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Notes -
Today we're going to discus the most exciting topic ever, Canadian real estate!
I'm largely just talking about Ontario, but Vancouver has also had crazy real estate for decades.
Toronto area real estate is famous for being a bit odd. California prices without California salaries. Or California weather.
There's a post on Reddit (circa 2022) showing similarly sized homes in Niagara Falls, ON and Niagara Falls, NY. 11 minutes apart. The US home was listed at $69k. The Canadian home was listed at $1.18M. That was about 900k USD at the time. That house was a bit of an outlier, but average sale price in Niagara Falls, ON was $617,100 (445k USD) vs $215.3K in Buffalo, NY.
And Niagara Falls is outside of comfortable Toronto commuting range, where the high paying jobs are. To get to downtown Toronto for 9AM Google maps recommends leaving at 6:10AM. Median household income in the city is $74,500 (54K USD).
When you get closer to Toronto, things get worse.
So how did we get here?
First cities learned that taxes on new construction were an easy way to get money without upsetting current residents. A new detached home typically has $186,300 (135k USD) in development fees*. I've heard people argue that it's higher if you calculate interest accrued due to government delays, often caused by no hiring someone with connections to work the system.
Combine that with high immigration and there's a significant structural housing shortage. Toronto has 360 housing units per 1000 residents. The US has 427, France has 540* all 2020 numbers.
Next there's the foreign investment issue. Some of the details here aren't proven since they aren't knowable for obvious reasons.
25 years ago China was less stable but getting richer. It was difficult to move money out of the country but wealthy Chinese could buy a home in Vancouver if they were frequently there for business or a condo for their kids studying without upsetting the CCP. This turned into smuggling money into Canadian real estate as a safe nest egg, and the Canadian government told regulators to turn a blind eye.
Things escalated into serious money laundering.
Again, I'll admit this is unproven before anyone jumps on me...
But Mexican narco gangs produce fentanyl in Mexico with precursor chemicals from Chinese companies. The fentanyl is sold in the US. The US government watches for big unexplained transfers of money going back to Mexico or to the Chinese chemical companies.
So they are using Canadian real estate to close the loop. The chemical companies sell the debt to a broker. The broker finds families in China who want to pool their money and get it out of the country. Then he connects with the narco gangs to transfer the money to be used in a home purchase by one of the family's kids studying in Canada.
But back to better grounded discussion.
The constant rise in home prices made house flipping and rental properties common. Airbnb became a driving force behind tiny expensive condo construction.
Then covid hit.
Canada had some pretty extreme covid lockdowns. This drove up home prices even more. And home flippers started buying home far from Toronto. Prices in small towns exploded.
However, the rental market in cities was hurting as living in a small apartment when everything is shut down for months is not fun. However a lot of federal politicians have invested in rental properties. The previous minister in charge of affordable housing owned two rental properties with hefty mortgages.
So the feds came up with a way to turn the city rental market around fast. In 2019 they had issued 404,000 new student visas. In 2022 they loosed up restrictions on employment as a student and brought in 551,405 new students.
No thought was given to where these 150k additional new students would live. See the housing deficit since 2020 as above.
Or work, as they all (and a big chunk of the other 400k) came in with the promise of being able to work 20 hours a week and assumed they could all land a part time IT job at least.
There are mass line ups for fast food jobs and stories of rented homes with 10 students living there.
But back to real estate.
A few things happened in 2023.
Business have been phasing out work from home, and commuting from that small town where they bought a house at the peak of the market in 2022 isn't manageable long term.
Interest rates have spiked. This is worse in Canada because mortgages typically renew at the current interest rate every 5 years. With the rate spike your mortgage payment can double or more.
Airbnb income has collapsed due to economic fears. This is happening across the US as well.
The Chinese economy is in trouble. So many people want to dump their investment properties in Canada because they need the money at home.
What's the result? A total shit show.
First there's the pre-construction market. A buyer puts a 20% down (35% for non Canadian resident) and is obligated to buy the house / condo when it's complete.
People were buying these to flip before closing. It was seen as a safe and easy way to make money. They couldn't actually afford the mortgage on the new place, but figured they couldn't lose money.
The risks were significant. If they don't close the builder does an assignment sale and the original buyer owes the builder for any shortfall from the agreed purchase price.
A quick Twitter search for an example turns up an assignment sale where a 2.2 million dollar home (1.6M USD) is being sold at a 332k (240k USD) loss after agent fees.
It's not an isolated example.
The new ultra luxury condo building at 1 Bloor West, marketed as "The One", has entered receivership with $1.2 billion in loans already in default (870M USD).
The normal sale market isn't doing well either. Ontario is in a weird situation where there's a glut of luxury homes but still a severe shortage of homes people can actually afford. Everything has been renovated and flipped. I don't think they've built a two bedroom starter home in the past 30 years.
There are some good Twitter accounts tracking real estate price crashes:
https://twitter.com/jasongofficial
https://twitter.com/ShaziGoalie
Again keep in mind it's just beginning. Investors are still trying to diamond hands it, but the mortgage resets are coming and there just aren't enough people with piles of cash who actually want to live in Ontario. They can't HODL forever.
Go to https://www.realtor.ca/ and search for Toronto homes over 1.5 million. Zoom out. There just aren't that many people in the province looking to buy homes at that price. Especially look at all of the listings in the middle of no where.
People have been joking, with less exaggeration than you'd expect, that during covid speculators purchased the entire town of Bancroft, ON and are now desperately trying to flip it.
Thank you for the comprehensive comment and I'll try to reply in more detail when I get a chance, but wanted to point out there's a newer thread that might get this more visibility!
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