Growth in residential real estate investing spreads to smaller markets

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Real estate investor buying has spread to the smaller cities during the pandemic, with purchases increasing in relatively cheaper housing markets such as Halifax and Ottawa, according to new research from the Bank of Canada.

Investors accounted for 19 per cent of the home purchases in Halifax in the second quarter of last year – one of the more frenetic buying periods of the pandemic. That compared to 14.7 per cent from 2014 through the first half of 2021.

In the Ottawa-Gatineau region, investors were responsible for 25.5 per cent of the residential purchases versus 20.39 per cent over the same period from 2014 to mid-2021. For Winnipeg, it was 17.21 per cent compared with 14.47 per cent previously.

Across the country, investors were responsible for 21.63 per cent of residential home buying in that second quarter compared with 18.96 per cent for the period from 2014 through the first half of 2021. Investor buying accounted for 21.63 per cent of purchases in Toronto, Canada’s largest real estate market, which historically has been popular with investors.

“The increased presence of investors in the housing market has contributed to strong demand and may reflect a belief that house prices will continue to rise in value,” said the research paper, authored by Mikael Khan and Yang Xu.

The sale price for a typical home across the country has climbed 38 per cent to $780,400 from January, 2020, through November, 2021, according to the Canadian Real Estate Association’s home price index, which adjusts for price volatility.

Smaller housing markets such as the Chilliwack region in B.C. and Guelph in Ontario have been inundated with buyers and have seen unprecedented home price growth.

The Bank of Canada first identified investors as a major source of demand last year.

The bank’s latest research shows that the share of purchases by first-time home buyers has been declining since 2015, when home prices started to accelerate in the Toronto and Vancouver regions. Their share of buying declined even further during the pandemic crisis.

First-time home buyers now account for just under half of all purchases compared with more than 50 per cent in 2015. Over the same period, investor buying has increased and now accounts for more than 20 per cent of all purchases, the research paper said. The last time investor buying increased faster than other types of buyers was in 2017 during the previous real estate boom.

The Bank of Canada authors used two sets of anonymized loan-level data to conduct their research. That includes mortgage originations from regulatory filings and credit bureau data from TransUnion. The researchers looked at purchases by investors from 11 cities and found only 4 per cent of their purchases were in non-urban areas, which would include many vacation regions.

The Bank of Canada report found that investors accounted for the highest share of highly indebted borrowers: 44 per cent of investors had a loan-to-income ratio greater than 450 per cent, meaning they were shouldering loans 4.5 times greater than their annual income. For first-time home buyers and repeat buyers, the share of highly indebted borrowers was each 24 per cent.

“Investors that are highly indebted could face difficulty servicing their debt following a loss of income (either employment or rental) or an increase in interest rates,” the paper said.

But the authors said there was a gap in their analysis as they could not ascertain whether investors reported all their income.

Policy makers are under pressure to deal with the country’s affordable housing crisis. The federal government has floated proposals aimed at curbing foreign buyers and house flippers but has not addressed individual investors. The researchers, federal housing agency Canada Mortgage and Housing Corp, many economists and realtors have said the problem is the lack of housing supply and that investors help provide rental housing.

“By exacerbating so-called boom-bust cycles in housing markets, investors could thus be a source of instability for the financial system and the economy more broadly,” the research paper said. “At the same time, investors are an important source of housing rental supply.”

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