Is It A Good Time To Buy, Sell, Or Invest In Real Estate ?

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:10] There's a common question on a lot of Canadians' minds right now. That is Dubai, Buy, or Sell, a house in this market or do I stay on the sidelines?

[00:00:25] It's a tough question to answer because not only is every person and their situation unique, but we've also seen a major volatility in the market for the last few years which exacerbates all of those unique situations.

[00:00:40] A combination of rapidly rising interest rates, inflation, immigration, weakening GDP and red tape in the building process, as well as speculative behavior from investors, have all made real estate market. We're looking at data and trying to answer some of these complex burning questions such as

[00:01:07] How do skyrocketing construction costs impact the market and when will these costs come down? When will housing become affordable? Could rate cuts be the silver bullet to revive our economy? And is now a good time to get involved with the housing market?

[00:01:27] So stay with us as we unravel the complexities of affordability, explore the factors that are driving these prices and discuss what the future may hold for Canadian home buyers and investors.

[00:01:39] So whether you are a seasoned real estate mogul or you're just getting started on your investment journey, stay with us because this episode is packed with insights that you can't afford to miss. But before we dive in, let's start off with a few things.

[00:01:55] We do have a wonderful review here from a Apple podcast user Kenny from Toronto who took the time to leave us an amazing review. Do you want to read that for us here, please?

[00:02:08] It says refreshing and informative and it's a five star review for a subject that is prone to misleading information and alarmist headlines like real estate.

[00:02:19] Nick and Dan take the time to parse out the useful and relevant bits to help potential and current real estate investors making form decisions. I like the flowing conversations too. It feels like I know them and I'm there with them.

[00:02:33] Kenny from Toronto by Apple podcast, thank you very much. We feel like you're here too when you say nice things like you just in. Thanks. Is Kenny in the room with you right now? Dan? No. I'm safe. We're good. Blink twice if you're being held hostage.

[00:02:50] Yeah, no appreciate that review and every single other one of you that takes the time to leave us one. But with that we have a lot to cover today. So let's jump into today's episode.

[00:03:00] What we're going to be doing is looking at two different reports here both from days are Dan. The first one is called Should You Jump Into the Housing Market and If So When?

[00:03:12] And the other one is rates cuts will boost the will boost sales and prices, but probably won't help Canada's home building ambitions. So let's start off with the highlights from the first report here. This is the days are to affordability index.

[00:03:28] Should you jump into the housing market and if so when by Mark Dezormo, Principal Economist? The highlights say that with interest rates falling in home prices expected to rise, some prospective buyers sense an opening after an exceptionally challenging period for affordability.

[00:03:45] Could the next few months be the right time for them to come off the sidelines? What do you think Nick? You know what? I think that if you follow the data and you pick your market, it's always a good time to invest.

[00:03:59] But I think this is speaking to a much broader audience of people. Yeah, so yeah, I think like based on their forecasts like they say some prospective buyers may find opportunities in late 24 to 25, which I think like that's probably going to be peak.

[00:04:15] I think my kind of peak pain thing is like the year 2025, I think is going to suck for the housing market. And they mentioned several caveats and additional considerations. They remain of the view that Canadian housing affordability will improve,

[00:04:28] but not return to pre-pandemic levels over the next two years. So they're not seeing prices functionally potentially coming down in the next two years. So maybe affordability could be a result of or any affordability that will see returning to the market

[00:04:46] could be a result of rates or incomes. Yeah, on that front more likely rates. But they do go on to talk about that resulting in that affordability will improve, but not return to pre-pandemic levels over the next two years.

[00:04:59] And they actually go through different scenarios that they forecast in this report. Neacenaries are an extension of mortgage repayment timelines, changes to temporary migration policy, pronounced in new spike in new listings and a recession.

[00:05:18] Now the cool thing is what we're going to do at the end of this report is really go through each one of those scenarios that Desjardinier has explored. Desjardin also expects regional differences to persist. Of course, Ontario and BC particularly costly starting points mean that the likely

[00:05:37] remain the most prohibitive market's well places like Alberta should continue to stand out as more affordable. Now it's been an exceptionally challenging period for Canadians seeking to purchase a home, and many just simply have given up amid the decades high borrowing costs

[00:05:58] and they still quite high home values. But now with interest rates falling in home prices expected to rise, some prospective buyers sense an opening could the next few months be the right time for them to come off the sidelines. What do you think Dan? It's interesting.

[00:06:17] I mean like hypothetically yes, I imagine many buyers could benefit from getting into the market while we're in a downturn. You know, like as your prices come down, there's less risk below you, right? And there's more upside potential above you.

[00:06:37] But most people are fearful to kind of buy in that downturn market. But the piece that's really preventing people from actually getting back into the market is like 10% of Canadians can afford to buy the avatose right now.

[00:06:50] So it doesn't really matter whether or not the average Canadian wants to buy the avatose if they can't buy the avatose, right? So the expectation is that affordability will improve but it isn't likely to return to pre-pandemic levels within the next few years.

[00:07:08] And if prices don't come down, then incomes will have to catch up or rates will have to come down in order to get to that pre-pandemic affordability. And we've talked about this a couple of times. The Bloomberg has like pre-pandemic affordability index and they said

[00:07:22] off the from peak prices would have need to come down like 33%. And I think nationally prices are down like between 10% and 20%. So prices have done a lot of work already. Incomes would need to rise like 55%, which obviously isn't going to happen, right?

[00:07:35] Like if income is going up 55% to more or less in trouble. That's the one I'm rooting for. Yeah, yeah, everyone gets a raise. And then the last one is interest rates would need to come down like 350 basis points. Which probably also isn't going to happen.

[00:07:49] I think like most economists see a terminal value of like, I think what is it like 200 basis points from where we were at peak. So you know kind of overnight rate at like 3%. So again, none of those things independently is likely to happen.

[00:08:05] Some combination of them is likely to happen, right? So let's jump over to the other report by day by day shared and called will rate cuts boost. Or sorry, rate cuts will boost sales and prices, but probably won't help. Can't can't as a home buying ambitions.

[00:08:20] Home building home building and so building ambitions. Tricky stuff because the first one is all about home buying. The second one is all about home building, but guess what they are. Fairly correlated. The bind and the building of homes.

[00:08:35] Yeah, so this housing market I looked baked in a rebound in homes sales and values in late 2024 and 2025 is interest rates come down. However, to assume the pace of price gains would be weaker than the pandemic and hotter quarters of 2015 to 2019.

[00:08:51] Which you know, I mean like to me, I mean prices are kind of down on a year over your basis right now. Like 1% but even if they're up 1% they're still lower than inflation and so you know it's easy to be like,

[00:09:03] Oh, this is so good prices are going up again, but if they're not going up a faster than inflation then your real or inflation adjusted price growth is actually negative. Which means that you're not outpacing inflation on price growth just like tick contextualize that a little bit.

[00:09:18] Yeah, exactly. So let's look at some of the highlights that were identified in this report. So days are down still expects that the Bank of Canada will begin reducing rates.

[00:09:31] Now this report came out literally two days before that first rate cut that was highly celebrated in social media and they're expecting more and that will further monetary easing and will support a broad base rebound in home sales. And housing prices later this year.

[00:09:52] Now that said, slowing economic growth in the coming quarters still elevate a borrowing cost and a very stretched affordability will limit the scope of prices and sales gains.

[00:10:06] So the Alberta housing market or sorry I'll I'll burders I guess two major housing markets continue to face the best prospects in 24 and 25 by contract the contrast the rate sense.

[00:10:17] The rate sensitive Ontario and BC markets should experience more softness in the near term but also see stronger rebounds as rate cuts increasingly work their way through the economy.

[00:10:26] So like this is an easy one to kind of contextualize we said this pretty early on like as soon as the rate hiking stuff started in Toronto and Vancouver especially.

[00:10:36] You know people were more exposed because they had prices were rising so quickly and people were taking on more and more debt to pay for those houses.

[00:10:44] And so as soon as rates went up because people had more debt those markets were more impacted right the borrowing power was reduced because everybody was buying with huge mortgages and the financial stress of all those existing owners who had had said huge mortgages.

[00:11:00] And so we're starting to see record inventory and at least in the Ontario market. Dagger and doesn't think lower rates will translate to a construction boom monitor using will take time to stimulate projects currently on hold and Canadian housing construction faces mirage structural challenges.

[00:11:18] These will likely limit our home building in affordable housing ambitions for the next few years.

[00:11:24] Yeah exactly and there their economic view remains that the bank account will continue to lower the key interest rate that will further again ease that monetary policy will again then support that rebound however a few factors.

[00:11:40] We'll prevent a more significant recovery the first one being they still expect hikes already completed so that's rate hikes that have already been cleared to remember that a rate hike takes.

[00:11:51] 12 but more like 18 months to really work its way through the economy and to really be felt by the people within that economy so they're still expecting those hikes that we've that were imposed you know.

[00:12:06] 12 18 24 months ago to to feel an effect and Dan I know we've talked a lot about this I think that's why you're predicting 25 be the hardest year.

[00:12:16] They're expecting that to weigh down both economic growth and job creation across the country in the months ahead and it'll also take time for the full effect of these you know quote unquote lower borrowing costs that we are all I'm sure.

[00:12:31] anxiously awaiting to take hold in the housing market right we just saw one and you know Dan how many times do you announce that question what's this going to do the house America what effect is just going to have an mortgage.

[00:12:42] The answer's pretty simple nothing or not much at all so just like with everything whether it's an interest rate hike or an interest rate decrease a cut it's going to take a while for that to the comment to play.

[00:12:55] Yeah for sure they note that affordability remains very stretched in most of the country which will limit home buying activity right we've talked about this a couple of times here like such I just mentioned it such a small portion of the population can actually afford housing right now and so.

[00:13:11] You don't have a ton of buyers which means that you don't have a ton of sales they are assuming the rebound period will begin only after the worst of the labor market softness is behind us, which means that you know once an unemployment kind of stops rising and we start seeing gains in unemployment again.

[00:13:28] And we start seeing more meaningful relief in interest rates so rate coming down not not 25 basis points at a time right and again it's kind of a be careful what you wish for think because rates coming down quickly means that we're not in a good spot right so on the listing side they suspect that moderately high unemployment and an undergraduate improvement in buying activity will prompt some sellers so list their properties.

[00:13:53] That new supply could also drive new sales in the tightest local markets while rate relief will also help the most stretched mortgage holders who might have otherwise sold be able to hang on a little bit longer, which maybe.

[00:14:07] You know who knows that they probably should just sell really I mean if you're you know if you're waiting for a hundred bips to save you maybe maybe maybe you should be looking at a different asset class.

[00:14:18] Yeah, you might be waiting a bit too long you can there's only white knuckling that can be done for for so long so let's look at some of those factors that is you know quote unquote stretching this affordable in the first one that they are done identified here.

[00:14:35] Is residential construction prices are skyrocketing so it's no secret to any of you listening we've all experienced it we felt that every single time I leave that house I feel like a cost money the cost of living for Canadians has risen but the cost of doing business has risen even more for home builders.

[00:14:59] In Q1 of 2020 and Q1 of 2024 total CPI inflation rose 16% whereas residential building construction the price index there climbed a whopping 59% absolutely crazy.

[00:15:19] Yeah, really is another factor that's contributing to the problem is declining presales and that delays project financing so they critical component of construction financing industry that minimizes the lenders risk is declining particularly in centers like Toronto where you know we see pre-contruction sales so.

[00:15:42] That partly reflects the fact that younger adults have responded lack of affordability by moving to more affordable parts of the country right and they link to another another article in that called charting a course to a brighter future housing affordability and young people's major life decisions which we'll have to do another episode on look at a happy that young couple.

[00:16:02] Yeah, yeah when they can afford a house. Yeah but you know I mean the reality is that is a trend that is going to continue in less these cities can figure out a way to be more affordable which it seems like there.

[00:16:19] If anything going in the opposite direction so like you know they're putting a more construction costs development charges arising et cetera and so.

[00:16:28] You know, days or day states that they feel that that trend of young people moving to other places that they can afford is something they expect to persist I'm going to have to agree with them on that one.

[00:16:38] I think that like if I'm going to make like my really really dumb predictive call here I think I've mentioned this a couple of times on the show so I'm not embarrassed to say it anymore but.

[00:16:47] The same way that you saw like Toronto you serve Montreal in being being Canada city you know like if you talk to people from like. I don't know like older generations in the US or something like Montreal is very much the city that people know from Canada right.

[00:17:03] Are you agree with that right 100% yeah I could I could.

[00:17:07] I could I could I could I could I could I could I could honestly see with how many young people are moving to Calgary right now I could honestly see Calgary you serving Toronto as Canada city like I could see that happening it sounds like I feel like.

[00:17:18] I'm like people from Toronto are going to hear that and be like oh man this guy is out to lunch but it I could like I'm not you know when you when you think about like when that happened like that would have started like the 80s or 90s right like it was a 30 40 year thing that took place right when the FLQ stuff was happening and.

[00:17:33] So you know not saying it's going to happen tomorrow but I'm saying it wouldn't surprise me if like I think that we're seeing the start the starting of it and if both places continue on their paths it could very easily end up that way I don't know what do you think.

[00:17:46] I'm I'm saying I completely agree and I think then you know that trend continues Alberta gets to expensive Calgary gets to expensive and boom now Saskatoon's Canada city.

[00:17:58] Did you increase your exposure to Saskatoon every single week and to something both to be I think but yeah you know I do completely agree that that it's the natural case I mean and even without becoming the city I think just the flock to a few years.

[00:18:15] The flock to affordability is it's so true. I mean I was speaking to a investor focus real-throwing in Calgary and there's seen a lot of their clients are people from Vancouver because they you know people live in Vancouver we've got a large audience that listens from Vancouver in the lower mainland.

[00:18:35] And it is very hard to get deals done there but does that mean you just don't invest you just ignore the real estate asset class over all know it means you go and find a mark that does.

[00:18:45] Work for you and guess what you've got one right next door in Alberta and all the amazing markets there but get and the client that this agent was touring was like oh you know I should have bought and BC you know 20 years ago but I didn't and now I almost miss Calgary so I want to get in.

[00:19:03] And let's say you know fast 40 year or two Calgary will be considered you know missed too hot to handle not the Netflix special right there but too hot to handle and you know it's where's the next place going to be.

[00:19:15] Yeah I think the only the only challenge that I'll let you get back to the report but the only like my only and this is like just it's not predictive it's not me I'm just trying to like think about the you know tell the whole story here because like I'm starting to see I'm starting to see kind of.

[00:19:31] Prices or not prices aren't coming down yet but you see price cuts you're starting to see a bit of a flood of inventory in Calgary and we've been talking about this a lot like you know it you know it the market has felt pretty over bought to me right.

[00:19:43] Like I agree that in in the long term I think that there will be a period of time when people say oh wow like that was a missed opportunity but you don't you know like.

[00:19:52] I mean I think that's really when everyone's flooding in and it's like you know if you go look at mutual fund flows Canadians are literally perfect at timing the peak and trough of the market.

[00:20:02] In a bad way like at the top it's like everyone's rushing in right and then at the bottom everyone's selling because they're scared.

[00:20:09] And that's that's Canadian mutual fund flows and so you know apply that to housing market everybody's rushing in to buy Calgary you know all the Toronto pre-calling guys are selling Calgary pre-constructions like you know in that note about not having.

[00:20:22] The the sales for pre-cons in Toronto I mean it sounds like because it's because they're all going to they're all selling in Calgary.

[00:20:31] And so anyway I think that there is a bit of downside risk to the Calgary market just like worth noting that it does feel like it's really really stimulated it's really like almost in its sense of mania and so it's just like worth watching and the last thing I'll say is like from a data perspective there is evidence that.

[00:20:47] These massive inflows of people into Calgary are usually happened like right before a huge recession it's just like I don't think it's just going to the end toll it's probably also related to oil prices right because.

[00:20:59] We're in like a bit of an oil boom and a lot of people go with their industries very hot and then so the question that's going to happen.

[00:21:06] From my perspective is what what if we see demand destruction in the oil market and well the the that part of it their economy kind of suffers a little bit are we going to see this.

[00:21:18] Exitists of people coming back to the Ontario's of the world because because of going isn't so good out there I don't know this is just these are the things that I think about when I think about getting exposure to Calgary.

[00:21:30] I'm very good at calling things too early right so while I'm just taking what they said yeah I completely agree take what they said at six to 12 months to it or in some cases a couple years.

[00:21:40] I think now like now it's kind of turning over you can see it happening I think I could be wrong but it does seem to be like you're seeing price cuts a lot of inventory et cetera but.

[00:21:50] I've been saying this and I like not trying to say it's over bought but it's like I've it's probably was at the risk of kind of getting into that melt up like a little bit of a mania bubbly ish.

[00:22:00] That was saying that like a year ago or more right so you know there's like.

[00:22:05] That's when I was too early now I'm kind of probably somewhere on the right track but a year ago yeah I mean like it's that's why I try not to see speak in absolutes right.

[00:22:14] Of course we're not in the business of predicting things here we just look at the numbers and try to see if history will rhyme as the great Mark Twain said and.

[00:22:25] Yeah Dan I completely agree I mean again I'm not going to put a time on it but I do think that.

[00:22:31] The Calgary has has probably peaked out a little bit and it's just not a place that I'm person looking at there right now now I do I do know that there you know there's people in our course there's people that that we speak to they're absolutely killing it out there.

[00:22:47] But if you are a new investor and you're trying to you know speculate on a or sorry if you're new person literally trying to actually invest then don't go out there and speculate on a pre-con do I think is what we're getting out here.

[00:22:59] Let's give up I just call them pre-con do's now by the way. Yeah sorry Jordan. No I think I'll be happy about that. Yeah it's become a it's become an actual word now we have to call them pre-con do dot c a's.

[00:23:11] Right there you go go check that website out for some great condo information in Calgary as well as all the Jordan screen. Go friend of the show.

[00:23:21] Let's get back to the report here Dan the next problem that day's are Dan has identified here our labor shortages they are persistent and have been for some time you and I have talked about this many times on the show.

[00:23:41] And the danger looming in the next couple of years. Well job vacancies have come down from their feet construction workers shortages remain higher than the pre-pandemic average in higher than the all industry average.

[00:23:55] The federal government and the provinces have implemented various programs to address this issue by encouraging Canadian youth to consider careers in the trades. And prioritizing the express entry of immigrants with skilled trades backgrounds.

[00:24:13] In fact young people share shares young people's share of the total construction workforce has actually fallen steadily over the past 15 years and let's remember that about two years ago auto a estimated that over 700,000 skilled trades workers are expected to retire by 20 years.

[00:24:32] And that number has likely gone up since then so hard to build our way out of a housing crisis if we literally don't have the workforce to do it. Yeah I couldn't agree more.

[00:24:51] The next part I guess heading that they have here is higher financing rates impact construction right so this shouldn't come as a surprise anybody but they ever have a chance to do it.

[00:24:59] And they provide some pretty cool visuals here so it says higher financing rates impact construction interest rates have a profound impact on the housing construction sector when the Bank of Canada raised its key interest rate to combat inflation borrowing cost for construction projects surged.

[00:25:19] And construction debt is on that variable overnight rate so imagine like all of you who were on variable interest rates you know with your like million dollar house and imagine the impact that you were feeling now I'm now put three zeros on the end of that and imagine how these builders are feeling has a result of that.

[00:25:38] Actually I spoke to a builder the day that the interest rate was cut and he was the only person that I spoke to it was like no, this actually does make a difference this saves me you know tens of not hundreds of thousands of dollars for sure small small small change for you know a big.

[00:25:56] Yeah for mankind there we go. Nicola original something like that yeah put it in the list.

[00:26:03] So the Canadian Homebole Association reported that 65% of its members built fewer units than they would have otherwise which makes sense right and there's also less demand as a result of the rates and consumer sentiment that prices aren't going up so that doesn't help.

[00:26:18] Irvenation confirm this trend reporting that over 21,000 units across 60 projects in the Toronto Hamilton area have been shelved indefinitely since the market peak in 2022. Looking ahead yeah looking ahead builder sentiment is quite low in both the single and multi unit residential construction markets.

[00:26:36] That's no joke guys 60 projects that have been shelved indefinitely. And there's like a. And then you was going to say you know all about this is your wheel.

[00:26:46] Yeah there's a couple hundred like registered projects that I don't know between a hundred and two hundred I can't remember the exact figure but there's there's many registered projects like that would be people who want to launch right there's going to be like dozens of attempted launches likely in the fall or spring.

[00:27:03] And who knows how they're going to go I mean you know and then and then you've got and that's that's just registered projects like those are people already have their zoning who are ready to like and permits who are ready to go build.

[00:27:13] The next is people like what about these projects that have been contemplated right so where people are in the approvals process they've gone for zoning that's like in the hundreds if not thousands of projects right where there's there's people who bought land and are in the process of rezoning it and so.

[00:27:27] There's so many people exposed to this that and so much money exposed to this that. This is a problem that really needs to get fixed soon but anyway I won't I won't dwell on it. Because they're trying to just present a positive recovery case here.

[00:27:41] Yeah here we go. Well this next one unfortunately is not we're not at the positive part yet and you'll start to understand why some of these projects have been shelved and a lot of that has to do with.

[00:27:55] DC's otherwise known as development charges higher development charges have also made housing much less affordable for example Toronto condo developer charge charges rose by 20.7% in the month of May alone in 2024 well these charges are paid by the developer at the time.

[00:28:18] The building permits issued they're ultimately passed on to the buyers who then have to finance the cost as part of their mortgage if it even gets to that because we just discussed a lot of these projects due to development charges labor shortages higher borrowing costs.

[00:28:34] And the number of other things are literally just shelved in some cases in a lot of cases apparently indefinitely. I also like this chart that they included here if you're watching this on on YouTube or on our Instagram or whatever.

[00:28:48] It shows Canada has the longest construction permit delays which are two two charts that I share a lot and I don't know I so I always just imagine that these people are listening to the podcast or following me on social media.

[00:28:59] You know it says time to obtain a construction permit in 2019 Canada is the second worst which we've discussed several times on the show.

[00:29:08] And then it also shows approval delays and housing affordability and it's literally just like this like one to one correlation CMH sees out line this before but one to one call it's got to be like like if you look at the line it's like basically house priced income ratio versus approval delay index and anyway funny.

[00:29:24] Yeah another the other kind of funny but ironic thing here is the only the two that the two people that are the two countries as you know people that it's the slow back republic that has the longest construction permits then Canada then slowvania.

[00:29:45] So yeah bad joke but anyway. That's good to get you. Oh yeah. They literally have it in their names love it.

[00:29:53] So yeah so Canada is among the worst in the OECD for construction permit delays which are correlated to lower housing affordability so not get these are not the kind of things you want to be setting records in right you don't want to be these are charts you don't want to be at the top of.

[00:30:05] We're still definitely not okay so let's do a quick little recap our main takeaways from that first report that we just did. Resonant residential construction prices are skyrocketing at the same time declining pre sails are delaying project financing.

[00:30:23] We also have a massive labor shortage in the near future with 700,000 plus skilled trade workers expected to retire in the next three years. Higher financing rates are impacting construction and those are ultimately increasing the lack of affordability because they are being passed on to the purchaser.

[00:30:44] So our higher development charges they are also added to the cost of housing which again ends up on the mortgage payments of the owners of those places if they if that project ever even gets there.

[00:30:56] And of course let's not forget Canada is the second worst in the OECD for construction permit delays so. Wow, shout out to Desher Dan for putting that to that somewhat depressing but great information together as always but let's that report was focused on home building.

[00:31:15] So we kind of use that as the foundation if you will to get back to the other report which is more focused on home buying so Dan over to you.

[00:31:24] Okay, so with all of that let's jump back to the first report we spoke about remember the one titled should you jump into the housing market and if so when based on.

[00:31:33] The Desher Dan forecast some perspective buyers may find opportunities to come off of the sidelines in late 2024 or 2025 by then they anticipate that the affordability index. They have their own special affordability index.

[00:31:48] So that's just what Canada needed was more indexes actually the DAI the day day I was I would like almost pronounce that die but that's a little morbid.

[00:32:00] So guys, you're right will have this index will have risen by about 5% of points from current levels about 2 thirds of the affordability improvement expected by end of 2025.

[00:32:09] And optimistically for those seeking to build housing wealth not just by a house to live in of course because that would be just shameful that to you have to it has to be a wealth building to dare you.

[00:32:20] Yeah, our projections also include steady price gains beyond that point as Ray cuts completed earlier increasingly work their way through the Canadian economy and by our projections I'm speaking on behalf of Deja accesses from their report because my projections are a little bit different than that.

[00:32:37] Appreciate that. And now remember earlier in the show we introduced this report and we said that they should end have put together different potential scenarios of these scenarios were an extension of mortgage payment repayment timelines changes to temporary migration policy a pronounced spike in new listings and a recession well.

[00:32:59] We are now going to go through each one of these scenarios and then cap it off with Deja dance kind of final thoughts and closing remarks and they actually have a pretty good call to action to policy makers at the end so Dan would you start us off with the first scenario here.

[00:33:19] So their first scenario assumes mortgage terms increase to 35 years from the current industry standard of 25 years which would see affordability worsening versus the base case in just a few years now that sounds kind of crazy right because you think oh the government's telling us oh we're extending amortizations make housing more affordable for you right.

[00:33:40] Little do we know that you pay 26% more interest on a 30 year am than you do on a 25 year am right so extending the amortization period has been floated in some corners of the solution to Canada's housing crisis because in isolation it would reduce mortgage payments and lower the income threshold for a loan qualification.

[00:33:58] However, they would also increase disposable income which would increase housing demand it would also increase the borrowing power of the marginal buyer which would increase housing demand.

[00:34:08] So there's their scenario shows that an immediate amortization adjustment would benefit those fortunate enough to be able to jump into the market right away but affordability would eventually become even worse because the initial gains would create a more dramatic rise in house values to an extent this would be a shortcoming and all.

[00:34:26] And then we would be able to do a more important part of the work that we're doing and we are going to do a more important part of the work that we're doing. pay attention to, especially policymakers who are saying, well, we're gonna increase

[00:34:39] memorizations and make it more affordable. It's like no, you're stoking demand by doing that. Anyway, next one. Yeah, I mean, well, first, I mean, I'm with you there. I vote no. I think pushing, you know, memorization another 20, sorry, another 10 years to 35 is not only not fixing the problem.

[00:35:01] It's even actually making it worse in some cases and you're just giving, you know, the whole thing just gets propped up on more stilts that will eventually snap. So that is not a solution that is like building a house in a solution.

[00:35:16] On a wood foundation, would you say they're neck, right? Yes, concrete foundation. Yes, but I'd say on a wood foundation in a pond because I don't think that's gonna last a long time. That is gonna start rotting pretty quickly

[00:35:27] and that again, that is not gonna fix the problem. That is just going to make it worse in the long run. That is literally a perfect example of that proverbial kicking the can down the road. So let's hope that scenario number one,

[00:35:39] that Desjardins has gone over does not happen. Let's go to scenario number two. We second scenario that they present assesses the impact of auto as planned to reduce the NPRs, that's non-permanent residence population by 25 to 30% by the end of 2026. Again, they don't see affordability

[00:36:01] improving meanfully in a long run under this scenario. But for this exercise, they compared their base case affordability index projections to a situation where population growth continues at the pace assumed before the federal government's announcement. The base case affordability projection is slightly better

[00:36:22] than the no non-permanent residence cut scenario but only slightly better. That's because well weaker population growth does translate into weaker housing demand. They also expected to result in fewer new listings. Now over time, it is also limiting our productivity capacity and ultimately our efforts

[00:36:47] to bring more supply online. Non-permanent residence also tend to rent more than the broader Canadian population. So the policies potential impact on house prices may be limited in any case. Thoughts on that one, Dan? This one, like we've been saying this for a long time, right?

[00:37:07] But the reality is eventually non-permanent residence demand on rent does increase the value of properties because in an irrational market where people buy properties for yield, not just capital appreciation or whatever the heck else reason that Canadian spends so much money on houses here,

[00:37:29] rents should drive prices up because rents are yield. They're the economic productivity of a house, right? And so if you reduce non-permanent residence and reduce rents then the rent value of a property brings that down, right? And as rents go up, it also becomes more sensible

[00:37:50] for the average household to potentially, somebody who isn't planning on purely renting to buy a house, because the exchange value of them saying, oh, it's so expensive to rent now. I'm gonna go buy a house that every time rents go up,

[00:38:03] they become more economic and sensible for somebody to buy a house. And so this doesn't exist in a vacuum but I think that it is people do underestimate the impact of this on rents and then the knock on effect on prices, right? I hope I explain that properly.

[00:38:25] Yeah, yeah. Okay, that was good. So there's thirds scenario. And these are really well-chartered, by the way, they show two charts like existing home sales price. And again, if you watch these videos on YouTube, if you're looking or I try and post

[00:38:37] like pretty much every chart that we cover on the podcast, I post them on LinkedIn, Twitter, Threads now as well. I post them on Facebook and I get one like on every post. So if you're looking to see most of the charts

[00:38:50] that we're referring to ever on this, just follow me on social media and you'll see them. Anyway, so the chart shows existing home sales price and then scenario three is what would happen if listing spike in the months ahead. And so that's the orange line surgeon new listings

[00:39:07] and it shows their projection of a surgeon new listings would actually have the best effect, I guess, you would say like it would create the lowest growth in existing home sales. But it would be kind of the middle case for the affordability index in the fullness of time.

[00:39:23] And their analytical framework doesn't suggest that the DAI would get anywhere in here. It's pre-pandemic level with that example. Do you want to give me the final scenario here because I know we're getting kind of tied on time? Yeah, the final scenario, Deserdinne, analyzed here,

[00:39:41] envisions a recession consistent with that of the 1980s and 1990s down turns and the GFC, that's the global financial crisis. And again, we've done several episodes of the course of the last 210 episodes here that have looked at those recessions and it had done deep dive.

[00:39:59] So go back and listen to some of those. Now again, it doesn't have the affordability index returning to the 2015 and 2019 average by 26. Ultimately, well economic downturns do usually result in meaningful home value depreciation. They also tend to bring interest rate cuts

[00:40:18] and the stimulative effect of those which mitigate price declines. Vel's come at layoffs and losses in the income being purchased to you, income being used to purchase a home. And their recession scenario puts the household disposal income more than $20 billion lower

[00:40:38] than the base case which they would use in 2025. Now with that in mind, those hoping for recession should not only be weighing their home line ambitions against the immense longer-term economic and social cost but they should also be thinking just how much more

[00:40:52] affordable a home would actually be for them if their financial situation changed. Dan, what are the final thoughts that they should Dan left us with from these reports here? So the final thoughts are that the last two years have been exceptionally trying for many Canadians

[00:41:09] seeking to purchase a home and even those not seeking to purchase a home. I think it's just been a very tough go for Canada. The good news is that they shouldn't have seized some relief in the quarters ahead

[00:41:19] as interest rate cuts reduce the cost of carrying mortgage debt. The bad news is that this likely isn't going to give us or turn to pre-pandemic affordability levels anytime soon and that's something that we've been talking about a lot on the show.

[00:41:32] I think that we want to set a realistic expectation for people. This is like, this is gonna be a pretty long period of economic austerity, I think, for Canada. I don't think we've gotten to political austerity but I would imagine that'll be probably the necessary evil

[00:41:46] that whoever's governing the country after the next economy will face, perhaps by design who knows. And so those looking for buying opportunity should consider the interplay between rates and home prices as well as relative value propositions in all parts of the country is what Desjardins says.

[00:42:06] And so I don't know, like, do you, I think we've kind of mentioned a couple of times like honestly the beginning of this show, like, from episode one we were like, it's gonna suck the economy's gonna get hit really hard but this overlining is that there's good opportunities

[00:42:20] in that and I think we're kind of at that phase and I think everybody's sort of acknowledging that we're at that phase of, oh, you know, this is the kind of the blood in the streets moment, right? By when there's blood in the streets.

[00:42:34] And so yeah, I think like the next couple of years will be very good opportunities for people who are looking to make lasting real estate investments but I also, I think that that comes at a cost of a lot of people suffering, right?

[00:42:50] And so it's really one of those double-edged stores somebody might say or be careful what you wish for, right? Yeah, no, really well said. I hope everyone listening got a ton of value out of this episode as Dan was saying if you want to see the charts

[00:43:05] that we were referencing follow us on social media go and watch this episode and all of that episodes on YouTube. If that's your thing, we appreciate all of you listening and reading, sorry, leaving reviews and don't forget it is right now, we are recording this

[00:43:21] on the first Tuesday of the month. The second Tuesday of every month, we have events across the country go and attend an event. Maybe you'll find your next deal or your next partner at one of them. Thank you so much for listening and as always.

[00:43:34] We'll see you on the next one. The Canadian real estate investor podcast is for entertainment purposes only and it is not financial advice. Nick Hill is a mortgage agent with Premier Mortgage Center and a partner in the G and H mortgage group, license number 10317, agent license M21004037.

[00:43:58] Dinofosh is a real estate broker, licensed with rare real estate, a member of the Canadian real estate association, the Toronto real estate board and the Ontario real estate association.