E93: The End of Free Money in the Condo Market

You know, the house of cards has all kind of come crumbling down, which is the investors have fled. It's no longer profitable to build new housing. And so now I think cities are going to be forced, and we're starting to see it. They're going to be forced to actually cut their development fees and charges if they want to get new housing off the ground.

-Steve Saretsky

[0:00:18] ANNOUNCER: Welcome to another episode of Sync or Swim, brought to you by Rentsync. From operational challenges to marketing history, we uncover the strategies and technologies in all things PropTech. So let's dive in as we explore the trends, tactics, and insights that define the future of multifamily investments. Sync or Swim starts now. 

[INTERVIEW]

[0:00:40] LHL: Hello, everyone, and welcome back to another episode in our interview series here at rentals.ca. Today, I'm joined by Steve Saretsky, a real estate investor, a top realtor in Vancouver, and co-host of The Loonie Hour podcast, which covers macroeconomic issues from a Canadian perspective. Steve, thanks for joining us. 

[0:00:53] SS: Yeah, no worries. Thanks for having me on. Looking forward to this. 

[0:00:55] GL: Yeah. To start off, something we talked about a bit after the latest round report came out is that, although we've seen a boom in purpose-built rental housing construction over the past few years, the new build condo market seems to be struggling, particularly in Toronto and Vancouver. And with interest rates up and asking rents falling for the past several months, it seems like condo investors are getting squeezed from all directions. I'd be interested to hear your take from the realtor investor side. 

[0:01:17] SS: Yeah, no, I think it's one of the main topics I've been kind of honing in on. Obviously, there's other people out there that have been kind of discussing a lot of the same issues. But to me, it's kind of where I think most of the pain or the problems are. I mean, I think when we look at the market, everybody tends to paint the market like a broad stroke. But I think what's happening is the issues, again, are very, I think, concentrated, particularly in the investor space and in the new construction space. 

When you think about pre-construction condos, for example, which is really what we've been building over the last, call it, decade, well, let's say about 70%, at least here in Vancouver, about 70% of pre -construction sales are typically sold to investors. And there's a reason for that. I mean, obviously, it is a speculative play, right? I mean, you're putting down a deposit, you're tying up your money for three to five years. And what I find is most end users, if you think about a first-time home buyer, as often times as when they've got the money, they want to be able to walk through the property, feel it. They're going to be living there for the next whatever, four, five, six years. 

And so buying and waiting three and a half years for your unit to complete typically isn't ideal. What you tend to find is these investors are a little bit more agnostic to that, about 70% of pre-construction sales. What we've seen now, of course, is the erosion of cash flows, right? Mortgage rates went up, rents no longer cover carrying costs. Not only that, but you've got falling resale prices. And so all these investors are saying, "Well, now I don't want anything to do with a pre-construction condo." 

And so what you're seeing now is pre-sales are falling off a cliff. In the GTA, you've got a 30-year low in new home sales. In Vancouver, we have about a six or seven-year low. But pre-construction sales are down for 2024. We're down more than half of where they were in 2021. The outlook for them really is really quite bleak. Most developers are just holding off today because they're not comfortable launching a marketing and sales campaign, spending hundreds of thousands, millions of dollars in some cases, only to fail to hit your pre-construction target, which is typically a bank wants to see about 60% of units sold in order for the developer to obtain bank financing. 

And so what we're basically seeing is a collapse in new homes. When you kind of layer that on top, the investors, as you mentioned, are getting squeezed from all angles. If you look at the data, of course, from rentals.ca, we're seeing declining rents in all major markets in Canada, particularly in Vancouver and Toronto, where rents are down about 10% over the last, call it, 18 months. And as an investor today, you've got declining rents, declining resale prices, rising mortgage rates, right? Most of these investors are turning over, renewing their mortgages today, and not at 2%, but at 4%. 

And you've got a scenario where if you look at all the units that we pre-sold during the boom, which was 2020, 2021, and 2022, a lot of those are coming up for completion today and over the next, call it, 18 months. And so you actually have a lot of new supply that is going to be completing, coming to market and competing with these investors. I would argue, potentially driving rents even lower and putting more pressure on resale prices as well. The investor market and the new construction market is in a world of pain. 

[0:04:38] GL: Yeah. And just expand on that, I think within that investor market, there's people who want to own it as a rental, and then there's also people who get into pre-construction investing because they want to flip it on assignment. They're speculative investors. They're putting forth the deposit that helps get the building constructed, but their intent is never to close. But now that the market has gotten a lot weaker in terms of sales, we're seeing a lot of those people being forced to close and having to push those units onto the rental market as well. 

[0:05:10] SS: Yeah. I think the assignment flipping stuff, basically flipping the contract prior to completion, I think is much more prevalent in the GTA from everything that I've seen. But I would say at least, again, in Vancouver, you look at it, there's a lot of people that I would say that got caught up in the hype and call it 21. And the intent was, "Well, okay, maybe I'll close it. But as soon as I close it, I'll resell it at a higher price once the unit is completed." And again, I think that's another layer of issue that we're adding on, which is when you think about a new construction, really what happened in the new construction market is – remember, home prices were rising at, call it, I don't know, I mean, in the pandemic even more, but call it 10% a year. 

And so what happened was the market got so speculative and developers got, I think, so ahead of themselves where, of course, they started paying more for the land and writing in these really optimistic numbers. But they're actually able to obtain them, which is to say that – I'll give you an example. The resale market is selling, let's say, $1,000 a square foot. Developers were selling new units at 1,200 a foot of foot because they'd say, "Well, in three years' time, when this is complete, the market will have caught up and it will have gone from 1,000 to 1,200." This is actually like a pretty good or fair price is kind of the marketing adage that was played out. 

Now, I think what you're seeing today is people that are now saying, "Well, my intent was to flip it on closing." Not only has it not reached 1,200 a foot on the resale markets, once you layer on all the fees that are involved, a new construction, you've got 5% GST in BC. You've got another 2 % for property transfer tax. And then you've got another 3%, call it, in realtor fees. You're really looking at 10% of fees and taxes that you have to hurdle over. 

And so I think when you start layering on the fact that the market hasn't risen as much as expected and you layer on the 10% in fees, people are stuck with, "Okay, there's two choices, I think in many circumstances today. The choice number one is close it. Don't realize your loss today. Rent it out. But your rent is not going to cover your costs, so you're going to lose whatever, 500 a month, 800 a month, 1500 a month, somewhere in that range." Or you can take your loss immediately on closing and sell at a $100,000 loss or more net of fees and taxes.

[0:07:36] GL: Yeah. And something I saw you mention, and I'd be interested to hear more if you have it, is you said that some condo developers who have a lot of distressed buyers are starting to actually negotiate discounts to the purchase price as more of a cost-effective alternative to, say, suing for damages. 

[0:07:51] SS: Yeah. And so that's one of the ones where a lot of that is under wraps. Obviously, developers aren't publicly advertising that, that some of the circumstances that we've come to our attention. Think about an example where, okay, I'm a developer, and this is more, I'd say there's sort of two scenarios where this would potentially play out. And scenario number one is, okay, think about this, you've got a high-end luxury tower, which is a very small buyer pool. Let's just say you pre-sold the units at $2,500 a square foot. So you sold them at $2,500 a square foot, you took a 20% deposit. The resale market is nowhere near 2,500 foot. And so even if the developer collects your 20% deposit as damages and then has to go and resell it, they're still probably going to be eating a loss because that 20% deposit isn't going to cover the new price. 

As a developer, if you're faced with a scenario where, okay, this is going to happen at scale, it's not going to be one or two buyers, it could be 5, 10% of the building, 15%, 20% of the building that might be walking away from deposits. You're better off in many circumstances to try to just renegotiate contracts with buyers individually and get them to close as opposed to having to resell 10, 20% of your building because a whole bunch of people walk away in an illiquid market. 

We know that's happening. I don't know how pervasive it is. We just heard a few examples of this. You can think about a scenario. There's been some dialogue in the GTA where you're hearing stories of large cohorts of buyers just trying to walk away. And so you think about a developer, it comes down to how much staying power do you have? If you're a developer and you're faced with 20% of the building walking away, sure, you can go and sue them, but that takes time. And if you don't have this financial ability to wait for that to play out and to try to go after 20% of the building and sue them, you might be in a receivership before you ever get there. It's putting developers obviously in very interesting scenarios. 

[0:09:54] GL: Yeah. And anecdotally, one of the strangest stories I heard about some of these complications is that there was a developer who had – they had built a buyer, had bought it, but then the buyer was unable to close. The developer had to take the unit back. But during the occupancy period, the buyer had rented it out to a tenant. And so now the developer had inherited this tenant, and now they have to sell it as a tenant property because they couldn't evict them. 

[0:10:20] SS: The process for closing on pre-construction units is different in the GTA than it is in Vancouver. In Vancouver, we don't have that scenario where you have – I think the GTA has this grace period or whatever. But yes, it's a little bit differently. Basically, in Vancouver, the developer would never release keys until the money fully transfers and they're paid out for the unit. I think that's where it makes things a little bit more interesting in the GTA and just in terms of forming stratacorp and everything. Issues there, I think, are much more pervasive. 

[0:10:49] GL: Mm-hmm. Now, speaking of unadvertised things happening in the condo market. Something that we've been hearing more talk about lately over the past year are these blanket appraisals of financers giving people an appraisal at the initial purchase price of a property or a group of buyers doing that in cases where the appraisal is dropped and they're having trouble selling their properties, they're offering these appraisals at the original purchase price, which is actually putting up loan-to-value ratios of close to or maybe even more than a hundred percent. But it hasn't really been clear where that risk is going, if it's being taken on by the lenders or if it's being offloaded to taxpayers through CMHC portfolio insurance. Do you have any additional insight or commentary on that? 

[0:11:35] SS: I don't know exactly if the risk is being offloaded, to be honest. I couldn't comment there. But obviously, yeah, I know we know the blanket appraisals are happening. They're particularly happening at, I'd say, the big two Canadian banks in particular. Yeah, I mean, I heard plenty of stories, right? Where buyer goes, buys a unit for $800,000, tries to get a loan. The bank comes back and says, "Well, it's not worth $800, it's worth $750." All right? And then so they say, "Well, hold on a minute. If you go to this bank, this bank did a whole bunch of blanket appraisals, why don't you go try that bank?" That bank will come back and say, "Oh, yeah, yeah, no worries. We can go back and we can give you a loan based on what you paid of $800,000." 

In reality, you can get loan-to-value mortgages of, call it, 90, 95, 100%. In some cases, more. I think in my opinion, you often look at this and say, "Well, why would a bank do this?" And oftentimes, I don't think they'll admit to this, but the reality is, is that bank is typically on the construction loan, right? If that bank is faced with a scenario where, "Hey, listen, we lent all this money to this condo developer, we got to have a whole bunch of people that can't close because the units aren't appraising. Yeah, are we better off just to kick the can down the road, give them the mortgages that they need so they can close? And, hopefully, those buyers can hold on for two years, five years, seven years. The market can figure itself out in due course, and we'll deal with the issues down the road if there are any." In my opinion, that's kind of what's happening. 

[0:13:10] GL: Okay, interesting. You think they're just de-risking a different part of their portfolio by taking out all these individual loans? 

[0:13:18] SS: I think so. I mean, the banks won't necessarily come out and say that. But I think in many circumstances, that's really what's going on. 

[0:13:24] GL: Interesting. Circling back to the investment side. From the data I've seen, prices have fallen by a greater proportion than rents have, which pushes down the price-to-rent ratio. Generally, a lower price-to-rent ratio favors the construction of purpose-built rentals over condos because there's more of a case to own the asset for a long time and make steady profits. Now that condos and the pre-construction market aren't a license to print money like they used to be, do you think we'll see more of a shift towards apartment buildings, particularly since a lot of government programs are incentivizing purpose-built rentals now? 

[0:13:55] SS: I do. I think that's what we're seeing in the data. I think purpose-built rentals are under construction at all-time record highs. Obviously, we had a boom similar to this in the 1970s. If you talk to a lot of developers, yeah, what's happening today is a lot of these – specially these sort of developers, that there's kind of two developers, there's the small to medium developer. They don't have the ability just to say, "Okay, let's just pause the project," because they've got investors on board, limited partners that are involved in these projects, and they've got returns that need to pay them out. Those developers in many circumstances will have to kind of keep pushing forward. If they can't push forward on the pre-construction side, they might opt to convert the building to a purpose-built rental. That's number one. 

Number two is you get the other sort of larger developer that needs to keep the lights on, which is to say they've been around for a long time, they've got a lot of employees, and they're going to be around for many more cycles. And so what they want to do is they want to keep their employees in jobs. They don't want to be laying people off. What they'll do is they'll say, "Okay, well, this might not work as a condo building. But why don't we launch as a purpose-built rental building? And we can either hold the asset or we can sell it off to a REIT, Real Estate Investment Trust, on closing." 

And so a lot of the times, these developers will actually just run those projects at a break-even. And sometimes, in some circumstances, they even had a loss just to keep the lights on and keep their employees fully employed. I think what we're seeing today is, as you struggle to hit pre-construction targets, or if you're concerned about hitting those targets, many developers, just to kind of keep moving the needle forward, are in fact going to the rental space. 

[0:15:37] GL: Yeah, and with vacancy rates being up over the past couple of years, I mean, they're still low, but they're not zero anymore. I think condo investors now have to compete with these big dogs, the purpose-built rental developers or condo developers who decide to switch to a rental building. And these bigger developers tend to have more diversified portfolios, more sophisticated market knowledge, better access to financing, et cetera, et cetera. Do you think there's any way for small-time condo investors to compete or even just mitigate their losses in this kind of market? 

[0:16:06] SS: Yeah. You know what's interesting? I think that's a good conversation because, obviously, we have these conversations with people that reach out quite frequently. And the scenario that I'm hearing today is we think about the sort of the softness or the softening in the rental market. Think about staying power, right? Again, to your point, it's a developer that might have built a purpose-built rental. They've got more flexibility to sort of hold out for their rent. They're like, "Listen, I want rent a one-bedroom for 2,600 a month. That's our number. And we're going to sort of sit on a vacant unit for a month or two or maybe three till we get that." And we might offer an incentive to say, "Hey, we'll cover your internet for the first six months or we'll give you the first couple months of rent for free, but we want 2,600." And so, they'll kind of have that staying power where you don't. And with the conversations that we're having is you get these mom-and-pop investors where, because rents are softening and it's taking longer to rent units out, the challenges they're having today is, every month that goes by, they're losing, call it, $2,500 a month at an unoccupied unit. If you go two or three months, I mean, that's $5,000 to $8,000. You're out of pocket. And so all of a sudden, it really starts becoming a bit of a crunch time. 

And this is also the discussions that we're having is, "Hey, I've been trying to rent out my unit. I've now gone two months vacant. That's five grand out the door. I got to make a decision. I either going to have to drop my rent and move this thing. Or do I just put it on the market immediately and try to sell this thing and get out?" And so I think those are a lot more of the conversations that you're having, that the sort of more mom-and-pop investor types don't have the deep pockets. It's harder for them to sort of navigate than it is for, obviously, these big developers. 

[0:17:56] GL: Mm-hmm. Tying this all together, do you think that ultimately what we're seeing here is the market shifting away from a sort of speculation-driven model and back to a value-driven model based on fundamentals? 

[0:18:05] SS: Yeah. I mean, which is a good thing, of course. I think over the long run, there's going to be some issues and volatility in the near term. But I think that the days of runaway home price growth where, every year, your rents go up 6% or 7% and your home prices go up 7% or 8% I think are gone. And I think we're in a new environment where – again, mortgage rates are 4% today. Maybe they come down a little bit more, maybe they don't. But I keep kind of saying, maybe four is the new two, which is 4% mortgage is the new two. And so people are going to have to adjust. 

And I think under that environment, I just don't think you're going to see the same level of price appreciation that people are used to. And so I think we'll shift away from that speculative market. And if you look at the product that is doing fairly well today, and I would say that the product that actually is still getting built, no one's really building high-rise condos, dog crate condos, one bedroom in the sky anymore because they're expensive to build, right? I mean, high-rise concrete costs a lot of money. And if there's no pre-construction market for it, there's no speculative investors to go and buy those units, they just don't get built. 

And so what are we seeing that's getting built today? We're seeing low-rise wood frame condos. That's five, six-story wood frame, particularly in the purpose-built rental space. And then you're seeing a lot of ground-oriented duplex style housing. Cities that are changing all their zoning to allow not just single-family houses, but duplexes and triplexes. You think about a developer, developers, there's no elevator, there's no underground parkade, you're building a two or three-story duplex. They're very easy to build. It's quick to build, and it's pretty cost-effective. And there's a demand in the market for ground-oriented. 

At the end of the day, a lot of people that are transacting in the market today, they are young families. They do need the third bedroom if they have a growing family. They do still kind of want a backyard. They do still want a bit of a fenced-in yard, right? And so I think we're going back to a market where builders/developers are having to serve the market. And the market today is end users. And end users are looking for more space, ground-oriented. And that's kind of what's happening. 

[0:20:16] GL: Yeah. And even in the rental market, we've been seeing that there's more demand being stimulated for two and three-bedroom units, larger units that were for quite some time not being built at any great pace. But a lot of people are looking for more space. Some of them are moving out from these primary major city markets to secondary markets in pursuit of that. Yeah, it doesn't surprise me that you're seeing the same thing in the condo space. 

[0:20:38] SS: Tons of demand for the townhouse market. Again, sort of like a three-bedroom townhouse. Yeah, I'm quite familiar with the Calgary, Alberta markets. There's a huge demand there. Because again, I think if you look at what we've been building as a rental product over the last 5-10 years, it's obviously been smaller one-bedrooms, junior two-bedrooms that are – two bedrooms that are 680 square feet. These aren't very practical for, let's say, a young family. 

I think the young family, you think of it like the millennial generation, that's more or less been priced at a housing, they're having to rent and they're looking for more space. And so I think that the market is slowly taking care of that. 

[0:21:18] GL: Moving along, we're recording this on April 25th. There's an election coming up in three days. A lot of policy proposals being thrown around. From your perspective, what do you think are some of the biggest hurdles to getting new housing built in Canada right now? 

[0:21:31] SS: I think it gets played up a bit. There is definitely a lot of red tape. I mean, if you think about let's say putting up a five-storey wood frame apartment building. Typically, in places like Vancouver where I am, that would typically take two, three, sometimes four-plus years just to get a rezoning and a development permit. If you're taking three years on that front, it's going to take you another three years to build. I mean, that's six years to get a product to market. And that time that's involved, the more time that it takes to build, it has to get priced into developers' performance sheets. You have to go to your investors and say, "Listen, this is going to take six years." What's the expected return of tying up your money over six years? 

And so it just becomes more expensive. And it's more expensive on the financing costs as well. I think if we can speed up timelines, I think that would make a lot. Obviously, we know that government fees, taxes account for close to 30% of the cost of new housing in Vancouver and Toronto. I think that's way too far. It's kind of like a similar thing like we talked to it at the beginning of the show, which is you mentioned this like speculative activity, right? The investor kept speculating, right? The investor kept saying, "Well, every year –" the investor and the developer kept assuming that, every year, prices would go up. Why not buy a pre-construction condo if, in four years' time, it will be worth more money and you can resell it for more money? 

And I would argue that the city governments have been doing the exact same thing, which is they just continued to ramp up development charges because they were also milking the cash cow, which is that, "Oh, well, people won't notice. We can just be ramping up development charges because people are going to keep paying it, because the end users and the investors are going to keep paying it." And so I think what's happened is it's kind of like the house of cards is all kind of come crumbling down, which is the investors have fled. It's no longer profitable to build new build new housing. Now, I think cities are going to be forced, and we're starting to see it, they're going to be forced to actually cut their development fees and charges if they want to get new housing off the ground. 

[0:23:30] GL: Yeah. I think that price appreciation that we saw over the past 10, 15 years kind of hit a multitude of sins in the market, right? A lot of people and trying to get a slice of the pie. 

[0:23:42] SS: Everybody had their hands in the trough, so to speak. And yeah, again, from all levels. And so it's always interesting, everybody sort of always wants to point a finger about who to blame. I think there's so many factors that go into it. But I think one of the easiest things that governments can do, at least in a down market, if you want to get more new housing built, the adage that I would say is a city today has the decision that they can make, which is they can leave their development fees as is and they'll get nothing because very little will get built. They can take 0% or you can cut your fees and at least get a little bit of something. 

And so how do you make the economics work today on new construction immediately? Because you can't really change interest rates. Those are set by the market. You can't really change construction costs because that's really set by the market, commodity prices, labor markets, etc. The only thing you can change immediately today is the arbitrary fees that you're charging. And that's the only thing that they can do in the very near term. I still think, regardless of that, you're still going to see a huge drop-off from housing starts. But if you want to at least mitigate the collapse in new housing starts, that would probably be the easiest thing to do. 

[0:24:59] GL: And talking about timelines, there's a stat that I try to tell to everybody because it's just mind-blowing to me. This was from Shaun Hildebrand at Urbanation. But in the GTA, the timeline from application to completion for a new purpose-built rental project is 100 months on average. About eight and a half years. I mean, we've got all these parties promising, "We're going to get this much housing built by 2030." Well, if you don't address those, basically, municipal timelines, if we get a project started the day after the election, it's going to be well past 2030 by the time that it actually comes online. That kind of long timeline, it adds, as you said, a tremendous amount of cost because you have the carrying cost for the property over the whole time that you have it, investors are going to want returns that account for that extra time that their money has been tied up. 

And there's also, at the municipal level, all these additional risks, like people refusing to approve a plan of a certain size. If you come with a plan for a development that will build 400 units of housing, then they might say, "Oh, that's too many. You have to cut it back to 250." That adds another year. It reduces the amount of units that you can do. It adds more cost. When you have more costs spread across fewer units, they're going to get more expensive. There's a risk premium for that as well. 

[0:26:13] SS: Yeah. No. Exactly. I think, yeah, I regulatory burden of just sort of getting through all those hurdles and not knowing, "Is this going to be a two-year process or is this going to be a six-year process?" for example. It has to be factored into your cost analysis, right? Yeah, I mean, I think that's a real challenge. 

I think I look at the federal governments, I'm going to tell you this, we're going to have some once political leanings and who you're voting for. Every single political promise right now of 450,000 to 500,000 new homes per year is never going to happen. The record number of housing completions, I think, was set back in the 1970s at 276,000 homes. And so here we are, you know, what, 40-plus years later, we've never surpassed that number. And so I'm just skeptical that going into what I would say is an economic downturn, I don't think you're going to get hit anywhere close to 500,000 new homes a year. In fact, I would argue you'd be lucky if you hit 200,000. 

Governments at all levels, I think you're going to have a hell of a challenge. I think the good thing is in the very near term, let's say over the next couple of years, I think we should be relatively adequately supply, which is to say that all the new housing that's in the pipeline is going to be completing. And that will certainly help alleviate a lot of the pressures that we've endured over the last decade-plus. 

But yeah, I mean, the writings on the wall is when you get out to 2027, 2028, new housing completions are going to be a drop in the bucket. And that's kind of sowing the seeds for the next crisis. The next crisis, in my opinion, is years out. But I think the writing's on the wall, given where I think new housing starts are going. 

[0:27:49] GL: Yeah, which is kind of interesting because people who are actually investing the money to build housing right now, when it might seem unfavorable in some ways, they may be able to be positioned to take advantage of that supply drought that's coming down the pipeline. 

[0:28:03] SS: Yeah, I think if you're a developer with deeper pockets today, I think this is certainly a good environment for them to go and pick up some distressed land sites. And if you've got a long enough time horizon, I think that there will be another bull market. And again, I don't think it's in the next 12 months. It is further out. And just because I think what's happening is the writing is on the wall, and there's a whole lot that can be done over the next couple of years. I think that new housing starts are really going to struggle. And governments, all levels, will have a lot of work to do to try to revive that space. 

[0:28:38] GL: Well, I guess we'll see how it turns out after the election. 

[0:28:42] SS: Yeah. Yeah, it'll be interesting. 

[0:28:43] GL: Yeah. So moving along here, something you've discussed in a couple recent episodes of Loonie Hour is the Bank of Canada kind of de-emphasizing their inflation target in favor of economic stimulus, particularly the uncertainty we're seeing around international trade. Now I've been saying for a while now that the Bank of Canada is being pulled in different directions on monetary policy, and there's really no sweet spot right now where inflation is under control, but households aren't struggling. It's kind of like a Venn diagram where the circles don't overlap. 

And I think the keystone of that issue is our high levels of household debt. We're now over $3 trillion in total household debt with real estate lending accounting for about $2.4 trillion of that. What do you think that the bank is going to be doing in the next few years? And how is that going to affect the housing market? 

[0:29:24] SS: Oh, I don't know. That's a tough one. 

[0:29:25] GL: It's a big question. Yeah. Feel free to speculate wildly. 

[0:29:28] SS: Yeah. Yeah. I mean, obviously, I think that the markets are still expecting the Bank of Canada to continue to get a few more cuts in this year. Obviously, you could debate the merits of like if they should be cutting, given they have an inflation mandate. Inflation is still above their target today. I've argued that if you look at the inflation components, one of the components that's still dragging CPI inflation higher is the shelter component, which is about 30% of the CPI basket. And we look at shelter and say, "Well, shelter is still pulling CPI higher." But yet, when we talk about resale housing prices, those are declining, rents declining. You're kind of like, "Well, is there really any shelter inflation today?" I would argue no. I mean, I would argue that we're in disinflation or deflation. But obviously we've had so much housing inflation over the last five to 10 years that perhaps a bit of deflation in the housing market is probably a good thing. 

Where does the bank in Canada go? I think it really depends on the path of the trade war. I would say this, what I would try to encourage your listeners and a lot of our clients is this is a market. I think we have to be really careful. I think Canadians had a propensity to go on a variable-rate mortgage. And so just know that you're taking a lot of risk. If you do get an inflationary bout because of the tariffs and stuff, six months from now, 12 months from now, just know that that can move. And when you get into these high prices like in Vancouver and Toronto where you've got a million-dollar variable rate mortgage and, all of a sudden, your rates spike, you're taking on a lot of risk. 

And so I would just tell people today, we're seeing a ton of volatility in the bond market with prices fixed-rate mortgages that anyone that's shopping today is probably going to be pretty aggressive on getting rate holds in place. Because we've seen rates, right? I mean, rates have gone from one and a half. They jumped up jumped up to about 6.5 at one point. They're now back down to 4, but they could easily pop back up here despite the Bank of Canada cutting rates, probably more this year. There's definitely a scenario where fixed rates could still move higher despite variable rates moving lower. I think that's just an important context. Because I think the biggest misconception that I see in the general market is people assume that because the Bank of Canada is cutting rates, that all mortgages and all mortgage options are going to get cheaper. 

[0:31:46] GL: Yeah, it's really more driven by the bond market on the fixed side rather than the policy rate. 

[0:31:52] SS: Right. And if you think about the average Canadian homeowner, I don't think many are very interested in paying attention to the bond market. I mean, it's just not an exciting conversation or a topic at the dinner table. But I think that people would be revised to pay attention to it because there's a lot of volatility in that space, and that's when you've got, what, 60% of Canadian mortgages renewing over the next 24 months, that bond market's going to be a pretty important factor. 

[0:32:20] GL: Okay. I want to wrap up here with a sort of bigger, more philosophical question about owning and renting. But do you think that over the past couple of decades, we've been a little overzealous with trying to promote home ownership through just monetary and fiscal tools, instead of trying to increase housing supply and economic opportunities for individuals.

[0:32:39] SS: I think the issue that Canadian policy makers have made is that, every turn, so every time there's been a bump in the road, every time there's been a little downturn in housing, they've come in and stimulated, right? So you think about obviously '08, '09, we don't need to get into the measures that policymakers did at the time. You look at 2015, the market was kind of rolling over in '13, '14, into '15. Bank of Canada then obviously aggressively cut rates. And then you look at the pandemic, and you say the signal that the government sent was basically, "Don't worry about – there's no risk in housing. Because if you can't afford to pay your mortgage, don't worry about it, we'll let you defer for six months." And we had a scenario where 17% of all mortgages outstanding were in deferral. 

And so I think that kind of sowed the seeds that what the Bank of Canada is saying, "Oh, we're not going to raise rates for a very long time." It basically gave people the green light to speculate. And so what I would say is, from a policymaker's perspective, is they have to kind of at some point just let people experience a little bit of pain in housing. Because I think if you kind of continue to come in every single time there's a downturn, the moral hazard is that people assume there's no risk. The government is going to basically back home prices and back risk. 

And so I think that's kind of the risk when we talk about all the speculative behavior in the condo space, it's because people have been ingrained that house prices never go down. And that any time there is a bump in the road, policymakers will come in and they'll fix it. I think we need to get away from that. I think we need to get back to – I had a journalist reach out and said, "Oh, we want to interview you for the upcoming election stuff. We're going to call you on election night. Can we get your opinion on the various housing platforms from both parties?" And what they said, "Well, which one do you think is better?" I said, "Well, listen, at the end of the day, there's really only so much that the federal government can actually do." And this is probably the one thing that Trudeau was actually probably incorrect in saying, is like, "There's really only so much the federal government can do. Most of the policy measures on housing are actually done at the provincial municipal level." But what the federal government can and should be doing is they should be running good policy to ensure that you've got a healthy labor market that is seeing a lot of productivity and higher wages. And that will help people afford housing, right? 

If you got a good job and you're getting a raise, that will help you get a mortgage and that will help you purchase a home. And so it's the same thing on the immigration side, right? I mean, if you bring in a million immigrants a year and you explode population growth to 1.2 million people, there's no way you can build that much housing. And so the federal government's biggest mistake I think over the last five ten years was the immigration side. And so I think as a federal government, if you can run a good economy and have sensible immigration policy, I think a lot of the other stuff can take care of itself. 

[0:35:28] GL: Okay. Well, lots to think about there. If you want to hear more from Steve, you can check him out on X, on YouTube, or on The Loonie Hour podcast. Steve, thanks for taking the time today. 

[0:35:37] SS: Yeah. Thanks so much for having me. I appreciate that. 

[0:35:39] GL: Okay, talk to you later. 

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[0:35:40] ANNOUNCER: Thank you for tuning in to another episode of Sync or Swim, brought to you by Rentsync. If you enjoyed today's show, make sure to visit www.rentsync.com/podcast for detailed show notes, key takeaways, and more. Thanks for listening. 

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