First-time home buyers are out and investors are in. That’s the takeaway from Bank of Canada (BoC) data showing the share of real estate investors in the market. Before 2020, investor demand for real estate was beginning to slow down. When rates were cut in 2020, it sparked a new wave of investor demand that helped them capture record market share. In the latest quarter, Canada saw investors buy 1 in 5 homes sold — at the expense of first-time buyers.
Over 1 In 5 Homes In Canada Are Bought By Real Estate Investors
Canadian real estate investors are scooping up a massive share of the market. BoC data shows investors were behind 22.2% of homes bought with a mortgage in Q4 2021. This is up from 21.3% in the previous quarter and 19% last year. It’s likely higher than this rate since the BoC only used consumer mortgage data. Investors also use corporate mortgages but people typically don’t.
Interest Rates and Investor Demand Show A Clear Correlation
The relationship between low rates driving investor demand is nothing short of remarkable. After a hike in Q3 2017, investor demand peaked at 20.0% the next quarter. Higher rates saw their share of the market drop further as rates continued to climb. The trend saw the investor share of the market drop straight through to 2020. Still historically high, but more end users were becoming a part of the real estate market.
Immediately after interest rates drop in 2020, the investor demand machine fires up. One quarter later, the share of homes bought stops falling, and the trend reverses. By Q4 2020, the market share begins to form the traditional hockey stick formation of a high growth pattern. If the BoC was a start up, it would be considered an overwhelming success. The unicorn of screwing Millennials and low income people, so to speak.
First-Time Home Buyers Are Losing Market Share To Investors
Cheap leverage isn’t just seeing investors take a larger share of the market. Last month, RBC warned investors are displacing first-time home buyers in their portfolio. It’s a trend with more than a few data points to confirm. Land registry data shows investors bought over a quarter of homes sold in Toronto, for example.
All of that new supply? An analysis we did earlier this year shows investors bought up to 90% of the recent supply. New supply is coming to market but not making shelter more affordable. That’s because the BoC armed investors with cheap capital to become a middle-man. The issue is clear before even looking at the impact a well-funded marginal buyer has on price.
How do low rates drive investor demand? Cheap and easy leverage for all. Despite the narrative that cheap money helps the poor, it never really made sense. The wealthier a person is, the more leverage they can typically obtain. It doesn’t matter if the capital used to create leverage is from a hedge fund or home equity line of credit, the advantage goes to whoever has the most.
De Nederlandsche Bank, the Netherlands central bank, has produced research backing this finding. Each low rate shock transferred up to 6% of national wealth to a country’s top 1% of households. More capital means a greater ability to use leverage — an obvious point in the above chart.
As interest rates rise, investor demand is expected to fall and inventory should rise. It’s the exact opposite, but even the BoC is starting to realize they’ve been wrong about low rates and improved affordability for a long time.
That’s not surprising. What’s surprising is how many people don’t understand liquidity and think IF I ONLY HAD MORE DEBT TO BUY THIS, I’LL BE ALRIGHT!
Why not focus on the other side of the equation? Make the competing buyers have less leverage and shrink their profits until they go somewhere else. Without a higher cost of capital, your perpetual rent payments are more profitable than the cost of borrowing and having you pay to carry their property.
People are clueless. They’re worried about unrealized gains, watching businesses close, and then if home prices fall they think all of these people not spending money will stop spending.
It’s a real mystery why the homeownership rate peaked at the Great Recession and started dropping as the government “helped” by lowering rates. Elect real estate speculators get real estate speculator policies.
I’m a homeowner and it makes ME mad when I see how reckless these policies have been. Right around when Canada and America started to tell consumers lending their own money to a bank receives no benefit but they should take out cheap debt, people should have realized the plan was to make it up on volume as the rich sold people assets with more and more debt to buy them.
It is too late now, all the investors have gotten enough equity in an overblown market and will be just fine. There should have been more rules about lending to these people as they are operating homes as businesses. Try getting a small business loan in CA. Extremely difficult, a mortgage is just given away if you have breath on a mirror.
The measures were fine to help during covid in market falls and a necessity to help majority of people then and I m referring specifically to regular actual homeowners whom I assume should have known from the start that prime rate falling would be raising back and hit ike a boomerang twice or 3x+ for whatever it was. The stats point that most homeowners pay more capital. Who buy homes and what is unequal gauging price at market is not mandate of BOC or government to interfere with Canadian market the inequality is not link to interest rates it is linked with some people ability to foster wealth better than others.
Regulations is a blade that would only cut the potential of regular folks it would only make it more hurdles for regular Canadians to make it to a higher level if they may.