The economic engine of new condo construction in Canada appears to be breaking down, at least in part, and that could throw a wrench into efforts to keep building more homes.

Or, it could be just what we need to finally start bringing housing costs down to sane levels. It's too early to tell.

Construction of condos is dependent on pre-sales. Once enough buyers have signed up, lenders will open their wallets and construction starts.

But a great portion of those buyers have no intention of ever living in the condo. Many also don't plan on becoming long-term landlords, though they will rent out the properties. Instead, these buyers are what have come to be called "investor" owners.

Over the last 20 years, real estate has been on a near-constant tear in Canada. The latest spike began in 2016, and the pandemic only added more fuel.

For years, the equation for investor buyers was simple: Real estate + cheap credit + time = hefty profits.

This led to some strange situations.

For example, many investors would buy a condo that cost them $2,000 a month in mortgage payments, plus $400 in strata fees and property taxes, plus $100 in utilities. And then they'd rent out this unit costing them $2,500 a month for $2,000.

They would lose money steadily for three or four years. And then they'd sell the unit, which they had bought for $400,000, for $500,000. Sure, they were in the hole $24,000 for their expenses, but they made $76,000 in profit!

A recent StatsCan report found that 21.4 per cent of all condo purchasers in the Vancouver area between 2018 and 2020 were investors. In Kelowna, it was a staggering 25.2 per cent.

Condo investing looked like a slot machine that always paid off. Until it didn't.

For the last couple of years, prices have been pretty close to flat. Interest rates have been high, punishingly so for anyone with a variable rate mortgage.

In Vancouver, preconstruction condo sales are down 27 per cent this year – and that's nothing compared to Toronto, where they have plunged by 73 per cent, according to the Altus Group. Investors have flocked to preconstruction condos for years, and without those investors, many projects would never have been built.

So if investors take their money and put it into sensible index funds and bonds, what happens to the property market? What happens to the aspirations of our federal and provincial governments to build our way out of the housing crisis?

Well, in the short term, it looks bad. Development firms simply may not be able to get projects built, which equals fewer units, which equals tighter supply, which equals higher rents and prices.

On the other hand, this situation was obviously never sustainable. A condo construction market predicated on speculators and ever-increasing prices was never going to stay standing forever. And, like a shaky Jenga tower, it might now finally come crashing down.

Can we build a rational financing model for condos in Canada out of the wreckage? We'd better hope we can, because we do need a lot more housing in the near future.