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.