It has been a mixed year in terms of the housing market. On the one hand, the economy has been hit by a multitude of worries, from multi-decade high inflation to central banks around the world tightening their purse strings. On the other, housing has traditionally been a strong defender against inflation, as investments in real tangible things have held strong when currencies depreciate. And while prices have dropped from their peak as borrowing costs increase, they are still significantly higher than their levels from 3, 5, and 10 years ago, especially in markets like BC and Ontario.

Most recently, the Toronto Regional Real Estate Board released some pretty solid news for the monthly MLS Average Price for homes, with Toronto homes still firmly above the $1.0M mark:

Why do we think this is? Why, despite warnings of a recession and untenable interest rates, do home prices continue to store value better than many other asset classes?

HOME BUILDERS IN THIS ENVIRONMENT

It’s no secret that building has slowed in the current climate. Builders, especially for new builds, are really waiting for one of two things to happen. The first is that interest rates have yet to peak, putting uncertainty in their cost models. It is extremely difficult to commit to large sums of money without knowing what your final costs will be, as the smallest miscalculation can lead to major losses.

The second is, as the economy slows, the labour market should become less costly for their builds. We are starting to see signs of peaking inflationary forces, so that is something that is on the horizon.

Right now, for builders, it’s difficult on two levels – one, costs are rising from interest rates. And two, the labour market is still extremely tight, leading to a large increase in labour costs. If and when the economy starts to slow, the second part of that cost equation should come down, just as interest rates stabilize for the first part. That could lead to many builders restarting their projects and a fast pace of new homes coming to market.

PRICES AND FUTURE DEVELOPMENT

A logical concern which comes out of this commentary is that prices are likely to drop further. This may be true as disposable income drops across the board, and as homes are slow to be built in the first two quarters of 2023 (which, in a way, helps land prices retain value). How much further remains to be seen, but what is clear is there are more forces at work than the two mentioned above. We’ve discussed at length in prior reports that there is a huge disconnect between supply and demand, and this remains true today – despite higher borrowing costs.

The reality that we are living in is that our population in Canada is expanding, and immigration has increased dramatically in recent years, especially in major cities. Affordability is a symptom of the demand and supply mismatch, and we are going to come up extremely short in meeting supply in the next decade. Canada needs 5.8 million new homes by 2030 to tackle the affordability crisis, of which we are on track to be about 3.5 million units short, according to the CMHC.

That fundamental mismatch in demand and supply should put a floor on prices in the near term, and in the medium- to long-term, things look pretty attractive. A recession may affect the demand for housing, but if builders stay on the sideline, supply will also be affected significantly – leading to stable or higher price pressure overall.

EYE ON THE LONG-TERM

With much of the news lately on how bleak things are looking, it is important to know that we are not in a brand-new cycle. Long-term investors, in any asset class, know that keeping your eyes on the long-term is the only way to really capitalize and build wealth. While we wouldn’t be surprised to see more of a short-term pullback, longer-term trends remain firmly in place.

 

The reality is, this has happened before, even semi-recently. Back in 2018, when central banks were hiking interest rates, the market was shaking similar to what we see today. And of course, we all still have a healthy amount of PTSD from the 2007-2009 crisis.

It is time that we learn from history, and take this opportunity for what it is – a great way to build assets and investments for the future. While it might take some time for normalization, profits and future returns look bright, for those with the conviction and intuition to see it.

For those looking to get a jump on the next cycle, or larger developers with some idle cash, our RealAlt® Investments holding is a mortgage fund trust that is returning 11.25%*. Contact us for more details today.

*Annualized rate of interest since inception as of October 31, 2022 – Series AA