Canada’s Sudden Population ‘Boomlet’ Is Boosting Housing: BMO – August 12, 2018,
I’ve been accused by some of being anti-condo or a doom and gloomer, no I’m a free market person. I’m for the demands of Canadians being met by real estate developers. Currently, the condo boom in many parts of Canada but primarily in Toronto and Vancouver are not in demand condos. Actually, let me say this differently, the Shoebox condos being built in Toronto and Vancouver are being built for a maximum of 3 people. Canada is not Asian, Toronto is not Hong Kong or even New York City for that matter however real estate developers are building condos as if it was.
That’s why housing prices are so high in Toronto and Vancouver because there really is a short supply of them. Personally, I’m not a fan of condos, but I would purchase one if the condo resembled an actual house. In the late 1990’s large condos were built in Toronto many of them with stairs within the units. A lot of 3 and 4 bedroom condos were built in many parts of the GTA for families. This was before CMHC and their mortgage-backed securities put Canadian taxpayers on the hook in the event there was a housing crash.
What used to happen back in those times was the condo market was reflective of the free-market so developers would try to meet the demands of the population. Real estate investors weren’t as interested in the real estate market because there was more risk. Well in 2018 that risk for real estate investors has almost vanished, primarily because supply and demand no longer exist in the Toronto condo market. It’s very rare to find a 4 bedroom condo in Toronto, whats common are studio, 1 and 2 bedroom condos which of course meets the demands of real estate investors who hope to buy, flip and potentially rent out their condos.
This is what I’ve been complaining about for about 10 years now, there’s a lot of empty condos in Toronto and they’re empty because there’s no demand for them. They’re empty because investors are hoping to rent them out to foreign students, they’re empty because in many ways they weren’t built properly, they’re empty because they’re not being managed correctly. They’re empty and their owners are silent because if word spread about how badly built they were, they’d never get sold, they’re empty because Canadians aren’t willing to pay $2000+ per month to live in a 1 bedroom apartment, they’re empty because AirBnB tenants are sporadic. It’s a huge problem that will only get exposed when the financial collapse occurs.
Canada has a differently constructed financial system from the rest of the world. In Canada, a lot of Canadian real estate investors are tied to derivative-based financial instruments. The big Canadian banks, namely Scotia bank and others have already passed on their risk to other schedules 2 and schedule 3 lenders. The coming economic collapse that a lot of Canadians aren’t prepared for is going to come in the form of Schedule 2 and 3 sub-prime lenders simply existing the Canadian financial markets.
The Schedule 1 or I should say Canada’s big 5 banks are already sheltered from the coming economic collapse. It’s the smaller banks and the individuals and entities dealing with the smaller banks that will experience the hardships in the coming years that will have problems. I’d also like to point out in this post that 50% of Canadians don’t have a mortgage, let me say this again 50% of Canadian homeowners don’t have a mortgage, what that should tell you is that the coming collapse isn’t going to be as disastrous as people think it is.
What it will be is embarrassing to the Canadians who are over-leveraged, will the government bail out these over-leveraged real estate investors? In the United States they didn’t, in Canada, they don’t have too, but depending on the political party in Canada when the collapse occurs they might. When debts get called in from smaller lenders and let’s say you own a mortgage that a big bank refuses to take on that’s where things get interesting.
Again qualifications for getting a mortgage are very high and the reason they’re high no revolves around the coming crash. In the United States the current Fed Chair Jerome Powell doesn’t care the rhetoric being pushed by Donald Trump, when he see’s good data he raises rates. He’s doing his job the way it’s supposed to be done and if the United States economy continues to do well Canada is going to be faced with a choice of Hyperinflation or deflation depending on what the Bank of Canada does.
If the Bank of Canada doesn’t raise rates to match the United States in an effort to protect people in debt, well the Canadian Loonie might get devalued, if the Bank of Canada decides to raise rates, well that means fewer Canadians qualify for a mortgage. Now, do you see what’s happening? To make matters worse is currently according to American’s they’re satisfied with the job Trump is doing regarding tariffs. The longer this tariff and America first stuff lasts in America the more it might have to be embraced by the democratic party.
If this America first thinking resonates in America, Canada is going to have to change how it structures its economy. Donald Trumps is the first President of the United States that I’ve observed that actually watching the interest rates of other countries. Trump’s tariffs on Canada revolves around our interest rates, our devalued currency and the tariffs we charge on American made goods. This allows Trump to play the waiting game and what’s worse is even if Trump loses the Senate there are no guarantees that NAFTA talks will move any faster.
More bureaucracy may actually shut down the government, what this equates to the Canadian economy is uncertainty in our manufacturing sector and again if Donald Trump gets another term this platform he built might become the norm in American politics, which is not good for Canada because for the most part our economy is built on Tariffs. Most of our social programs are funded by the tariffs we charge Americans and other countries to do business within our borders. If America goes tit-for-tat with us, Canadian businesses doing business in America may simply relocate to America. To make matters worse Trudeau has expanding the government and intentionally run a deficit.
The Canadian economy, our real estate market. Namely our condo market, in my opinion, is a disaster waiting to happen. However only time will tell.
Interesting times ahead.
Click the link below for the Huffington Post article:
Canada’s Sudden Population ‘Boomlet’ Is Boosting Housing: BMO