Investors account for one-fifth of all home purchases in Canada, adding more fuel to the debate about their influence on the country’s soaring real estate prices and demand for housing.
Since the start of the COVID-19 pandemic, investor buying has rebounded to 20.1 per cent of all purchases in the country, with a slightly higher share in Toronto and Hamilton, according to data published in the Bank of Canada’s financial system review. That is lower than during the tail end of the previous real estate boom, but higher than in prepandemic days.
With the Canadian Real Estate Association (CREA) reporting the national average home price is 38 per cent higher than a year ago, real estate investors are being accused of driving up prices. However, housing experts and economists have not been able to quantify the investor effect on pricing, even though such a large volume of investor buying is bound to have an impact.
“Determining the precise level at which investor activity should be a cause for concern is difficult and requires further study,” Bank of Canada spokesman Alex Paterson said in an e-mail.
The Bank of Canada data is a rare and incomplete look at the amount of market activity driven by investors. It was disclosed in May in the bank’s latest financial system review. It defines investors as borrowers who obtain a mortgage to buy a property while maintaining a mortgage on another property. It does not include all-cash transactions and only goes back to 2015, when the country’s real estate market was already frothy.
It shows that the share of investor buying in Canada reached a high of 21.7 per cent in spring of 2018, before dipping just below 20 per cent in 2019. The most recent reading was 20.1 per cent in February. In the Greater Toronto Area and Hamilton, two markets the bank has identified as exuberant, the share was 22.7 per cent in February.
“When investors go into the market in a big way, they can drive up the house prices,” said Aled ab Iorwerth, deputy chief economist with the federal housing agency, the Canada Mortgage and Housing Corp, adding that the longer-term effect is that investors are often a source of financing to develop more housing and increase supply.
Jean-Philippe Deschamps-Laporte, chief of the Statistics Canada’s Housing Statistics Program, said investors will influence home prices. “People who prefer to buy rather than rent will have to compete harder. That is a fact,” he said.
Real estate investors have come under more scrutiny after news broke that a Toronto condo developer is planning to buy $1-billion worth of single-family homes in Canada to rent by 2026.
With the country’s rental vacancy rate below 3 per cent and an affordable housing crisis raging across the country, rental homes have become coveted assets for big investors who believe they can earn steady profits by increasing rents.
Toronto-based Core Development Group Ltd. is the first big investor in the country to establish a large-scale single-family home rental business. If Core succeeds, it could entice other institutional investors, such as private equity firms and pension funds, to join in a big way.
So far, those investors are spending billions of dollars to own apartment buildings, also known as purpose-built rentals. In the past year, there were $12.9-billion worth of apartment building deals, according to data from commercial real estate company Avison Young. That included two private equity firms, Starlight Investments and KingSett Capital, buying 27,000 apartment units and several hundred short-term rental apartments across Canada for $4.9-billion last November.
Martine August, assistant professor at University of Waterloo’s school of planning, said Core Development’s acquisition of rental units is low compared with the total of hundreds of thousands of apartments bought by other investors. However, she said both types of purchases are cause for concern and part of the same process of profiting at the expense of tenants.
“The business model is really about trying to drive more value for investors and that comes from tenants,” said Prof. August, who researches the financialization of housing – the process of turning housing into financial products.
Part of what has driven investors to buy rental properties is low vacancy rates and shortage of affordable housing.
Home prices have risen so quickly that cities that were once considered affordable are nearing the $1-million mark. More residents, including high income earners, are unable to buy and are forced to rent.
Andy Yan, housing expert and director of Simon Fraser University’s city program, said investors are able to take bigger risks than home buyers who intend to live in their home as the investors can tap their existing assets to offer higher prices. “They have a greater set of moves than homeowners. They have more financing, more capital and higher risk capacities,” he said.
In Canada, it is difficult to define, quantify and measure real estate investors and their effect on the market. Publicly available housing data is mostly from the real estate industry.
The Canadian Housing Statistics Program, which was launched by Statscan after the 2016-17 real estate boom, is trying to fill data gaps and uses information from a bevy of sources, including property assessments, tax filings and census data.
One of the program’s most revealing reports is from 2019 and examined properties that were not “owner occupied” in three provinces. It found the highest level of investor ownership in the residential area near the University of B.C. in Vancouver, where 47 per cent of all property types were held by investors.
It also found that in Toronto, more than one-third of the condo market is owned by people who do not live in the units and who either rent them out or leave them empty.
Mr. Yan and other affordable housing advocates question the idea that there is a supply shortage when so many property owners are investors. “You will constantly hear it is supply supply supply, but supply for whom,” he said.
The demand for real estate has spurred more development. Multi-residential building construction is at record levels this year, most of which are new condo developments.
In Toronto, the price of a new condo averages $1,400 per square foot. That means that with a 20-per-cent down payment on a 500-square-foot one-bedroom, investors would have to lease their condo for over $3,000 a month to cover their mortgage payments, condo fees and taxes.
“I would love to know exactly how much supply has to come on stream before units become affordable,” said Leilani Farha, a former United Nations special rapporteur on adequate housing, who is now global director of the housing rights group The Shift and has blasted Core’s plan as profit mongering.
So far this year, Core has spent about $50-million on 75 properties in seven Ontario cities, including Hamilton and Barrie. That accounts for 0.06 per cent of the total number of seasonally adjusted sales in Ontario, year to date, according to CREA data.
The developer is adding basement apartments to its properties and turning houses into two rental units: a two-bedroom basement apartment renting for about $1,600 a month, and a three-bedroom above-ground unit at about $2,100 a month.
CMHC’s deputy chief economist said the Core model does not reduce the supply of housing. “They are shifting it from homeownership to rental,” said Mr. Iorwerth.
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