Growth in residential real estate investing spreads to smaller markets

A For Sale sign stands outside a home in the Ottawa-Gatineau area, where investors accounted for 25.5 percent of home purchases in the second quarter of last year.Justin Tang/The Canadian Press

Buying by real estate investors has spread to the smaller cities during the pandemic, with buying picking up in relatively cheaper housing markets like Halifax and Ottawa, according to new research from the Bank of Canada.

Investors accounted for 19 percent of home purchases in Halifax in the second quarter of last year — one of the busier buying periods of the pandemic. Compared to 14.7 percent from 2014 to the first half of 2021.

In the Ottawa-Gatineau region, investors accounted for 25.5 percent of home purchases, up from 20.39 percent in the same period from 2014 to mid-2021. For Winnipeg, it was 17.21 percent, down from 14.47 percent previously.

Nationwide, investors accounted for 21.63 percent of home purchases in this second quarter, compared to 18.96 percent in the period from 2014 to the first half of 2021. Investor purchases accounted for 21.63 percent of purchases in Toronto, Canada’s largest real estate market, which has been popular with investors in the past.

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

The selling price for a typical home nationwide has increased 38 percent to $780,400 from January 2020 to 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 of BC and Guelph of Ontario were flooded with buyers and witnessed unprecedented home price growth.

The Bank of Canada first identified investors as the main source of demand last year.

The bank’s latest research shows that the percentage of first-time homebuyers who buy homes has declined since 2015, when home prices in the Toronto and Vancouver regions began to rise. Their share of purchasing declined even further during the pandemic crisis.

First-time home buyers now account for just under half of all purchases, compared to more than 50 percent in 2015. Over the same period, investor purchases have increased and now account for more than 20 percent of all purchases, the research paper found. The last time investor purchases grew faster than other types of buyers was in 2017, during the preceding housing boom.

The Bank of Canada authors used two sets of de-identified loan-level data to conduct their research. This includes mortgage applications from government filings and credit bureaus from TransUnion. Researchers examined purchases made by investors from 11 cities and found that only 4 percent of their purchases were made in non-urban areas, which include many vacation spots.

The Bank of Canada report found that investors accounted for the highest proportion of heavily indebted borrowers: 44 percent of investors had loan-to-earnings ratios greater than 450 percent, meaning they were shouldering loans that were 4.5- times higher than their annual income. In the case of first-time buyers and repeat buyers, the proportion of heavily indebted borrowers was 24 percent each.

“Highly indebted investors may struggle to service their debt following a loss of income (either employment or rent) or a rise in interest rates,” the paper said.

However, the authors pointed out that their analysis had a gap in that they could not determine whether investors had reported all of their income.

Policymakers are under pressure to deal with the country’s affordable housing crisis. The federal government has presented proposals aimed at curbing foreign buyers and home menders, but has not reached out to individual investors. The researchers, the Federal Housing Agency Canada Mortgage and Housing Corp, many economists and real estate agents have said the problem is the lack of housing supply and that investors are helping to provide rental housing.

“Thus, by exacerbating so-called boom-bust cycles in real estate markets, investors could be a source of instability for the financial system and the wider economy,” the research paper states. “At the same time, investors are an important source for the housing supply.”

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