Comatose

The trouble with building a condo economy is when it collapses. As is happening now. What was an unfolding disaster is now a rout thanks part to Ottawa’s blunder on capital gains taxes.

We told you last week about the withering impact this tax grab will have on cottages, cabins, hobby farms, trusts and inheritances. Now the other shoe is dropping – from the great height of a 70-story condo tower in the heart of the Big Smoke.

First, some context.

Every government in the land has bought into the we-lack-housing meme, with oceans of tax funds being thrown into creating more. The feds alone have committed over $10 billion (that we don’t have), yet new construction is declining. This is an epic fail of public policy. Units are not being built because demand has crumbled. That, in turn, is the result of higher lending rates, a 7% stress test and crazy Covid prices which never declined in any significant way.

Here’s a chart from National Bank Financial plotting the ratio of construction to population. Oops.

Source: NBF Economics

If you buy into this supply crisis scenario, you know a collapse in the largest construction sector in the country’s biggest market creating tens of thousands of new units annually ain’t good news. But did you know it’s this bad…?

• New condo sales in Toronto are the most dismal since the ’09 credit crisis
• Sales are 71% below the ten-year average
• Year-over-year in the first three months, they have crashed 85%
• In early 2022, 9,723 units changed hands. This year only 1,461 found buyers
• Scads of precon buyers – who wrote offers two or three years ago – are unable to close because of higher mortgage rates
• Over 60 projects containing a potential 21,5000 new units have been scrapped indefinitely
• There is an incredible 30.6 month supply of unsold, new units in Toronto and almost 17 months’ of inventory in the surrounding region.

Source: Urbanation

Prices are coming down, but not fast and not dramatically. Developers spent a ton of cash and assumed heroic levels of financing to put these developments in place, so there’s a floor to costs. It’s something the burn-it-down, bring-the-recession crowd don’t seem to understand. No matter how many new units get constructed – whether condos or SFHs – the cost is not destined to collapse. Building materials have escalated. Wages are rising steadily. There is a shortage of trades. Urban development charges have not fallen. There’s no reason to think more supply will hit the market with sale prices fading as a result.

After all, if there’s a 30-month supply of new condos with sales down 85%, and yet prices have declined a mere 3%, you can see the economics at play. Only lower financing costs will make real estate cost less – but then, ironically, that also increases demand, especially when governments are priming the pump.

As for Chrystia’s capital gains tax bloat – the one Ottawa told us would affect only .013% of the population – well, the ripples continue to spread. The cottage and rec prop market, already shaken by a lack of buyers, will be sorely impacted as the tax hikes click in before the Canada day long weekend. Trusts and people getting inheritances later this summer and beyond are in for a surprise. Yesterday we touched on the impact for doctors, plumbers, hairdressers and other self-employed people who earn through corporations. And now you can add a brewing condo crisis to the list.

“Folks wanting to beat the capital gains changes,” says mortgage broker and influence Ron Butler, will be dumping “dog crate rental condos mainly in 416 and 604 Vancouver.” Ditto for those who have built up equity in investment properties with tenants. “The sudden change in Cap Gains rules motivates some to cash in their second homes BEFORE the end of June.”

This much is clear: demand for real estate has withered since most people can’t pass the stress test at these price levels. New home buyers are disappearing fast. Yet without demand and firm sales, builders can’t build. Inventory piles up. Projects are shelved. Construction falters. Politicians who tell you they’re ‘building houses’ are doing no such thing. It’s a complete myth.

By the way, how can there be a crisis of supply when years and years of inventory sits empty in our largest city?

It’s sobering to think what comes next.

About the picture: “It’s been a while,” writes Dharma Bum. “Louie the Chihuahua needs a photo spot on the blog! He had a long day while I was packing up the house in preparation for the big sale!”

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