Longtime readers of this blog might remember a post that I published back in 2016 where I talked about the genesis story of Toronto-based developer David Wex and his company Urban Capital Property Group. In it, I wrote about his first project at 29 Camden Street in the Fashion District. It had a total of 55 condominium suites and an average price per square foot of ~$195. And it took somewhere around 2 years to pre-sell enough of the suites for construction financing.
The reason I bring this up today is because when I originally wrote the post, it seemed so far from reality. In 2016, I said that these same 55 suites could be sold within 2 hours at $800 psf! But now things have changed once again. The market realities that David was facing in the mid-90s with Camden Lofts feel remarkably similar to today. Selling even 55 suites might not be a sure thing. And this is the first time in over 2 decades that the market has been like this.
So for fun, let's consider what happened in the late 80s and 90s. The Toronto housing market peaked in 1989 at an average price of approximately $273,698 (according to the Toronto Regional Real Estate Board). It then went on to decline 27% over the next 7 years, finally bottoming out at approximately $198,150 in 1996. So it took around 8 years for the market to stabilize.
Real estate is a highly levered asset class, which means that pricing is sensitive to interest rate changes.
Larry Summers recently published a post on his blog where he argued that the Fed (US) is being far too complacent about their ability to respond effectively to a future recession. He sees this as their biggest monetary policy challenge going forward.
Given the potential impact to real estate and city building as a whole, I thought I would summarize some of his key points:
Private sector GDP growth in the US averaged 1.3% over the last year
Since the 1960s, this level of tepid growth has typically foreshadowed a recession
Larry sees > 50% chance that the US economy will enter a recession in the next 3 years
400-500 basis points of monetary easing is usually needed to counter recessionary pressures
The Feds will likely not have this much room to play with when the next recession comes along
I don’t think anyone could have predicted that rates would remain