Cheap debt turned Canadian real estate into a playground for deep-pocketed investors, with fewer end-users. That was one of the insights in the RBC Q2 2022 earnings call with analysts. Investors now represent almost 1 in 7 residential mortgage dollars they’re owed. RBC’s top brass called it a “sad commentary” to see so few first-time buyers, displaced by more investors.
Investors Owe 1 in 7 Dollars of RBC’s Canadian Mortgage Debt
Nearly 1 in 7 dollars in residential mortgage debt at RBC is investor debt. Investors were behind $47 billion of the mortgage debt in Q2 2022. It represented about 13% of the bank’s portfolio, and was a growing segment.
Unfortunately, they didn’t provide historic numbers to see how much it grew. However, it was noteworthy that the numbers grew. In general, the bank has seen more wealthy clients, likely capitalizing on cheap debt.
RBC explained real estate wealth wasn’t the only boom in wealth for their clients. “… we’re seeing just the overall income and the net worth of a mortgage buyer increase over time,” said Neil McLaughlin, RBC’s head of personal & commercial banking.
A “Sad Commentary” To See Fewer First-Time Home Buyers
Cheap debt and more leverage is a great way to crowd out those who can barely afford the market. It turns out that’s exactly what’s happening, explained the bank.
“… I think it’s a bit of a systemic issue that first-time homebuyers are becoming less and less a part of our portfolio,” said McLaughlin.
He further suggested first-time buyers might be going to other D-SIBs, a.k.a. The “Big Six” Canadian banks. Specifically, ones who may not be able to borrow under their stringent following of B-20 Guidelines. However, they think this is more of a structural issue forming across Canada.
“…. I think it is a bit of a sad commentary in terms of young people being able to get into some of these markets,” said McLaughlin.
RBC’s internal data indicates that Canadian real estate is packed to the brim with real estate investors. Earlier this year, we dived into ownership data and found that 1 in 5 mortgages went to investors. It’s a distribution similar to the dollar volume they appear to be carrying.
In Ontario, similar observations can be made regarding the displacement of first-time home buyers. Land registry data shows investors saw their share of the market climb to over 25% of purchases. It was nearly a 10-point increase over the past 10-years, rising almost 3 points in 2021 alone. At the same time, first-time home buyers dropped 4 points from 2011 to 2017, increasing as rates climbed until 2020. The slash in interest rates quickly put an end to the trend, boosting investors.
RBC is far from alone, however, they’re the only bank mentioning it out loud.