The next crisis

Rates will fall tomorrow, everybody says. Another quarter point. After that, it’s a black hole of doubt.

Mortgages at 4% have revived the resale market somewhat, but people who worry that Canada has too few new homes coming to market are now worrying a lot more, despite lower rates.

“We are literally watching the foundation of the next housing crisis being laid today,” say builders in the mighty GTA. So if you’re getting tired of hearing about today’s real estate crisis, wait. There’s a brand new one – probably worse – on the horizon. Just in time for those Alphas (and elderly Zs) to slam into it.

First, know what’s happened with sales. They suck. In the country’s largest market for population, development and construction, there were fewer buyers last month than at any time in the past four decades. Overall sales were the worst in 34 years.

In this market of six million souls, only 9,816 new homes sold last year, down 47% from 2023 and almost 70% lower than the ten-year average. In December new deals were 80% lower than the long-term trend. That broke records. There are 86% fewer condo buyers now, compared with the past, and 62% less purchasing singles.

This is how it looks since 2015 (single-family home sales in blue, condos in orange).

Sales of singles, condos take historic dive

Source: BILD

Currently just under 22,000 units are built, ready for occupancy or available to be constructed as soon as a buyer show up. That equals a 14-month supply. Historic.

Logic dictates when supply overwhelms demand, prices fall. And, truth be told, there”s been some moderation in the asking price for brand-new houses and freshly-erected condos. The average single-family home is now just over $1.5 million (that includes townhouses and rows as well as semis and detacheds) while condos average just over a million. Both are roughly 3% below the peak, hit in early 2022.

Is that enough of a discount to goose sales and get people into new digs? Obviously not.

Despite bad sales, prices drop a mere 3%

Source: BILD

So what’s the problem? If single-family homes and condos are not selling, with builders ceasing to add new inventory, why don’t the prices tumble by a quarter, or even half? If citizens cannot afford to buy homes priced like this, why don’t the building guys flood the market with cheaper ones?

Because builders want to stay solvent. They cannot survive operating at a loss. Inventory won’t be dumped at a fraction of the cost it took to create it. That’s called insolvency. Instead, you wait. Because you understand what’s coming – a true political crisis of supply.

Says industry consultant, Altus Group, “2024 will go down as a historic year, with December’s new home sales hitting their lowest point in nearly 40 years and the whole year producing the lowest annual total since 1990. As 2025 begins, new home buyers remain unwilling to re-enter the market despite lower mortgage rates, falling prices, and elevated inventories.”

Builders, meanwhile face astronomical material costs, repeated wage demands from employees and the trades, financing charges far higher than end-users pay and municipal levies, fees, permits and taxes required to service new developments, build local infrastructure and feed starving city budgets.

So lousy sales, unsold inventory and sustained costs mean builders cease building. Starts go down, not up. Those three or four million new homes promised by the federal government are fiction. Starts are 40% below target in the nation’s capital itself. The cranes in DT Toronto are left over from sales recorded three or four years ago – and many of those buyers may vanish on closing day.

Says the industry: “It is financially impossible to build homes that the market can, and is willing to, absorb at present prices. Sales have plummeted and housing starts are sliding – and will continue to follow the sales trajectory. Without immediate action from governments to reduce development charges and municipal fees, the future housing supply is in peril.”

Now the bad news. There’s no fix for this. None. Cash-strapped governments are not going to be building homes aimed at middle class buyers. Nor should they. If demand is rekindled in a few years, the competition for housing could be brutal.

And, yeah, Tariff Man. If he does it, recession comes. The builders fold. Crisis and electoral unrest ensue.

Could this be planned?

About the picture: “Our Aussie Shepherd, Cowgirl won Best in Show at the dog show in our RV park in Yuma Arizona,” writes Michael. “We are waiting to see how this Trade War could turn out. If the Prez puts all us Canadians in the doghouse we may have to cut our winter short.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2025/01/28/the-next-crisis/