The Wild Banshee?!? In The Coalmine

The Metaphor

Everyone keeps looking for the canary to tell us where Canadian real estate is headed.

Never mind a canary, I think we're overlooking the screaming banshee.

When people ask me what's happening in Canadian housing, my answer is simple.

We're not in a housing collapse.

We're in a housing hangover.

From 2020 through 2022, we pulled years of future demand into a very short period of time. In some markets, it felt like we compressed four spring markets into just two years.

Then...

Interest rates surged.

Inflation ran a little wild.

Immigration policy changed. Radically.

Population growth slowed dramatically.

New household formation weakened.

And now the market is trying to digest all of this... and more... at once.

Detached homes have corrected and, in many places, appear to be finding a floor.

Condominiums remain under much greater pressure.

Toronto and Vancouver continue to struggle.

The Prairies and much of Quebec have been comparatively resilient.

There isn't one Canadian housing market.

Not really.

There are dozens of regional markets moving in different directions.

And I don't think interest rates are the biggest story anymore.

Demand is.

Housing demand isn't created by optimism.

It isn't created by campaign promises.

It isn't even created by lower interest rates.

It's created by people.

People form households.

Households need homes.

Those households need income.

They need access to mortgages.

And perhaps most importantly...

They need confidence.

For decades, Canada's housing model rested on three assumptions.

Permanent population growth.

Cheap credit.

Rising home prices.

Today, at least two of those assumptions have changed dramatically.

And that's where I think we're still staring at the wrong thing.

Interest rates.

Instead, we should be on red alert over the population numbers.

For the first time in our country's history, Canada's population has begun declining month after month... after month.

That isn't a canary in the coal mine, it's a screaming banshee.

Because we didn't build housing for today's population.

We built housing for yesterday's projections of tomorrow's population.

That's a very different thing.

Many condominium projects...

Rental assumptions...

Infrastructure plans...

Development pro formas...

...were all based on a future that now looks materially different.

That doesn't mean Canada has too much housing.

Far from it.

It means we may have too much of the wrong housing...

...in the wrong places...

...built on assumptions that no longer hold.

Some buyers are finally gaining leverage.

Some prices are becoming rational again.

Some markets remain remarkably healthy.

Others have much more work to do.

The question I keep coming back to is this:

Are policymakers reacting to the right problem?

So far, most of the responses have focused on the symptoms.

Unsold condominiums.

Developer stress.

Higher arrears.

Credit risk.

Those matter.

But they may not be the disease.

Because hangovers fade.

Structural mistakes don't.

The Math

So... let's put some numbers to the banshee.

How big of a deal is a decline of 'just' 157,000 people?

Fair question.

The number itself isn't the story.

The change in trajectory is.

Developers don't spend five years building a condominium tower based on today's population.

They build it based on where they believe demand will be five... seven... even ten years from now.

That's a completely different calculation.

Today, Canada's population sits at roughly 41.4 million people.

Recent data shows we've declined by approximately 157,000 people over the past six months.

On its own?

That's meaningful.

But not catastrophic.

Now let's run a simple thought experiment.

Suppose Canada ultimately ends up with one million fewer people than previous projections expected.

Not one million fewer than today.

One million fewer than governments, lenders, developers and investors were planning for.

Canada averages approximately 2.3 people per household.

One million fewer people works out to roughly:

435,000 fewer households needing somewhere to live.

Whether that becomes 435,000 fewer homes built...

...or 435,000 additional vacant units...

...or something in between...

...depends on how supply responds.

Now we're talking about something significant.

Not because those homes disappear overnight.

But because expectations drive investment decisions years before the first shovel goes into the ground.

So what happens if we overshoot?

Ten thousand vacant units?

Fifty thousand?

One hundred thousand?

For how long?

And what does that do to prices for existing homeowners?

Here's another wrinkle.

Those one million people don't typically arrive in Canada and immediately buy detached homes.

Most rent first.

International students.

Temporary foreign workers.

Permanent residents.

Young families.

Which means the rental market feels the shift first.

Vacancy rates rise.

Rent growth slows.

Cash flows weaken.

Investors hesitate.

Condo demand softens.

Developers stop launching the next project.

Sound familiar?

It should.

We're already seeing it.

This doesn't mean Canada suddenly has "too much housing."

It means we may have financed, approved and begun constructing housing based on demographic assumptions that have materially changed.

There's an important distinction there.

For the past three years we've obsessed over interest rates.

I understand why.

But I think we're increasingly watching yesterday's headline.

The bigger question may now be population.

Because housing demand isn't created by optimism.

Or headlines.

Or campaign promises.

It's created by people.

And when the assumptions about people change...

...every spreadsheet underneath the housing market changes with them.

The math doesn't care about politics.

Or opinions.

It just waits patiently to be acknowledged.

DW