A dose of reality

He bought a nice two-bedder, two-bathroom condo in DT Toronto two years ago at the going rate. Just over a grand a foot. Better than most resales ($1,200) and sure cheaper than the new-builds ($1,500), he figured. So the 900 sf, fourth-floor unit came in at just over a million.

Of course, there was the double land transfer tax. That added $36,110. The mortgage of $805,000 at 4.63% came with payments of $4,513. Condo fees were $1,210 a month (always a little higher for an older building) and did not include parking. So, after putting down $310,000 – basically his entire net worth at age 32 – Sam’s monthly nut was $5,723. Adding in insurance ($80 a month) and property tax ($290), the total ran to $6,100. The Millennial insurance underwriter was also aware that if his downpayment had been stuck in ETFs yielding 6% he’d have $1,550 a month more cash flow. So the condo was really costing $7,650.

And, to rub it all in, an identical unit to his on the floor above sits for rent at $3,800 a month.

“This sucks,” he told me in a moany email last week. “I’m getting out.”

So why would a young guy bury all his wealth and take on $800,000 in debt to get an apartment he could have leased in the same place for half the cost?

Because it’s real estate. Everybody wants it. Properties always go up. And every politician in the land says we have a housing crisis because there aren’t enough homes to go around. Immigrants and students are Hoovering them all. Pierre and Doug said so. How can you possibly lose, buying in the middle of the biggest city with a solid 20% down, a decent mortgage rate and a nice, upscale unit?

Well, the only reasons Sam would spend double the amount to own instead renting are (a) pressure from a house-horny society and (b) the certainty of a tax-free capital gain when he sells because… real estate always goes up.

Here’s what just happened.

Sam contacted three real estate agents/brokers active in the area, had them visit over a couple of days, and collected their suggested listing prices. The shocking news: all of them said that given the better Spring market and the likelihood of coming rate cuts with more buyer activity that he should be able to sell… for what he paid.

Less the $36,000 transfer tax, of course. And minus the $40,000 (or so) in commission.

So after two years, $310,000 in a downpayment and $146,000 in payments, Sam would take a loss of at least $70,000 to sell. Or, he can hold on, keep being gutted by his obligations, and hope another irratioal real estate boom sweeps across the city.

He decides this week.

So what’s going on? The Fed, the Bank of Canada, almost all major economists, Ryan and Garth have all told you to expect interest rate cuts in 2024. The best guess? Three of them. Probably starting in June (maybe sooner here) and bringing down the cost of fixed-rate and variable mortgages by the summer or autumn.

Won’t cheaper rates deliver a higher price for Sam’s unit? People seem to think lower loan costs and increasing sales are a slam-dunk for home equity. But in that formula they forget one key factor. Inventory. Supply and demand. And counter to what every politician is telling you, we have way more of the former.

Here’s the latest condo count in Sam’s city, courtesy of data freak Scott Ingram:

Source: Scott Ingram. Click to enlarge.

There are currently just shy of 5,000 resale condos for sale in 416 alone. Inventory is growing faster than sales – now at around 3.7 months, or twice the level this time last year. If Sam decides to list, he’ll be competing with a slew of available units, and the only way he can secure a buyer is by – you guessed it – offering the best possible deal.

It’s not just condos, of course. Not just the canyons of DT Toronto. It’s everywhere.

Currently (today) there are 251,518 resale listings on the MLS system nationally. The GTA accounts for about 21,000. The Lower Mainland area has 14,000. The Montreal region offers 17,000 choices. Ottawa has 2,700 listings. Calgary and its burbs about three thousand.

Last month active listings were 15% higher than at the same time in 2023. In Vancouver the number of available properties grew by over 16%. In Ottawa new listings jumped almost 30% and the total number was 16% higher than a year earlier. In Calgary new listings jumped 13% but robust sales dropped the year/year number by an equal amount.

In short, the supply of real estate is going up, not down. Despite anticipated rate cuts, more sales activity and governments telling you the opposite. This also blows up the twin myths that (a) small-time or corporate investors are mopping up all the properties, forcing first-time buyers out and (b) voracious immigration has kicked natives to the curb.

But wait. What about newly-built stuff? Sam has to compete with those units as well.

The year just ended was a disaster for builders, despite Ottawa throwing $4 billion at construction and cities opening their floodgates for development. In the GTA sales fell 41% from 2022 and 51% from 2021. It was the worst showing in 15 years – and resulted in a massive buildup in inventory. Would you believe more than 22,000 units empty or unsold in the GTA alone? Poor Sam. Here’s Urbanation’s report:

With sales slowing much faster than new supply entering the market, total unsold new condominium inventory increased 41% year-over-year to 22,477 units in Q4-2023, representing a record high. Inventory was equal to 21.2 months of supply — roughly double the 10-12 months considered to be a balanced level. The 15.5 months of inventory in the 905 Region was substantially lower than the 26.7 months of supply in the City of Toronto.

Draw your own conclusions. But I’d say we’re being gaslit.

About the picture: “A pet of a different sort for your perusal,” writes David, in Calgary. “This is bearded dragon, Zoom. He is three and is about a foot long. He likes his lettuce and raspberries but really loves his crickets coated in calcium powder.”

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