News: Housing Construction Demand & Hot Rental Market

In this week's Industry News (Week of 26 Jul 2021).

Adding housing supply is easier said than done | National Post

While housing prices have been rising rapidly in metropolitan areas across the developed world, new housing construction has not kept pace with demand. Building more housing, even when it is urgently needed, is easier said than done. Housing prices have also been rising fast in many populous urban centres across Canada. The pandemic contributed to the increase in the demand for larger-sized low-rising dwellings whose prices have increased swiftly over the past 16 months. However, the pandemic is just a recent contributor to our housing woes. Prices have been growing in Canada since the early 1990s, with only brief and rare interludes. What has not kept pace with demand is construction.

Canada built much more housing on a per person basis in the seventies than it has been building recently. In addition, what has been built in the past three decades might not be the proper structure or tenure type. A quick look at construction trends in urban housing markets reveals the mismatch between demand and supply. For example, consider the Toronto Census Metropolitan Area (CMA), Canada’s largest housing market, where the share of low-rise housing (detached and semi-detached) has declined over the years. In comparison, the share of mid- to-high-rise apartments (primarily condominiums) has increased such that 70 per cent of the housing starts in 2020 were apartments

This article is a Konfidis "must read." At Konfidis, we strive to strip emotion out of residential real estate investing and focus on fundamental supply and demand analysis. Ultimately, the lack of new supply, coupled with such limited new construction being focused on urban high-rise (a mismatch with the increasing demand for larger format housing), will support continued single-family home price appreciation over the long-term.

Full press release available here.

Even if prices fall, the era of affordable houses in Canada seems to be done | The Globe and Mail

To return to summer 2019 levels, the national average resale home price would have to fall about 25 per cent, but a housing crash of that size would likely be packaged with a recession that rivals the economic impact of the pandemic. This is how Canada’s housing market cools: from the white-hot intensity of a thousand suns to merely scorching.

We’ve sold today’s young adults on the wonders of home ownership, but they’re increasingly being priced right out of the market. Another leg higher for housing is possible when immigration reopens and some of the billions sitting in savings accounts finds its way into down payments.

Over the last couple of years, we often hear from investors that they are waiting for the market to "cool" before they "jump in." Unfortunately, that strategy has not played out as planned, and the market is not showing signs of a significant pull-back anytime soon. And even so, what is the opportunity cost to stay out of the market and wait?

"Only a sharp pullback in house prices will make a difference for affordability. A decline of 10 per cent from current levels would represent a significant pullback. Yet we’d still be near the price levels of early 2021, which in turn were more than $100,000 above what we saw in the summer of 2019."

Even the world's most talented economists cannot consistently "call" short-term movements in the housing (or other) markets. As disciplined investors, we focus on long-term fundamental analysis to support compounding wealth over time. And even with the recent upward movement in housing prices, the long-term supply and demand fundamentals for continued appreciation are compelling.

Full article available here.

Rental housing market heats up, raising affordability fears | The Globe and Mail

Strong demand from new immigrants, university students in the coming months is expected to push many cities back to tight market conditions. Activity is heating up in rental housing markets across Canada, a troubling sign for affordability in cities with a chronic shortage of available units. The coming months should see strong demand, as the country is poised for an influx of new immigrants, part of the federal government’s push to make up lost ground. And with universities set to resume in-person classes, more students are signing leases. The demand side should continue to strengthen. Immigration levels have perked up in recent months, and the federal Liberals aim to admit more than 1.2 million permanent residents between 2021 and 2023, ensuring a steady flow of new renters for years to come.

The trouble is that supply isn’t growing nearly enough, industry executives say. “We’re calling for increased immigration numbers – unprecedented, never-seen-before immigration numbers – going forward. So the fundamentals are just incredible,” Mark Kenney, CEO of Canadian Apartment Properties REIT, told analysts on a May earnings call. “Without meaningful housing policy to accelerate the development of rental, I think that we’re going to find ourselves in this supply-constrained environment,” he added.

Canada's top multi-family apartment executives are calling for a hot rental market as an unprecedented number of new immigrants come to Canada. These trends will have similar impacts to the single-family housing and rental market. "For renters, the other option is homeownership. But on that front, affordability has deteriorated. Fueled by rock-bottom interest rates, buyers have purchased homes in record quantities and driven up prices."

“The rental market is going to become increasingly more important as ownership affordability continues to erode,” said Shaun Hildebrand, president at Urbanation.. “That’s just going to shut out more first-time homebuyers in the future and put further pressure on the rental market.”

Full article and video available here.

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Konfidis is pleased to share our weekly real estate investing industry news piece herein. We love connecting with our members. Reach out with your questions to hello@konfidis.com.

Shael Soberano, CFA Konfidis Inc. Chief Investment Officer

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