
So when you look forward, it seems more likely that the neutral rate is higher, not lower. And the message is that households, businesses, governments, the financial system, they need to be prepared for that possibility.
The second is about his view on Canadian housing:
The fundamental issue in the housing market, and this has been an issue in Canada for 10 years, at least, is structurally the demand for housing is growing faster than the supply. And so yes, interest rates go up, the housing market will slow. But it’s only going to slow so much because there is a sort of structural shortage of supply relative to demand.
I think what you’re seeing is that with supply growing less than demand, the housing market has started to tick back up, housing prices have started to tick back up. That’s something we need to take into account in monetary policy. But we’re not targeting the housing market. We have one target: CPI inflation.
These two forces are opposing ones. Higher rates create downward pressure on home prices. But, as we all know, a structural housing supply problem does the opposite. Where these two forces balance out is anybody's guess. But as Tiff mentions above, his concern is not home prices; it is inflation.
I am not an economist, but my view is that the broader real estate market is still going through its reset. There will be more pain and less housing supply overall in the short-term. Risk and leverage are still being unwound and that takes time. It also sucks.
Because of this, I think if you ask most people today, they will likely tell you to wait: "We haven't yet hit the bottom of the market." This is likely true. But I have zero ability to time the bottom of a market. And at the same time, the future does feel a lot more knowable compared to a year ago.
My philosophy is more akin to what I blogged about earlier in the week: If it's cheap, if the thesis is sound, and if you have the ability to think long-term, then these downturns are when you want to buy. And that is how I'm starting to feel about things right now. This includes everything from real estate to NFTs.
Disclaimer: This is not investment advice.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren't for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
