Gravity-defying home prices are attracting more and more investment capital to Canada’s housing market, several recent reports suggest.
Addressing the Ontario Securities Commission on Nov. 23, Bank of Canada Deputy Governor Paul Beaudry said that a “sudden influx” of investors into the housing market likely helped fuel rapid growth in prices to Early 2021. Canadian home prices rose 24.4 percent in June compared to the same month last year, according to data from the Canadian Real Estate Association (CREA).
“Our analysis finds that many Canadians are buying homes as investment properties, that is, in addition to their primary residence, and the importance of this phenomenon has increased,” Beaudry said in prepared statements.
The BoC data online reflects domestic investors, bank staff told Global News.
It’s a phenomenon Romana King, Vancouver-based content director at real estate search site Zolo, says she has witnessed it firsthand.
Encouraged by skyrocketing prices, many Lower Mainland homeowners have been tapping the equity in their primary homes to buy investment properties or vacation homes in sought-after locations like the Okanagan, she says.
Many investors perceive housing as a less risky place to invest compared to financial markets, King says. And the record price gains since the summer of 2020 mean that “real estate continues to be something that attracts people,” he adds.
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In Vancouver, benchmark home prices were up one percent in November compared to October. In Toronto, median home prices jumped 2.5 in November, reaching $ 1,163,323, an increase of nearly 22% from $ 955,889 in November 2020.
In Ontario, homeowners who already own one or more homes accounted for 25 percent of property title changes between January and August 2021, according to a recent Teranet analysis. That’s an increase of about 16 percent in 2011.
“While end-users were the main driver of the Toronto-area housing boom in 2020, that trend appears to be changing in 2021,” wrote John Pasalis, president of Toronto-based Realosophy Realty, in a recent report. . Now investors appear to be playing an increasingly important role in the city’s rising property prices, he added.
And while house price growth cooled off a bit in the summer, the market is heating up again. Nationwide, home prices rose 2.7 percent in October compared to September and were more than 23 percent higher compared to October 2020, CREA data shows.
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Mortgage data shows more activity than likely two groups of multi-property owners, says Rebecca Oakes of Equifax Canada. For one thing, there are borrowers with two or three active mortgages on their credit file. This group likely includes a significant number of homeowners who own a primary property and one or more vacation homes, Oakes says.
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Then there are those with four or more mortgages, who are more likely to be real estate investors. The number of homeowners in this group increased more than 15 percent in the April-June 2021 period compared to the same period in 2019, data from Equifax Canada shows. The increase was particularly pronounced in Ontario (over 21 percent) and Quebec (nearly 16 percent).
Still, nationally, this group now represents only 1.3 percent of consumers with a mortgage, according to Oakes.
“It is still quite low. But there is definitely growth last year and this year, ”says Oakes.
Homeowners with more than one mortgage account for more than 16 percent of the market, according to the data.
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How long will real estate investor optimism last?
One of the concerns with a huge presence of real estate investors in the market is that they can cause home prices to rise much faster than they would otherwise, blocking others who hope to buy a house to live in, Pasalis warned. .
When buying a property, investors are less constrained by income considerations than traditional home buyers because they are counting on making a profit by ultimately selling the home at a higher price, Pasalis said. That also explains why investors may not be discouraged even when the costs of maintaining a home far exceed the rental income the property can generate, he added.
In his report, Pasalis provided the example of comparable condo units in a downtown Toronto building whose price soared from $ 648,000 in late 2018 to $ 890,000 in October this year. At that price, an investor with a 20 percent down payment and a 30-year mortgage would face a monthly mortgage payment of $ 3,500, about $ 1,000 more than the market rate for that type of unit, Pasalis wrote.
But “as long as there is another optimistic investor around the corner willing to pay even more, prices will continue to rise,” he predicted.
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That kind of investor psychology is similar to what Pasalis says he noticed in Toronto during the spike in home prices in 2016-2017 that prompted the federal government to intervene with mortgage stress testing requirements for borrowers.
Investor expectations about future price gains may also “expose the market to a greater likelihood of a correction,” warned the Bank of Canada’s Beaudry. And if one occurs, the damage can extend well beyond investors. That’s because, for many households, their wealth and access to low-cost credit are tied to the value of their home. “
Research on the collapse of the US housing market of 2007-08 found that investors, who had borrowed more and were more sensitive to declines in home prices, had higher rates of default on their obligations. mortgages compared to owner-residents, amplifying the downward turn in the home. values once the housing bubble burst.
“In the states that experienced the biggest housing booms and busts, at the peak of the market nearly half of the origination of purchase mortgages were associated with investors,” according to a research article from the Federal Reserve Bank of the United States of New York.
Beaudry, however, played down concerns about a housing crisis in Canada.
“None of that is to say there is a calamity on the horizon,” he said in prepared remarks, adding that the country’s financial system remains “generally quite resilient.”
Still, he added: “A fall in house prices could significantly affect household spending, with repercussions on employment, even if it does not put the financial system at risk.”
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