Oliver Foote, Author at Oliver Foote

Canada’s Supply Crisis Will Get Worse Before it Gets Better

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post:

Factors Impacting Housing Prices:

It doesn’t take an evil genius to realize that the main thing driving housing costs so high in Canada around major economic centres is a lack of supply compared to the crazy demand we have. Last year we welcomed over 1,000,000 people to the country from immigration, international students, and most recently war refugees. Similar numbers are expected for 2023. The housing crunch will only continue to get worse because our pace of construction is not currently and likely cannot keep up with the demand anytime soon. There are a lot of things that caused these problems and continue to make it challenging to solve them, today I’ll discuss a few of them.

A study back in 2020 between Urbanation and the Federation of Rental Housing in Ontario was anticipating a rental unit shortfall of 200,000 units in the coming decade a new report published just 3 years later quotes the shortage at 300,000 units. The pandemic economy is one big factor that likely made these problems worse. The momentum of building new housing slowed temporarily and construction costs exploded as inflation took hold. Followed shortly thereafter by the rapid increase in interest rates. This meant that simultaneously while costs were still high, the cost of money was also high. Causing many rental and condo projects to be outright cancelled or delayed. This means that around 3-5 years from now when construction was supposed to be completed on all these new pre-construction projects that didn’t sell this year, as well as rental housing projects that were stopped due to cost overruns. We will experience even tighter supply on the market due to the high interest rate environment we are currently experiencing.

Secondly, we stopped building rental housing through the 80’s and 90’s for a variety of reasons. Similar to today the 80’s were a period of very high inflation, construction costs exploded, and government policies were put into place which tried to transfer the construction of purpose built rental housing onto the private market. In 1968 the first condominium project was sold in Toronto. They were seen as a way for people to own the apartment they lived in rather than rent it. This aligned with the Canadian dream of “own your home” and made it easier for governments to justify slowing their investment in housing. As we’ve learned from decades of underinvestment and very exclusionary zoning bylaws. In a rapidly growing economy like ours turns out that solely relying on the private market to supply all the housing was not a great idea.

According to this report by the FRPO, Urbanation, BILD, and Finnegan Marshall published February 9, 2023. They state that purpose built rentals made up 9% of new rental housing supply in the GTA over the last 10 years and 90% of purpose built rentals were constructed between 1960-1979 (approx. 223,954 units). There is an interesting line in this report that bears quoting, “looking forward, more challenging investment economics should lead to a reduced share of condo investors who buy-and-hold and a lower level of new condo launches, placing more emphasis on the development of purpose-built rentals.” As is stands today around 59% of all condos in the GTA are purchased by investors. However, the report is essentially saying that as construction costs continue to climb, buying condos as investments will become a more and more challenging proposition as the number of units that cash flow positively on closing continues to decline. Construction costs quite sticky and often outpace inflation so it’s unlikely that there will be any relief to make condominiums affordable again.

One shocking and problematic statistic is that we are only on track to add 135,000 new rental units between condos and purpose built rentals, but we will still be short by 177,000 units. One of the biggest barriers to getting projects completed is the development timeline taking on average 100 months, which is about as long as it will take my to pay off my student loans. It will take a focused effort to shorten this timeline as a majority of the delays stem from paperwork, not actual construction. If a lot of red tape does get removed, I think there will be some very good opportunities for developers and people who understand how to re-develop properties into multi-units. They will be contributing to the rental housing supply, and it will likely become easier from a zoning standpoint to push these projects through.

Another interesting dynamic at play here is immigration. Canada was built on immigration, and we have an amazing culture and country that welcomes people from every part of the world to try and build a better life. Canada is a place where everyone should feel safe no matter where you’re from and everyone is connected by the fact that we are all Canadians despite our diverse and different cultures. From an economic standpoint without immigration we would have a declining population, which would mean fewer workers, and with baby boomers retiring the Canada Pension Plan would be somewhat screwed without new workers to replace the ones who are retiring and living longer than ever. So from a purely economic standpoint we need immigration. But one thing is clear, we’ve done a terrible job planning for it.

To be fair, some of it was unplanned, like the war in Ukraine. But even within the immigration which we control, we don’t seem to be managing it very well. There seems to be a consensus brewing that if we plan to welcome so many people, we have to have housing for them to live in. I’ve personally come across some crazy situations in my real estate work, one such situation being students who are living 7 people to a 1 bedroom apartment in Mississauga to keep their costs down while studying in Canada. I can hardly fault them for wanting to save money, but this is not what I would consider healthy living conditions and it is concerning that we are allowing people to live in those kinds of conditions.

There is no easy solution to this problem, but it is heartening to see all this data that is now coming out identifying real numbers on what needs to be done in order to correct course. It is also good to see many new government policies that are addressing difficult zoning restrictions and allowing up to 3 units on almost any pre-existing single family zoned lot, as well as easier application processes for “laneway suites”. We are also starting to see an emphasis on getting people to work in the trades, because even if we approve all these new construction projects, we need people to build them and surprise surprise, we don’t have enough. I could go on for hours about our trades problem as well as zoning bylaws. But for now I’ll leave the discussion here and you want to learn more about how these topics fit into this housing puzzle subscribe to my newsletter because that’s what I’ll be discussing in two weeks! Subscribe to newsletter here.

(Link to next post coming Dec 24, 2023…).

Thank you for reading and we’ll chat soon,

Oliver Foote

Newsletter #3 – November Stats, Housing Supply Crisis, New TRESA Legislation in Effect!

As the year is winding down this is going to be the second last newsletter of the year. Looking forward to continuing it into the New Year and wishing everyone an amazing holiday season, hope you have an opportunity to get out and meet with family and friends and that you have a great 2024. I hope that all your wishes come true!

Now has never been a better time to be a buyer. There is so much supply to choose from and historically low levels of competition. This has been reflected in the stats from last month.

Here are some main points of interest:

GTA sees 3.96 months of supply (i.e. 1 in 4 homes are selling)
Listings are up 40% from last year, purchases are down 6% from last year.
Average price: $1,082,179, about the same as this time last year
Oakville saw some very highly priced condo’s sell last month skewing the Oakville average
Mississauga’s average price fell below $1 million for the first time in 3 years.

Some other bits of news worth sharing:

New TRESA legislation came into effect on December 1, 2023:

Open biding is now allowed
Designated agency: more clearly identifying which Realtor you are working with
RECO information guide to help consumers understand Realtor services
Self-Represented Parties are more clearly outlined (i.e. people who don’t work with a Realtor)

BoC Maintained it’s Policy rate at 5%
Canada’s GDP declined 1.1% in Q3
5 year government bonds have dropped almost 1% from their recent peak in October making fixed rate money comparably cheap to the past 4-6 months. Inventory remains historically high, setting up a potential pop in activity come the new year once more buyers realize they can afford to purchase again.

The Blog – December 14, 2023:

Canada’s Supply Crisis Will Get Worse Before it Gets Better: (Dec 14, 2023 Blog)
Canada is on track to have a shortage of 300,000 rental units in the next decade
We stopped investing in rental housing in the 80’s due to similar factors that we’re experiencing today
Consensus on the poor job we’ve done planning for immigration over many decades

Read the full blog post here: https://oliverfoote.ca/2023/12/14/canadas-supply-crisis-will-get-worse-before-it-gets-better/

As always thanks for reading, feel free to reach out to me at any time.

Best wishes in the coming weeks, Oliver Foote

The Future of Interest Rates: Will They Fall in 2024?

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post:

The Rate of Rates:

The economy is like trying to steer a cargo ship but the captain is missing and all the wheels are the wrong size. If you change the angle of the ship heading by 1 degree, you won’t notice the subtle change for the first few minutes, similarly the Bank of Canada’s (BoC) interest rate decisions can take 12-18 months to show up in the data. Well here we are around 21 months since the first rate hike in March 2022 and we’re finally starting to see those decisions showing up in the economy.

I’m not going to pretend I can predict the future, but I do want to talk about some economic signs that I’ve been reading about recently that point towards the next step in the BoC’s rate setting to be more holds and eventually a rate cut. If I’ve learned anything about this past interest rate and inflation cycle, it’s that things take longer than most forecasters had predicted.

To being the discussion I wanted to talk about the most recent Monetary Policy report from the Bank of Canada published October 2023. It indicates slightly negative GDP growth in the second quarter (Q2) of 2023 and a return to positive growth in the third quarter (Q3) of 2023. (*Note: Statistics Canada recently reported Q3 GDP as declining 1.06% and revised Q2 up from -0.2% to +1.4%) Their overall projection for 2023 is positive GDP growth. However, the per capita GDP declined 1.6% compared to last year. In my opinion per capita growth is a better indicator of the direction the economy is heading since Canada has a rapidly growing population. This effectively means that on a per person basis spending is declining and our economy is slowing. Additionally, businesses aren’t borrowing as much money to fund their capital expenditures because of the high interest rate environment; more business investment generally indicates a growing economy.

Secondly, the most recently reading of CPI inflation from the Bank of Canada was 3.1% in October 2023 which is getting very close to the BoC’s target range of 1-3%. A decline in gasoline prices was the largest contributor to the lower inflation reading. This also happens to be one of the more unstable components that make up the Consumer Price Index (CPI). Depending on what is happening globally energy costs can be very volatile. On the flip side the BoC has stated that supply chain issues have very significantly improved compared to this time last year. As a result, the bank will likely want to wait and see how things play out in other sectors of the economy in the coming months before making any more rate decisions. I don’t anticipate their decision will come quickly since there are still large components of CPI like energy, and rents which are continuing to be inflationary.

Thirdly, as it relates to housing. The housing market has seen a significant increase in supply over the past 3 months with the fewest number of sales for an October period since 1999 according to an Urbanation based on TRREB data. Due to the higher interest rates many people are opting to rent rather than purchase which has put a significant amount of upward pressure on rental prices. We are entering a seasonally slower time of year where many people tend to put off looking for new housing until the new year, so there has been a bit of a short term softening in rental prices.

However, if housing prices continue to remain elevated while interest rates are high, rents will also continue to climb. Sellers are having a hard time coming to terms with the value their home will sell at right now because there is so much competing inventory on the market. People who took on variable rates during 2021 and the beginning of 2022 are the ones who are hit the hardest right now with their borrowing costs more than doubling since then. Banks have been very accommodating to borrowers in some cases extending amortizations to 40 years or beyond in order to keep people in their homes, which has kept mortgage delinquency rates near all time lows and partly why we haven’t seen any significant increase in bank sale homes or general fire sales.

Continuing on the resale housing side of things, the average selling price of a resale home has increased from this time last year. This is mainly due to a skewing in home sales towards higher priced homes and a significant reduction in activity in the first time buyer category. Move-up buyers are finding homes more affordable comparatively to a year or two ago. Meanwhile, first time buyers are finding themselves priced out because purchasing power has declined 40% from the low rates at the end of 2021. An interesting development in the downtown Toronto core (C01) market is that condos are now oversupplied with 7 months of standing inventory. Part of the explanation for this could be that many investors took on variable rate mortgages during 2021. Since 40% of condos in downtown are investor owned if they bought at elevated prices its likely they are now negatively cash flowing and spending a good chunk of money every month to own their investment which partly explains the flood of inventory.

This presents a very good opportunity if you are a first-time buyer and want to break into the downtown condo market. Finding a tenanted property could provide more of an advantage to getting a good price. Due to many other buyers purchasing as investors they will likely want a vacant property and will not want to take on a tenant because the rents will likely be too low to carry their new mortgage and applying for an above guideline rent increase in a rent controlled unit can be challenging.

If you earnestly plan to move into the condo and live there for at least one year you can give the tenant 90-day notice and have them move out and move in yourself. Then down the line if you were to move out you might be able to hang onto the property and rent it for market rates and use it to leverage into your next property. If my prediction that interest rates will come down in the coming years turns out to be correct, your property will likely see accelerated appreciation as rates get cut, as well as lower mortgage payments if you were to take on a variable rate mortgage.

In a few years you could refinance and lock in a fixed rate then take out some of the equity from the property to the point where it would can cash flow neutrally. You can then use that cash to put a down payment on the next property, rent out the old one, repeat. Even if you don’t want to refinance, I think a lot of would-be investors and first time buyers don’t quite understand the opportunity that this market presents with the ultra slow sales, pick of the litter (lots of supply), and a consensus view that rates will be coming down. The market is essentially giving potential buyers an easy lay-up to make their investment work in long term in exchange for short term pain. Obviously there are risks to this like anything, but barring anything crazy like another pandemic, I think we are very very close to a market bottom and I believe that people will look back on this time and say “I wish I had.”

Fourth, there is a somewhat concerning development. According to Urbanation new construction home sales have hit a 10 year low which does not bode well for the future supply of housing. One of the only ways that new housing supply gets built in the Greater Toronto Area is through new construction condos. However, there is a slow development happening in the purpose built rental space. Governments at all levels are beginning to put real money towards building this type of housing again, but it will take years for this to make a significant dent in the housing supply.

In the meanwhile the housing supply outlook is somewhat grim for the next decade or so. If the replacement cost of a condo continues to remain much higher than the current market value of a similar unit, investors and end users are unlikely to see the value in purchasing new construction which could cause a noticeable slowdown in new housing starts (construction) which will constrict housing supply even more. On the flip side, developers are providing an unprecedented amount of incentives, including rental guarantees for multiple years, zero development charges, and very extended deposit structures in order to try stimulate sales.

In conclusion, the housing market is showing signs of a slowing as rates stay high. Pricing remains elevated due to a lack of overall supply in the market, the rate of population growth in the GTA as well as the resiliency in employment and accommodating banks. The continuous influx of new people to Canada could potentially slow the decline of inflation compared to the US. Ultimately, people still need a place to live which should continue to stimulate a floor level of sales until the interest rate environment loosens a bit at which point home sales a prices will likely stabilize and begin a slow climb upwards. Although inflation is coming down, the bank will likely not make a decision on rates until the less volatile or “core” components return back to normal levels. Expect things to continue to move slowly like the freighter ship with a slow return to a normal inflation levels as very slow rate cuts in the new couple of years.

Talk soon,

Oliver Foote

Oliver’s Newsletter #2 – Interest Rates, Economics, Event Recap:

Thank you to everyone who came out to the event this Saturday! It was great seeing everyone there.

If you weren’t able to make this one don’t worry, I’ll be doing more in the future as well as virtual events.

Keep up to date on the newsletter and my other emails to be notified!

I’m not sure what go into me but I wanted to try and dig into the weeds of how housing relates to the broader economy and wrote up a mini economic report detailing what to expect from the economy and interest rates in the coming months.

This Week in Real Estate:

The Future of Interest Rates: Will They Fall in 2024?

“The economy is like trying to steer a cargo ship but the captain is missing and all the wheels are the wrong size. If you change the angle the ship is headed by 1 degree, you won’t notice the subtle change for the first few minutes, similarly the Bank of Canada’s (BoC) interest rate decisions can take 12-18 months to show up in the data. Well here we are around 21 months since the first rate hike in March 2022 and we’re finally starting to see those decisions showing up in the economy…

Read the full blog post here: https://oliverfoote.ca/2023/11/27/the-future-of-interest-rates-will-they-fall-in-2024/

Exclusive Replay of my Event:

Thanks to Chris De Souza for helping out and being my special guest at the event.

Unfortunately, part way through you’ll notice both camera’s cut out. Forgive the audio, luckily I still had the fail safe on the laptop. Will have to set some timers for the next event.

There is over an hour of great insights about getting into a home, different financial products that you can use and being an investor in this video. So I’d still very much recommend checking it out if you want to learn more!

YouTube: https://youtu.be/AMU_M8U74Oo

Hope you have an amazing week! Chat soon!

Best regards, Oliver Foote

Landmark Court Decision in the US regarding Realtor commission, NAR sued for $1.8 Billion:

Update Dec 12, 2024: Added Newsletter Email Archive at End of Post.

Realtors Look Out:

This headline seems to be everywhere in the past week, and if you haven’t seen it well, welcome to my world. The National Association of Realtors (NAR) in the US is known to be a big lobbying organization and it’s Canadian counterpart CREA is also quite good at lobbying. With real estate values being so high, and so much money flowing into the industry, these big organizations have a lot of sway.

The plaintiffs were a group of sellers in Missouri who brought forward a case stating that the seller in a real estate transaction has to pay for both the buyer and the seller agent fee. Effectively masking the cost of working with a realtor from the buyer which they were claiming was an anti-competitive practice. Another issue in the case was that the NAR controls the MLS (think Realtor.ca or HouseSigma), where most people go to find the home they plan to buy. Prior to this lawsuit, the NAR had a stipulation on the MLS system that in order for a seller to list a home they had to offer at least 1 cent to the buyers agent which played into the anti-competitive nature of the suit, basically the NAR positioned themselves at gatekeepers to the largest selling marketplace. I can think of a few other companies, cough cough Apple App Store, that acts as a gatekeeper to app developers who want to get their apps out there by restricting other app stores or the ability to “side load” apps.

The jury did find the NAR and Keller Williams Realty, one of the largest brokerages in the US, guilty of anti-competitive practices. Naturally, the defendants did say they are going to appeal the decision. Overall, I think it is a good thing anytime anti-trust lawsuits are successful as generally the outcome is more competition and the ruling in this court case could mean that sellers don’t have to front the commission for the buying and the selling agent which could increase competition. One of the main arguments of the NAR for the seller paying both fees is because buyers already have to come up with a down payment and other fees already associated with a purchase out of pocket. So this ruling could potentially make the barrier to purchasing a home even higher for buyers.

So, what does this mean for Canada? Will there be a similar lawsuit brought forward here, now that this case was successful in the US?

As of this very moment, I don’t see this being the case. There are many brokerages that do offer reduced commissions in Canada and some brokerages offer “mere listings” where someone can sell their own home on the MLS without using a realtor. Which are two of the bigger arguments that the plaintiffs used in the US case. We are also instructed in our education courses that as a buyer’s agent we are required to show a listing regardless of what a seller is offering if it is going to potentially be the right fit for the buyer. In practice this is a bit more complicated. In these cases the buyer will likely end up being asked to pay for part of the fee depending on the contract with the buyers agent. In a marketplace where all other homes don’t require that same buyer to pay the realtors fee, it can be a difficult, or even impossible pill for a buyer to swallow depending on how much they planned and saved for.

Update Dec 10, 2023: It has been brought to my attention that there is a similar attempted class action lawsuit that has been filed but is still many steps away from making it to trial in Canada. They have made some ground trying to name some Brokerage’s as a defendants who agreed to some allegedly anti-competitive rules set out by TRREB. We’ll see what ends up happening and if the class gets Certified. Note this lawsuit is focused in Toronto.

Historically in Canada there have been many times where flat rate brokerages or reduced commission brokerages come around and offer a reduced fee. But when times get difficult in a slower market like today, they can struggle to survive and often go out of business relatively quickly. When it is tough to sell your home people tend to get a certain level of comfort coming from someone who does this as their full time job rather than the 50% of agents who are part-timers. I find that as long as a realtor is doing a good job of explaining to a seller what they are getting for their services, most sellers tend to see the value in investing the money to make the home selling process smooth, easy and to get a good price for their home. The Greater Toronto Area has so many realtors the competition is very high and the level of service that an agent has to provide has to be very good in order to shine amongst the crowd of “everyone is an agent”.

Also depending on where you’re looking, ‘typical’ commission rates do vary around the province, for example in Kitchener/Waterloo, Hamilton, St. Catharines and other outer markets commissions can be lower, but so is the cost of doing business overall. As always, everything can be negotiated, you just have to ensure that the person you are hiring to sell your home is going to provide you with a service level that you can be happy with.

There is also new legislation coming into effect on Dec 1, 2023 called the Trust in Real Estate Services Act (TRESA) which will replace the old 2002 legislation in an aim to increase transparency and consumer choice in their real estate purchases or sales in the province of Ontario.

One of the biggest changes that will be put into place is the process of open bidding. Sellers will have the option to sell their homes in an open bidding process where they can instruct their agent to disclose the price of an offer and the conditions of an offer to all the other buyer’s agents who have shown interest in their home.

This is a positive change overall and some sellers will opt for this more transparent process and may see it as an advantage to disclose what other people are offering since it may allow buyers who do have the budget and the desire to purchase a home to outbid their competition. I suspect some sellers will decide to continue with the blind bidding process as they may see this to be more advantageous since buyers have to do a bit more guesswork as to where the final price will land. Depending on how the market is at any given time, your specific situation, and how much activity a house is getting, there will be advantages and disadvantages to each method.

It will be interesting to see how this open bidding rule will change the marketplace. I do think that new companies will be formed thanks to this legislation that puts houses up for sale in an “auction” style sale, whether this is an online auction or an in-person auction. The seller would set a reserve or minimum sale price publicly or they can set their price internally, which would be a “sale on approval” strategy. The latter would allow them to either accept or deny the highest price within a certain timeframe. The exact particulars of the legislation are still being worked out, and auction companies like this do already exist for selling homes, it’s just a matter of how well this will catch on with consumers.

In Australia, they do have this style of open bidding where everyone who wants to purchase the home will show up to the house on the day of the auction and then it proceeds as a typical in person auction would with an auctioneer. I remember watching this air on television years ago and at the time Australia was going through it’s own housing crisis and prices were still sky high even with the this transparent method of bidding so I don’t imagine this single thing will be the silver bullet that fixes our housing affordability problems.

Newsletter 1: My First Real Estate Newsletter!

Happy Sunday and Happy Dawali to those who celebrate!
Welcome to the first edition of my newsletter!

Super excited to announce this new bi-weekly addition to my business.
In this newsletter you’ll find some weekly real estate news and my thoughts on it.
Exclusive local discounts only available to people who read this newsletter.
Information about my latest podcast episode and guest!

Feel free to send me a direct email anytime if you have any thoughts you’d like to share, or if you have any questions you’d like me to address for the next edition of the newsletter!

Follow along at oliverfoote.ca.

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This Week in Real Estate:

Landmark Court Decision in the US regarding Realtor commission, NAR sued for $1.8 Billion:

Group of Missouri sellers brought forward an anti-trust case against the National Assocation of Realtors
Main issues under consideration were seller commissions and gatekeeping of MLS systems.
How will this affect Canada? What does our current landscape and legistlation look like?
Will a similar case be brought to the true north? Why or why not?

Read the full blog post here to find my thoughts:

https://oliverfoote.ca/2023/11/11/landmark-court-decision-in-the-us-regarding-realtor-commission-nar-sued-for-1-8-billion

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This Weeks Podcast Episode:

I interview one of my long time friends Zach Gomes.
He is now the first franchisee of Canadian Barbecue Boys! (Grill Hero).
We talk about how he got started, some of his customer horror stories, and how he went from cleaner to franchise owner in just 4 years.
Listen to the episode on your favourite platform!

YouTube:     https://youtu.be/M1yiQ1tSwe4
Spotify:     https://open.spotify.com/show/5tdMXuCbaV7AhnSTFzemOU
Apple:     https://podcasts.apple.com/us/podcast/oliver-foote-podcast/id1714701272

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Exclusive Discount:

In line with the podcast episode Zach was generous enough to provide a discount code to anyone on the mailing list or anyone who listened to the podcast and lives in the Region of Peel where he services!

Get your BBQ cleaned!

Use code: PEEL24

Get a quote here: https://get.canadianbbqboys.com/quote/

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Hope you have an amazing week and looking forward to doing this again soon!

Best regards,

Oliver Foote

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