A $1 BILLION bet that Canadian housing will end up like Germany.

Tuesday Jun 29th, 2021


It’s no news that Core Development recently announced they’d be purchasing $1 Billion in Canadian housing with their new fund. It was only a matter of time until this happened, as Jay Vasantharajah (@jayvasdigital) and I discussed in a podcast episode about a year ago. (Link for the curious)

The industry knows about this – and therefore the majority of people in Ontario know about this, because the majority of people in Ontario are directly or indirectly employed by the real estate industry, and the majority of our headlines are about housing.

Core’s strategy epitomizes my hypothesis that Canada is heading for a German housing model.

A German housing model means low homeownership, high institutional ownership, high foreign ownership, and declining affordability. It means young people and working-class people in urban areas are primarily renters. It means that the country is eventually divided into a working-class and an investor-class, and that real estate isn’t really a means to upward mobility.

One of the things that is becoming abundantly clear is that most of the "new world" could expect to see the eventual migration of their urban economy into a German housing model. This phenomena would be more prominent for OECD or G20 nations, and even more prominent for members of the British Commonwealth (especially Australia, New Zealand, and Canada). From my perspective, the phenomena is so hidden in plain sight that it's almost rhetorical - we're just further behind in our life cycle as a sovereign state. No fresh, unencumbered land registry will remain unpolluted by massive institutions forever.

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Same Symptom, Different Disease

Core’s investment magnitude echoes the scale and optimism of Blackrock Capital’s similar move stateside - an institutional takeover that alludes to both nations heading toward a German housing model. The US appears to be more protected against this fate simply because they’re better at bringing housing to market. There are many parts of the US where you can go to the municipal office with an engineered drawing, leave with a building permit, and start construction that day. I don't personally know of a single place in Canada where this is possible (although I'd love to... DM's open).

Canadian real estate supply is tightly bound in bureaucracy. This stifles our ability to make meaningful supply-side solutions. Like America, we obviously don’t have a shortage of land, but we have an inability to do anything with it because our regulatory framework has not made affordable housing a priority (though it constantly claims to). This inability to keep up with housing demand has led to long-term consequences. I’ve already discussed how we have socialized the burden of retiring boomers by inflating the value of their primary asset (the principal residence).

Now, we see a different externality that comes as a result of reactionary and myopic policy – the privatization and financialization of affordable housing. 

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Multiplex Everything

As part of Core’s strategy, they intend to turn single-family residential homes into multifamily residential homes using accessory dwelling units or ADUs. An ADU is basically a second or third unit that is added to a property within the boundaries of municipal planning, building, and fire code. I’ve explained exhaustively over the past several years that this is the single best way to add-value to a residential property. (Honestly, it’s probably the thing I talk most about, I thought about changing my instragram handle to duplex daddy)

Beyond its investment value, a handful of other urbanists, city builders, and real estate shit-shooters on the Twittersphere and beyond have always talked about this concept. Our municipal planning is leading to two polar opposites – extreme density against the sprawl of large single-family detached construction. This is what happens when the market believes that McMansions ought to be converted to fourplexes if our government’s “passion” for affordable housing is to be believed. Monetary policy has pushed the limit of affordable housing to the point that it is only profitable at scale.

And from all of this we can derive what I’d say is among the greatest lessons of capitalism.

When a problem is finally rendered unsolvable by the public sector, you can always count on the private sector to figure it out… even if it means killing the Canadian dream in the process.

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