The Canadian Investor - Will Canadian Real Estate Rebound in 2024?

Episode Date: January 4, 2024

In this special episode of the Canadian Investor Podcast, Simon and Dan Foch look back at what happened with Canadian Real Estate in 2023 and what’s in store for 2024. We discuss mortgage rates, indebtedness for Canadians, potential Bank of Canada interest rate cuts and more! Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I'm here with this special recording with Dan, not the normal Dan you're used to hear from on our News and Earnings episode.

I'm here with the one and only Dan Foch, and we're going to do a recap of 2023 in terms of housing in Canada, and then what trying to do some predictions for 2024, what we think could happen in terms of housing. I know there's a lot of people looking to buy their first home, get into the housing market. So I think it'll be a really useful episode for that. Dan, how are you doing? How are you surviving having a couple month hold at home? Yeah, I'm good. It's, I mean, I think that the world's very different after the pandemic. So people are a lot more tolerant to people just taking meetings from home and whatever.

So it's been, it's a much better, I have a six year old as well. So it's a much different experience working from home and having a baby now than it was six years ago. So I'm good. Yeah, I'm good, man. The other question would be how am I surviving given that my industry has contracted by 50% on the earning side. And in that respect, I'm doing okay, I would suppose. But it's pretty rough out here. I mean, real estate, if you look at commissions, dollar volume per agent, because the number of agents has been increasing, everybody's rushing into the real estate industry. It's like the lowest that I can find on record. So, and that's even like, and that's not, that's nominal, that's not ingested for inflation. So if you take the number of realtors in Ontario

and the number of dollar volume of total transactions, realtor earnings is down like really, really low. So the real estate industry is and has been in recession for a year now, basically. Well, that's good context. And not to tell us how much you're making or anything, but are you doing better than average in terms of maybe not the pure dollar value, but maybe the drop in earnings? Are you faring pretty well? And is it similar for agents like you that have a lot of connections and are more established? Yeah, I think I would be doing an average year right now, like maybe a little bit below average and well below the last couple of years. And I think that agents who are, and this would go with most industries, I think that most

industries will see this during um you know recessionary period if we end up in one of those and i think we're going to kind of try and discuss that a little bit today but with when it comes to content like it's really easy to see who is being honest and who was being um dishonest or like you know self-serving let's say or had an ulterior motive with their content over the last little while and for me so i get a bit of a selection bias obviously right people right? People who are maybe more- You're on the one end of the spectrum. You're on the bearish end, for sure.

Yeah, you guys, no, yeah. There's no hiding who I am. I try and be as balanced as I can be, but I feel like the data just doesn't tell a good, hasn't told a good story for the last little bit. And so, I was never really saying the market only goes up in 2021 and 2022. And I'm not telling people to rush in and buy today, because rates are going to come down or whatever,

which it seems like that's the new thing, right? So I think that that's probably why I haven't felt it as much because I just always aimed it aim to do the find the truth and people really gravitate towards that in times of uncertainty, right? And that's kind of... No, that's good. And before we get started, so what was the one sentence that Grok AI called you in terms of like you asked it to roast you? So Grok AI, just for context, is the new AI that you can get with Twitter.

I guess it's similar to Chad GPT. It's a large LLM, large language model. So what did they say? And like there was one sentence at the end. The chicken little thing that like they, well, they compared me to chicken little, except other than the sky is falling. I just said that Canadian real estate will never recover. I think is kind of what that, I don't know if there was another line.

Or the poster boy for like the bearish Canadian market or something like that. Yeah. That was pretty good. Yeah. Yeah. It's funny. Okay. Well, do you want to start with a bit of a recap what happened in 2023?

And I know depending on where you're looking at in terms of geography, obviously Canada is such a big country. I know like Calgary has been a little bit of the outlier. So I just wanted to place that context, but you want to tell us a bit what happened the housing market sure yeah so in canada it's tough to look at national data because like toronto and vancouver make up 70 of the total dollar volume of the national averages so you really do have to look at it on a city by city basis and so i'll talk a little bit about that but if you do look at it at a national level, last year, we saw the biggest price drop ever in Canadian history. So on an average and median and house price index, the biggest drop we've seen since the data started being recorded

in Canada, that was 2022, Q1 2022. February was the peak in most markets. And it dropped until about January of this year. And then it started to pick back up in the spring market. And then this year, we saw the strongest spring market in history. So we saw the most price growth in a five-month period. So obviously, Canadian real estate doesn't always go up. It's very volatile. And we've seen that. I mean, it's just an incredibly volatile asset class when you look at houses in Canada. And it seems to be, if you really look at it, and if you zoom out, and the first episode that we did on our show that's on your network, the Canadian Real Estate Investor Podcast, we talk about, and this was at your recommendation as well, how does Canadian real estate respond to interest rate increases and recessions. And if you look, we found it was most comparable to the 1990s downturn. And we can talk a little bit about whether or not the recessions will be comparable. But in the 90s, in 89, you saw house prices peak. And then there was a huge dip in house prices into 1990. And then there was a bull trap, they ran up about 10% in 1990. And then

they started falling again and gave back those gains sort of by the end about 10% in 1990. And then they started falling again and gave back those gains sort of by the end of the year in 1990. And present day, we just saw the exact same setup happen, right? Like exact same thing. 20% drop, 10% bull trap, 10% erased. So, you know, and this is on the average, but by, you know, January to May of this year, house prices rose 10%. And they typically do raise rise five to 10% in the spring market just based on seasonality. And then may until present day, they've basically given back all of those gains, which kind of lined up with the earlier in the year pause, right from the Bank of Canada, they they pause it at four and a half percent and then like restarted hiking in June.

Yeah. And I think what you you heard Tiff really starting to talk a lot about the housing market in those pressers after they resumed hiking because he was like, the housing market has not responded how we wanted it to. So they paused in Q1. And I mean, it is interesting because in Q1, well, I mean, by the end of last year, by the end of 2022, we had the variable rate was way higher than the fixed rate. And so nobody really in their right mind was buying the variable or buying with a variable unless they felt rates were going to come down immediately.

So you had like 75% of purchasers using the fixed mortgage rate. And so the Bank of Canada sort of lost control of the demand curve, right? They couldn't, they could no longer play with the demand curve. Any increases that they were putting into the market were only impacting existing homeowners and so if they kept hiking they would be pushing more supply into the market by causing more pain to sellers rather than taking buying power away from buyers and that's you know that's obviously an oversimplification because i know that their language and predictions impact the bond yield curve and then that's kind of the next piece of the puzzle is okay so if everyone was buying with a five-year fix, in Q1, you saw the five-year bond

yield dip twice in February and in April, I believe. And that was giving out fixed mortgage rates in the fours, 4.5. And so everyone was like wondering, oh, the Bank of Canada paused again in the fall of this year. Why didn't the market rip? It's because, well, your fixed rates were a hundred bips higher than they were in the spring of this year. And so it's because well you know your your fixed rates were a hundred bips higher than they were in the in the spring of this year and so it's then i think that that that really is it so the question is you know now with the bond yield curve kind of coming down a bit again could we expect another strong spring market next year i i don't know i i honestly don't know i mean you're seeing a lot of these more affordable markets you're They seem to have settled, right? Calgary. So, you know, Calgary is setting new all-time highs.

Everyone's moving there in search of affordability and it's not even affordable anymore because it's just, it's been overbought. A lot of Atlantic Canadian cities, they were down like 20% from the peak, but they're recovering nicely because people are rushing back in because they're affordable entry-level markets. The prairies, Saskatchewan and Manitoba seem to have stabilized. They didn't really see too much run-up or too much drop. And even the lower mainland in BC seems to be back to kind of normal seasonal patterns. So like the entire problem that we're seeing now seems to be concentrated in the GTA or Southwestern Ontario, kind of the greater Golden Horseshoe area where prices are falling again. And that's pulling in kind of playing with the national average. And they're doing that

simply because people are really levered up, they can't afford to buy or a lot not there's not a lot of buyers and not a lot of people can afford to buy, but they can't afford to hold any longer. So we're seeing, you know, for sales, delinquencies rising power of sales increasing substantially. sales, delinquencies rising, power of sales increasing substantially. And so it's definitely skewing the national data set. Do you want me to jump in on policy a little bit here in CMHC, or do you want to chat a little bit on the prices? Yeah, no, I think that'll be a good next step. The one thing I'm going to add, so yeah, the five-year Canada bond will be an indicator of what banks or, I guess, financial institution will base their five-year mortgage rate on. So clearly, they're faster to increase it if rates are going up, and they're a

bit slower to decrease it as rates are going down, which we're seeing right now. And for those listening on Join TCI, they would have seen the ups and down this year. And what you're referring to, there was a dip in the spring got the five-year rate definitely more affordable for people a bit more reasonable and then it's picked back up but I think since then my view is you have to be very careful assuming that the same thing will happen because the economy is not what it was nine months ago we saw retailers retailers, Canadian Tire infamously really started seeing it towards the end of Q2 when the Bank of Canada started the rate hikes again. But now we're starting to see the data with GDP coming in in negative territory. So we're starting to see the lagging data kind of

start aligning with what retailers were saying earlier because they see it not quite in real time, but definitely much faster than the general economic data. Yeah. And then I think that, and I put those charts in the notes and you sent me a message sort of saying, you know, that Equifax report kind of like rebuts the consumer spending. And it is interesting because when I saw these charts, it's like, well, we're seeing Canadian vacation spending, increasing records. And then records and then and this is they comparing it to pre-covid so there's a couple of questions i want to ask on that one and then also uh retail data up seven percent this holiday shopping season but i'm like is that a real like is that is that adjusted because it doesn't say

it like it's just an index that this is from the this is from rbc's analysis the other one's from the bank of canada website or no they're both from rbc's analysis actually so but it's like if you look at trout like okay say travel spending is up because airport traffic data is only up 1.8 travel spending is up 34.5 if that's not real because it doesn't say whether or not it's real right so if it's not adjusted for inflation, then if you were to just compound the four years of inflation that have gone by in that period of time, it could be pretty comparable. Plus add in the increase in population. I mean, you look at populations up 3% in that same period of time on the Black Friday shopping period, and prices are up 3% as well. So there's a good portion of that 7% if it's not adjusted

for population and inflation. And then you're saying, and you can see it in the Equifax report, you're seeing a massive amount of debt piling up that is probably paying for a lot of the spending, right? I think Canadian credit card debt is going up. Household savings are coming down massively. I think the question is, are mortg is next on the chopping block, right? Yeah, exactly. It does give the sense. And I think it's great to look at the data from both perspectives because it kind of gives a more nuanced view. In the news, they'll tend to just say, okay, spending was up 7% during Black Friday. Well, okay, well, what are people spending with? Are they just getting more credit, getting more into debt? Are they trying to buy now to save money so that they don't have to spend later in December, for example, for their Christmas gifts?

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This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the App Store and join the community today. I'm on there. I encourage you to go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you

they're already on there. People are just on there talking, sharing their investment ideas, and using the analytics tools. So go ahead, Blossom Social in the App Store, and I'll see you there. So I'll give a little bit of the big points here of that report. And I think it's important because it is from Q3 2023 before we move on to 2024. And it's a good indicator, I think, on where things are trending. Now, most of the data is compared to Q3 of 2022. So year over year, like you referenced, credit card balances for Canadian reached $113 billion in Q3, which was an all-time high, and it was a 16% increase compared to the

same period last year. Equifax noted that the increases are being driven by a variety of factors, but four that they pointed out, rising cost of living, higher interest rates, economic slowdown, population growth, which is definitely one you obviously mentioned, but we've been hearing more and more now. The average credit card balance increased 10.5% year over year to $4,119. That's the largest increase being seen with consumers. And the biggest increase is being seen with consumers that had below average credit score. So below 620, I think the average typically is around 650. So definitely below

average here. The average monthly credit card spend rose 2.2%, while the average payment only increased 1.7%. So obviously, this means that Canadians are spending more on their credit card, but they're not paying as much on it. You definitely would want to see these numbers kind of be very similar. So that is definitely something that is a bit worrying to see. 4% of Canadian missed one debt related payment compared to 3.23% last year. That's a pretty significant increase in the span of a year. And the delinquency rate, which is the non-payment for 90 days or more on non-mortgage debt, was 1.2%, which was a 29% increase versus last year. And that was the most significant in Ontario and BC, I think for obvious reason, because people are more stretched

with their mortgages and housing payments, even if it's rent. So the increase there was 35 and 34% for Ontario and BC respectively. Credit card delinquencies on their own rose 15.8%. Credit card holders making minimum payments rose 3.4%, while those paying the balance in full fell 1.5%. And then if we go on to the mortgage side, new mortgage originations dropped 9.5%. I think it aligns with what you were kind of saying earlier, just based on the ebbs and flows of definitely interest rates. New mortgage amounts increased after falling for the first half of 2023. The average mortgage payment on new mortgages was up 10.4% compared to Q2 of 2023 here.

So just a little different comparison, but pretty significant increase. And mortgage delinquencies are rising, but still remain below pre-pandemic levels, with Ontario being the lone province surpassing 2019 levels. So I think that just brings a little bit more context on, yeah, for me, it's a little worrying that we're seeing Canadians still spend a whole lot, yet this credit data is showing that the spending is being done with debt and not increased revenue, increased income, or increased disposable income. Yeah, I completely agree. I think it goes to that kind of invincibility that Canadians kind of seem to feel when it comes to just like, you know,

you can keep piling on debt and stay middle class and whatever it is and just pay for it later. and stay middle class and whatever it is and just pay for it later. And, you know, it might ultimately end up being like, when I think about what the policy objective of the government might be or central banks might be, like it seems like we're kind of entering a little bit of an era of fiscal dominance where the central bank in Canada cannot outpace what's happening on the fiscal side. So fiscal policy being government spending and whether or not that will continue. But it does seem to be inflationary. I mean, you've got massive

population growth, right, which is deflationary, it's supposed to be deflationary on wage, but it seems to be inflationary on everything else, all the things that all those new people are consuming. And then you've got just a lot of spending happening in all different types of programs, some some great and some confusing, I suppose. And then taxes as well, which end up being inflation, at least on the consumer taking money out of their pocket. The fascinating part about when you talk about these mortgage delinquencies, and I've just tossed a chart in here from CMHC's residential mortgage industry report. If you look at the curves of where the delinquencies are rising, the, the bigger the mortgages, the faster the increase in delinquency, which is, you know, I mean, you would, it seems intuitive,

but then it would, you would also say, well, aren't, aren't the people with the big, well, you know, the big houses, the wealthy people that should be fiscally responsible. Right. And, and it appears not. So, you know, the biggest mortgages are the ones that are increasing in delinquency at the fastest rate. So your small mortgages, your less than $200,000 mortgages, typically, historically, well, they're always the highest delinquency rate, but they're basically flat. And then you go to your 850K and more mortgages, and they're really ramping up. It's starting to look a little worrisome from my perspective. That one is interesting from my perspective. That's where you can see a strengthening of the price floor. It's a decent market for a lot of people who are

upsizing because if you're selling something that's in the, if you're selling something that's kind of entry level, that has a broader market, you've got downsizers, you've got investors looking at it, you've got first-time homebuyers looking at it, then it's a good product. But then if you're buying something that's in that more distressed category, it could be a great market

as long as you can afford the credit swap, right? Which is upsizing your mortgage as well. Yeah, I mean, we're seeing it right now. You know this and listeners, I don't think I've mentioned it yet, but we're looking to buy a new home and sell ours in the next year or so. We love where we're located. It's just a two-bedroom home with a little lady that has her own room, potentially having a second kid in the next year or two, it starts becoming pretty crowded. So we're definitely looking at that. But our home is kind of in that category of more kind of starter homes.

And we've done a few visits and, you know, a realtor, which, you know, is, you know, provided some feedback. And he sent me the response that he got from the other realtor from one of the homes. Like, OK, like, you know, it was all right, but still a decent amount of work to be done. And we thought the pricing was too high for that. And basically the realtor was like, make an offer. Bring me a little ball.

Yeah, they're like, they're open to negotiating. That was the answer. We're not because, I mean, literally we'd ask him to take a 30 percent haircut for it to make sense for us. But we're starting to see that. And for us, we're kind of in that middle range, but going to an upper category, I would say. Yeah. And the stuff is staying on longer. Definitely what we've seen. Yeah. And so this is where you really get down to the credit sensitivity of the market, right? Like a lot of people, Canadian real estate isn't a cash rich asset. Like everyone is using debt. It was just purely an interest rate play. Everyone is and was using debt and the increased

buying power at record low rates to upsize their lifestyle and now we're at a point and this is where i think a lot of people just say it's not just cuts from my perspective that matter in canada it's all like we we still need to go through a deleveraging period like you can't stay at 120 percent debt to household income or whatever it is 108 we're back to 818 percent i think right you can't stay there you just like and and as long like the the reason the u.s was able to recover out of 08 was because they they deleveraged and we are like the point of a credit cycle is to deleverage and i i don't think i think until canadians do that the only way to fix the problem, and I don't know whether or not central banks or fiscal policymakers want to go this route, but I could see it being an outcome,

is to inflate away the debt. And that's where you kind of end up with a much messier outcome for Canadians, right? I think that's where... Yeah. It may be better short term but long term typically that will be more painful whereas if you look at the deleveraging it'll probably be painful more short to medium term but the longer term outcomes will typically be better it all depends what what angle people are willing to take yeah i think also the deleveraging is like it's more darwinistic right like you have this um this evolution by natural selection that should take place in the economy and it did it did in a big way in the u.s and you can see it happening a little bit in canada right now but a deleveraging would require the people who were fiscally irresponsible to pay

the piper for that those bad decisions whereas if you if you're putting inflation if you're using inflation to try and flay away the debt of the entire economy then you're you're rewarding those people and almost punishing well you're punishing everyone at that point right by by devaluing the currency so i don't know i mean it's crazy to me that the that canadian dollar has still been exceptionally strong i don't know if that is mostly because of oil and petrodollar status, but just fascinating position for the Canadian real estate or Canadian economy to be in. Yeah, I'm not an expert on Forex. It really seems like the market is just really, how would I put that?

Just seeing the Fed pivot in a very kind of, that's the only thing they're focusing on and just rates potential rates from different central banks and i think that's what's making a lot of the short-term movements on the various currencies that would be my guess i could plea completely wrong but that would be my guess and i mean i agree with you in terms of the deleveraging like we we took a much smaller mortgage than we were approved for. We like literally took a mortgage 30% less than we could have been approved for because we wanted to be prudent. I wanted to be able to continue our lifestyle, even if rates went up to 5% mortgage

rates, which ended up going higher. Right. So we were very prudent, but a lot of people, I mean, were basically, a lot of people were calling us almost like kind of stupid for not leveraging to the max because leveraging always is good. It never ends up badly. Yeah. And I'm being slightly sarcastic here, as you know. Yeah, but like, and I think now is it's, even in the examples like you're describing where you're getting somebody who might be on that 850,000 plus curve on the mortgage side, right?

Where there's, you know, there's a lot of people who just took on too much. And this is where you're seeing Toronto, why Toronto is suffering or the GTA or the Greater Golden Horseshoe. House prices just were running up double digits year over year in the Greater Golden Horseshoe. And it forced people to take on more and more debt in order to even buy. And you saw that combined with FOMO, the fear of missing out in the industry. And what it all culminated into was a market that was incredibly credit sensitive. And so as soon as rates came up, it was like as soon as that first hike happened, GTA housing blew off like 10%.

And, and it was, it's, it's forward looking, right? Like it's, it's a, it is a more sophisticated market and they were pricing the mark, the house, the housing market was functionally pricing in future rate cuts as soon as they started, because it was a hundred percent fueled by, by just rates, rate driven buying power. So I guess maybe I'll quickly, while we're on GTA, I'll just, there's this chart that Desjardins put out. It's at the bottom of the note here, but how low can prices go in Toronto? Even a severe recession won't make housing affordable in Toronto. And they basically modeled out a couple of different scenarios and their scenario their worst case scenario is a 90s style recession plus strong construction which would and this is where you

know it's kind of and i know you want to talk about the royal page projections and stuff but this is where it's kind of fascinating from my perspective because i don't know i would i would probably defer to your judgment whether or not we're going to see a 90s style recession. I think that, you know, by some arguments, you could say the debt situation is far worse. But I think by other metrics, you could say the economic situation is far better. But let's say you do see it, just hypothetically, the question is, could we see a strong construction or basically like overbuilding a ton of, you know, construction of new units to create the supply scenario that would offset that excess demand, which is keeping house prices propped up. And this is where I think fiscal policy is fascinating from my perspective. I mean, in the summer, the prime minister,

you know, he said, oh, housing isn't a primary federal responsibility and i think and i think oh did that change quickly and and it's really and as soon as that happened the polling numbers started to come out that they were just getting i think i think it really resonated with voters that it wasn't it wasn't a good thing to say right i'm trying to get too political here and and um they you know they fell in the polls very quickly and now shortly after that it just became the primary federal responsibility he was like this is the problem that we need to solve with tons of new policy coming into play uh into place that that is aimed at supply creation so they saw short-term rentals are now under scrutiny on on whether or not they can be claimed for tax

expenses can be claimed for tax deductions with the. There's a huge tax issue with that. If you flip over from a short-term rental to a long-term rental, by the way, you go from a commercial to a residential and you have to do a HST self-assessment. So that could be created quite a bit of risk. Okay. I didn't know that. Yeah. There's a great thread on it on Twitter. Then they came up with this new mortgage charter, which is basically like a repackaging of existing rules but it just i think it just i think it made a lot of borrowers realize that those rules existed and so that could ease a lot of pressure for borrowers who are like oh i'm in trouble i'm just gonna call my bank up and ask for a 40 year am or whatever and they got a lot of flack for that that new mortgage charter but at the same time i think you know i'll give credit

where credit is due like i've been very critical on them too but i'm with you at least if it provided whether you know all these things were existing but at least it gave it more visibility and for a lot of people they just didn't know that so i think that is definitely a positive you just bring awareness the way they framed it was probably not fully you know reality but still i think you have to give them credit where credit is due for that part bring visibility to it and i'll credit them that a lot of these policies i mean a lot of them they're borrowing from other politicians as well which is fine that's i think that's how politics should work but but you know they like they like taking credit for things for sure and they they like i think that you know, they like taking credit for things for sure. And they like, I think that, you know, they're already running their re-election campaign.

So they also came out with this new like updated version of, or they said they're going to come out with this updated version of the Wartime Housing Act, which is like basically they're going to take prepackaged floor plans and make them easy to build. Yeah, I saw that. It's like, I mean, I look again, like I don't want to get too into it, but all builders are doing that anyway. Like all builders, builders build like six floor plans, you know, like across the country. So it's not like, and those will be designed for multiplex. It's not going to be done till like end of next year anyway. So I don't know. I think that one's a bit of a nothing burger, but it sounds good.

Like when you hear wartime housing, it's like they definitely got the media rolling on that one. And then the other things, I mean, they've just been going around basically bribing municipalities into upzoning to uh yeah and and they've and it's really triggered this chain reaction where you're starting to see provinces and municipalities in a hurry to upzone to like you know vancouver just went to six that first they went to four and then now they're at six units ontario did the um bill 23 toronto did four plexes you know london's doing four plexes so so so what was bill 23 was it like every single residential lot in in ontario could have uh three units on it two plus one three units yeah two plus one okay yeah yeah and um and so you're seeing the same thing happening coast to coast where i mean we talk about this a ton on

the canadian real estate investor podcast like And it was actually our prediction that we would see this massive thing of upzoning. That was my biggest prediction for this year. So I'm glad I got that one right. But just that you're going to start seeing everything being upzoned because it's the easiest way to create incremental changes in supply rather than relying on at scale, like high rise development to continue. All of these will take time though, to take effect, right? Because I'm just thinking about the zoning. Like I don't, I'm assuming it's similar in Toronto, but the cost of building is so expensive in Ottawa right now.

I mean, it's nice that you can do, you know, two, three units, but if the cost is prohibited, you have higher rates like this. This is not, people are not going to do this until it starts making sense. Yeah, so I agree. However, I think the economics of adding a basement apartment to your house, as an example, is far better than the economics of building a high rise unit. Right. Like a total creation cost of a high rise unit is like six hundred dollars a square foot.

The total creation cost of a basement apartment in a house that already exists is is like $600 a square foot. The total creation cost of a basement apartment in a house that already exists is like a hundred bucks a square foot. And so, and there's no development charges and it's more agile. Like you just go get a building permit now rather than zoning bylaw amendment, all these studies, et cetera. So it's, it's more agile supply. It remains to be seen whether or not it'll have an impact but i i am i'm one of the the believers you know that it that it could have an impact and then if you work it's changing into a bull we're seeing the metamorphosis right now although i guess you it is kind of the bear case because i'm i'm going along desjardins predictions here that it's like could we see

overbuilding right and then i think the last piece to add to that is this CMHC MLI Select, which, you know, and Nick, my co-host on the podcast and myself, we're partners in a mortgage brokerage that does a ton of financing on the MLI Select side. And we're seeing massive amounts of people. Do you want to explain what MLI Select is? Yeah, I can. Yeah. So, so basically CMHC has the similar way that they do mortgage insurance for homeowners. They do mortgage insurance for purpose-built rental construction and purpose-built rental acquisition as well. And so they have programs where you can get as high as 95% loan to value or 95% loan to cost on construction and up to 50 year amortizations

on purpose-built rental buildings and so and this is basically so a lot of that that all of that construction like uh high-rise pre-sales are down like 60 percent right so you're not seeing people lining up to buy condos and go cash flow negative so that the builder can build them and whatever. So a lot of that, that rental demand is going to be sweet. It still exists, right? We're still seeing growth of 3%, you know, on them, non-permanent residents per year. And so it's got to come from somewhere and you're seeing a lot more builders building with this MLI select. And when you heard Chrystia Freeland do the announcement where they were like unlocking 20 billion in bond financing and they issued up the new round of cmb uh that's exactly what it was for it was all for cmhc ml i select

purpose-built rental financing and so i think you know the the question is like could this lead to a a scenario where we were building as much purpose-built rental as we were in like the 70s 80s because it wasn't until like the cre, I think, where we really switched over from being, building a lot of rental to building a lot of, you know, that Canadian dream of home ownership. And I think it's questioned, like, can we see a reversion back? So that's, if you were to,

I'm presenting the bear case here. If we see the 90s recession and all of those policies end up getting us to a scenario where we're building a lot of supply and we're seeing a huge increase in purpose-built rental supply, it is plausible that it could see a delayed recovery in the Canadian housing market as a result of all of those factors. Now, I think you put in some- Put downward pressure on the price. For sure. Yeah.

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So I came across, I know you're familiar with this one. So Royal LePage at every year they have, I guess, an outlook for the year to come. What's your typical view of their reports? Obviously, I always am skeptical when I see a report from a firm that clearly has interests and house prices and volume to pick up i i the research that they do in the surveys and stuff are good their forecasts are always off like they're you know and they're always very bullish right anyway we can we can we can get into it but yeah i would say like from in the most part they're usually on on the high end of the bullish scale and uh like even remax revised their forecast down for next year to say that they expect house prices to

fall really okay royal page is the only outlier as okay so i'll give kind of just a it made like the headlines but whenever i see these things i like to actually read the report because i think a lot of people will just look at the news headlines and not look at the actual report. So I'll give the biggest lines here. So according to the report, there are Royal LePage is predicting that Canadian home prices will be rising 5.5% in 2024. They said that it will be fueled by pent up demand and Canadians realizing that current rates are the new normal with possible interest rate cuts in the back half of 2024. And I think this quote really gives a good overview of how they're thinking. So Phil Soper, which I believe is the CEO of Royal LePage.

So he said for the last year, many Canadians have been fixated on the idea of interest rates needing to come down significantly before they can afford to enter or re-enter the housing market. Acceptance that a mortgage rate of 4-5% is the new normal should untether pent-up demand as first-time buyers, flush with savings collected during the extended down market in housing, regain the confidence to go shopping. So I'm not sure with the flush and saving where he's getting that data from, but I just like, sorry, I had to chuckle while I was reading that because what we're seeing is like the savings rate actually like kind of plateauing and trending down even with Stats Canada data,

but also different financial institutions have been reporting that. And I know it's more anecdotal, but Dan Kent, to co-host one of the podcasts with me, he has StockTrades.ca that does like, you know, stock recommendation analysis and ETFs as well. And they've seen definitely a different trend. So it's been slow, slower growth this year compared to previous year, which obviously, if people are looking to invest in stock is because they have spare money to do so. So I found that a little bit funny. I mean, obviously, it's a non zero probability that it could happen. I think that's where I wanted to say where,

you know, it's still possible. I wouldn't put a really high probability personally. I'm not as well versed in real estate that you are, but they seem overly focused on interest rates. And the issue I have is and I pulled some data from the CME Fed watch tool and I know it's a U.S US Fed, but it's still a good indicator because the Bank of Canada is never really that far off from what the Fed will do in the US. And essentially right now, the FedWatch tool, the markets are pricing an 85% chance that rates will be between 3.75 and 4.25 by the end of 2024. So that would be cuts between 125 basis point and 175 basis point. That means it's an 85% chance that there's five to seven rate cuts of 25 basis point each way

beyond the three cuts that the Fed dot plots is projecting for 2024. And there's also a 57% chance that it's six or seven rate cuts. So they're definitely putting more emphasis on more cuts starting pretty early in the year, especially earlier in the year, because it's a political, it's an election year in the US. And one thing the Fed typically wants to avoid is making it look like they're cutting rates right before an election, potentially helping the incumbent Joe Biden in this situation. But then again, the fact that the market is putting so high probability for these rate cuts, the market would only do that if they think a recession is coming. Yeah. I mean, this is where even the federal government in canada who i think

is pretty optimistic when it comes to the economy predicted unemployment hitting 6.5 percent in canada this year which i think we'll see probably in the first two quarters of next year i i could see it being significantly higher than that not being significant might be the wrong word but i think like in the sevens wouldn't surprise me and i I think in Phil's statement, it's like, okay, let's assume that there is some group of buyers flush with savings. It's obviously not substantial enough to show up in the data, but it could be substantial enough to move the needle in a spring market. And then let's say we see a spring market where bond yields stay in the threes and fixed

mortgage rates are in the low fives, even high fours, and you've got a ripping spring market again. It doesn't, like you can burn through that pool of buyers very quickly. Then what happens is you're now left with more buyers with more, sorry, more people who are added to that pool of debt or to that pool of household indebtedness, right? Like you're taking people out of the economy of savers and adding them to the economy of debtors, right? Or sorry, people with liabilities. And so it just compounds the need for an eventual deleveraging from my perspective. And I think the deleveraging will take a long time. Like I think we're going to see a market that kind of grinds down slowly. If I had to guess, I think we'll see a relative strength in the spring market. It's so easy to do this.

Like, every year you can sound like a genius, be like, ah, prices are going to rise 5% to 10% from January till May. Then prices are going to fall 5% to 10% from May till August. And it's like, it'll do that every year, barring any major economic disasters. It's what happens to that, like, on the two-year, what does it look like? And I think, if I were to guess, I would say the bottom of the real estate market in Canada will probably fall in the end of 2025. And I think it'll be a five... I would expect a five-year recovery period. I think to imagine, in order for prices to jump back to where they were, rates have to jump back to where they were, rates have to jump back to where they were.

And that's never happening. And even at rates in the fours, you still have the most renewals, most mortgage renewals coming up in 2025 and 2026. And all of those people still are in a position of seeing an increase in payment. And so that's sustained pressure on the economy. Pretty significant increase in payment.

Yeah, for sure. Yeah, 20% to to 30 increase in payment uh if you're on your 25 and 26 assuming those are all five-year terms that's just 20 2020 and 2021 vintages of mortgages those are the best rates right like so those people are seeing even at even at going you're going from like a one point if you're all everyone's on the fix let's assume you're going from a 1.5 to a 4.5 or even a even a 3.5 it got that low huh well you even if it was in the two like let's say somebody was getting not 1.99 2.5 but even 2.5 to to four and a half is an almost doubling of your capital cost and that's that's a 30 increase in your mortgage payment so yeah it's no i think those yeah oh go ahead i was

gonna say i think it's it's just it's not it's, no, I think those, yeah. Oh, go ahead. I was just gonna say, I think it's, it's just, it's not, it's not even close to over yet. And so to imagine that like, it's binary, like prices either go up or down. It's like the, it's like that, that quote, right? The market can stay irrational much longer than you can say solvent. It's like, to me, the market can trade sideways a lot longer than people really are willing to give it credit for. And that, that would really be, I think there'd be a little bit of downward pressure on the market still, but I, but for the most part, I would expect to see the market trade sideways probably for, for a while. Yeah. And the, the rate cuts is an interesting topic too, because I know you go on TikTok and it's like, oh, buy your home now because,

you know, rate cuts are coming and the market is gonna rip just higher. And that's a little bit of the sense I got from the report. Obviously, a more dialed down version than that. Yeah, they're definitely a bit more bullish because rates seems to be stabilizing, potentially going down. But what I was getting to with the Fed is if we see like five, six rate cuts next year, interest rates will probably be it will only be one component because what you're going to be seeing, the reason why rates would be cut so much is there's a recession. And the more they're cutting, the more it's a deeper recession. I think that's the simplest way to put it.

And that's what we're seeing with bond yields. You were talking about the five-year in Canada, the 10-year in the U.S. I mean, the market is essentially saying rates need to come down because we see economic growth slowing down in the next little while, in the next few years. And central banks will be forced to get rates down. And if that happens, I mean, obviously there's going to be job losses and you may have people that are forced to sell. Obviously, not a great outcome. There's less people that have the buying power because maybe they lost their job to be potential buyers and get approved for a mortgage. So I think that's definitely an aspect that's being overlooked by that report is they really focus on, you know, pent up demand, interest rates. Pantub demand, interest rates, and this idea that all Canadians that want to buy a house are sitting on mountains of money that I wasn't aware of.

Yeah. Yeah. No, I would agree. And I think it's funny. You see it in my industry. I do a lot of economic analysis for realtors, right? Like charts for realtors to use. And the amount of times that I put a chart and it's like, I called the volume bottom. This is an example. I called the volume bottom in Canadian real estate. I said the volume, the bottom, the lowest number of sales

that we will see for this cycle will take place in December of 2023 and January of 2024. And everyone's like, price is bottomed. I'm like, no, no, no, no, no, no. That's not what I said at all. But like realtors take, yeah. Realtors take the chart and they're like, buy now before prices go up. And I'm like, and I'm literally like messaging people are repackaging my charts. Like that's not what it says. Like, and I, and so I have to be deliberate with my language because they'll take anything like the, and you're getting, it fascinates me that it hasn't been regulated by like the OSC or something, to be honest with you, the real estate industry, because you're getting people like promising, guaranteeing returns you know saying

you can get this rental return and then like um you see their pro forma and it has like a capital appreciation of like a certain like a some insane amount like 10 plus percent and anyway the point being like you're getting a market that is driven by animal spirits of real estate professionals. You know what I mean? Like, I think that economic book, Animal Spirits, right? But, like, of realtors who are really just, like, you know, they have a vested interest in seeing

prices go up, and so they're just, like, trying to pump this thing with air at all times. Like, I'm seeing, like, you know, people reposting my tweets on Instagram and, like, oh, buy now before prices go up. And it's like, I'm seeing like, you know, people, uh, reposting my tweets on, on Instagram and like, Oh, buy now before prices go up. And it's like, no, no, no. Like, so anyway, I think it's, it's, you can tell that like we're in the, in the real estate market has really reached that kind of desperation level where people are trying to push one another to, to make these things. But the point that I would, that I'm trying to make in saying all these

anecdotal things is like, everyone's saying rate cuts are going to be bullish. It's like, everything that comes before rate cuts is not bullish. It doesn't make, none of those things make house prices grow up. Like, you know, the 7% unemployment rate, even a 6.5% unemployment rate is not bullish. Those, those are not things that, you know, major economic contraction, Canadians spending record amounts on household debt servicing. Because I think we've reached our peak. We just had an all-time high for household debt servicing. All of these things mean that Canadians are not going out getting into bidding wars for fun anymore, right?

Yeah, exactly. And one thing to support that is that EI claims, so employment insurance claim, actually climbed 6.3% in September compared to the previous year. They declined compared to August a little bit, but on a year over year, they're still increasing. That data is definitely quite laggy. So that's the most recent data. I think that October 1 should be coming out soon and we'll get an idea. October 1 should be coming out soon. And we'll get an idea. And EI, I'm not sure if they include EI from attorney leave and parental leave. But even if they, as long as they're consistent, whether they include it or not, I think it wouldn't skew unless there's some kind of

baby boom happening in Canada, which I don't think, yeah, it doesn't seem like that. And I think that's a good data point to keep an eye on for people looking to get a sense, because obviously it could also be more regional. And it's good on the year over year data, because obviously there's the Atlantic regions that notoriously there's going to be more EI claims during the winter, especially if there are fishers, well, fisheries and going out. Obviously, they're not able to get as much income. So there's different ei qualifications for them back there but that's an interesting data point to look at

i just came across like i don't know about you sometimes i i start doing notes and i get into rabbit holes oh yeah yeah that's how i ended up like my my most popular data set since like early in covid like before i was even like, you know, in the media and stuff like that, I did the urban exodus data point. That was like my biggest one. Like I, a lot of media picked that up, but then I started doing this data point just looking for, cause I was like that CMHC data that I presented earlier in this episode that you put the chart up for the, the people enjoying TCI. It's like, if you, if you really look at that data, that data is at a minimum is four months old at a, a maximum, it's six months old.

So CBA, the Canadian Bankers Association, reports that mortgages that are 90 days delinquent, they report one month later. And so that's four months have gone by since that mortgage, that borrower stopped paying. And usually during that period of time, typically within a month, the lender, a prudent lender, a lender who is eager to solve that problem, which lenders are becoming in this market, they've already taken that property power of sale. So I was like, how can I get a better data point that would be a leading indicator on whether or not delinquencies are going to rise? And I started tracking power of sales. And now that chart's been published in Bloomberg, Wall Street Journal, all of these

different publications because it shows power of sales are up 200% on a year-on-year basis. And on a two-year basis, they're up 400%. So you're seeing a 4X increase in people failing to pay their mortgages to the point that... So failing to pay their mortgages and failing to list the house themselves to the point that the bank has to exercise the power of sale and let you know we hear foreclosures in the u.s yeah so when does that typically happen the power cell process is it like what two months after they've missed payments like is it the 90 days like when does the bank typically take over for the power of sale it would depend on the lender so and this

is where like i think the big banks have obviously an incentive to not make things show up on their books as power of sale. So in that data set over the past three years that I've been tracking it for, there are very few big six banks. It's all mix, monoline lenders, individual privates. And so they would all have an incentive to go power of sale very quickly because they just want it off their books. Because if it's sitting there, and in a lot of cases, they're in second position. And if they don't get it out expediently, then you would assume the mortgage ahead of them also goes delinquent. And if that person goes power of sale, then they could get wiped out. So they can lose their principal entirely. And so I would say for them, it's as soon as they can do it, which is 15 days after the mortgage is delinquent. And so you're probably seeing one of those properties. So 105 days, basically, right?

No, no, because the delinquency is like first payment. It doesn't have to be banks. Banks, just like because of the Bank Act only have to report 90 days delinquent loans. That's just your big sixes, right? So this is the fascinating part. It's like, there's this whole other world where if you're going back to like the big short analogy, right? And you're thinking about like, remember, he's pulling the dominoes out and he's like, here's your D, your tranche, whatever. If you think about your – what would be your subprime? I wouldn't call them subprime, but your B loan environment in Canada or even – not even your B loan. Like I wouldn't even say Bs like your credit unions, monoline lenders.

Most of those are pretty okay. But your B plus C private loans in Canada, they're starting to go delinquent pretty quickly. And the question is, does that eventually get to a point where it becomes contagious to your B and A loan environment? I don't necessarily think so. I think it solves its problem. I think that's the deleveraging that we're seeing. Anybody who's in a high leverage position that needs to go through the deleveraging that we discussed earlier in this episode is using a private loan probably. And so I think that we'll see a lot of that get super wiped out. I think you're going to see a bit of a redemption crisis in the MIG environment. And then I think things will be smooth sailing after that, but you can

see it happening. It's showing up in the data. Yeah. And MIGs are Mortgage Investment Corporation. They're typically, I think some of them will be publicly listed. Yeah, there's a handful. Yeah, there's some. Speaking of, we actually had like an inquiry. One of them wanted to advertise for investors and we ended up, not that they were not reputable, but just because of the potential trouble in that space, we ended up saying no, that we would prefer not to have them as an advertiser so we don't say yes to all advertisers we are definitely we pick and choose and it has to align and make sense for for the podcast yeah yeah anything else you want to add for 2024 as we're wrapping this up because we're running a little bit long but that's okay if you have a few more things i think we're good

man i think i've covered everything i want to i mean this was an was an awesome episode. You know, I always like to hear your take on what's going to happen in the macro world. So always a pleasure. Yeah, no, it was great. Just, you know, obviously we talk a lot and I, you know, always check your Twitter probably a couple of times a week just to make sure I'm up to date

on all the Canadian housing stuff because I know you stay up to date for that. This was great. For those of you who are hearing Dan for the first time, check him out on the Canadian Real Estate Investor Podcast where he co-hosts bi-weekly. So two episodes a week with Nick Hill. Fantastic. I try to get to every single episode. I don't always do, but definitely learn a lot of things listening to you guys. A lot of things I didn't know and definitely helping me with the process of buying a new home in the next year or so.

So thank you for that. And I encourage people to go and listen to you there. And you can also follow you on Twitter. What's your handle again? Daniel underscore Foch. Maybe just Google me. You'll usually find it. Yeah.

Just Google him. There you go. The Google machine. Well, thanks for coming on. everyone listening happy 2024 this episode will be coming out early early january we're recording this uh december 19th so a couple weeks delay but i'm sure what we talked about will still be useful for people who just want to get a pulse on the market or some that are looking to buy maybe their first home in the next couple years i think this is definitely some useful information. So thanks for coming on, Dan.

My pleasure. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.