Families are roadkill on the road to investor profits in the housing market, and this needs to be fixed

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Houses are too good an investment.

Investors lured by double-digit gains are competing to buy houses with people who want to own homes the old-fashioned way, which is to live in them, raise kids, own pets, have guests, decorate and renovate. Curbing investment in houses is mandatory if we want a housing market where young adults have a hope of finding something affordable.

If you’re concerned about house prices rising, it’s almost a disappointment that the Bank of Canada decided to wait until March to start raising interest rates. Gradually rising rates will make houses more expensive and thus weigh on demand and price growth.

But we need more than higher rates to reduce investor demand for houses. Some governments around the world have come to this conclusion and taken steps. Now, it’s Canada’s time.

Housing was on the slow track to unaffordability until the pandemic, which brought us cheap mortgage rates and a need for space to spread out while under lockdowns. Price gains picked up momentum, to the point where the average national resale house price in December was 38 per cent higher than two years earlier.

It’s natural for investors to want a piece of that action. Bank of Canada research shows investors were responsible for 20.6 per cent of residential property purchases in the second quarter of 2021, up from 18.7 per cent just before the pandemic.

Investor participation in the housing market isn’t a new phenomenon, but the scope and pace of their home buying is gaining momentum. Investment buying has picked up in smaller cities such as Winnipeg, Halifax and Ottawa, as well as big cities such as Toronto. The tax-filing service TurboTax reports an 47-per-cent increase in the number of users reporting rental income from the 2018 to 2020 tax years.

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Institutional investors and other big players are taking an interest in investment real estate as well. They’re buying houses to rent out, or selling shares of properties to people who can’t afford to buy and want an opportunity to benefit from real estate price appreciation. It’s not just a Canadian thing – U.S. investment companies have been buying up houses in bunches.

People in the housing industry commonly say our affordability problem is based on an inadequate supply of houses to meet demand. A recent note from BMO Economics included a blurb saying while supply is a concern, the acute issue today is heated demand from buyers – people who want to buy homes to live in, but also from investors. BMO quoted data from the Teranet registry showing multiple-property owners accounted for the largest share of transaction volume last year.

To encourage homeownership, Canadians are allowed to sell their principal residence tax-free. Investors who sell a property that isn’t their principal residence pay tax on half their capital gain, which means the profit you make when you sell an asset for more than you paid. This 50-per-cent inclusion rate is designed to encourage people to invest money that helps build our economy.

The 2022 personal tax calculator from Ernst & Young shows that, in several provinces, someone with an income of $150,000 would have a lower marginal tax rate on capital gains than on dividends paid by Canadian corporation and interest from bonds or savings.

One way to curb the buying of houses by investors would be to use the tax system, an approach used in New Zealand and Singapore in the past year or so. New Zealand now taxes gains profits on an investment property sold within 10 years, compared with five years previously. Singapore raised taxes for citizens, permanent residents and foreign buyers who purchase a second, third or subsequent home recently, and sales immediately fell.

The quickest way to deflate our housing market and improve affordability would be an end to the principal residence tax exemption. But this punishes everyone – investors, but also seniors who have owned homes for decades and young people buying first homes at today’s elevated prices.

Rising interest rates could tamp down demand from investors by making the cost of mortgage financing more expensive. But some work on the tax side is needed as well, and not just the anti-flipping tax the federal Liberals have promised to people who hold properties for less than 12 months.

We need action on houses being bought as investments. Our housing market isn’t growing any more – it’s festering.

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