In November 2021 the Canadian Real Estate Association released national home sales statistics. The statistics showed that 2021 had set another yearly record where home prices were concerned and the year is not even done yet. These high house prices are bringing investor capital into the market just as a number of recent reports had suggested.
The analysis of the data indicates that more Canadians are purchasing homes as investment properties than as principal residences. Often these already have their primary residence and the phenomenon is continuing to grow. Online data from the Bank of Canada supports this reflecting mostly domestic investors.
What is Causing This Influx of Investors into the Market?
Many of these residents are using the equity in their primary residences to purchase new vacation homes and investment properties in coveted spots. Many are making this move as they see housing as a safer way to invest their money leaving the financial markets behind. Real estate continues to attract people thanks to all the records in price gains seen since the summer of 2020.
How the Trend Has Changed
TheToronto housing boom of 2020 was driven by end users but this is not the trend we are seeing for 2021. New investors are playing the majority role in driving up the real estate prices this year.
In the summer, we saw where home price growth cooled off a bit. Now we see the market heating up. In October we saw the prices increase more than 23% over the prices of October 2020. The data shows an increase in activity from multi-property owners. There are borrowers with 2 or 3 active mortgages. These homeowners have their primary property in addition to one or more vacation homes.
There are also those who have four or even more than four mortgages. These are most likely real estate investors. Homeowners in the latter group increased by 15% in 2021 for the months April to June when compared to the same period in 2019. This increase was highest in Ontario with a 21% increase and in Quebec with a 16% increase.
How Long Can Investors Remain Optimistic?
The concern now is that these investors could cause the prices to increase at a faster rate, locking out others looking to buy a home as their primary residence. Investors are less constrained by income when considering a property for purchase. Investors are looking to turn a profit by re-selling a home at a higher price. This is why investors aren’t deterred by rental income being under the costs of the home. As long as investors are optimistic prices will continue to rise because they are usually willing to pay higher prices and have money at their disposal. This is similar to the type of investor psychology seen in 2016 to 2017 in Toronto. This was followed by the government stepping in with the mortgage stress test requirements.
What Happens if Investor Optimism Continues?
Expectations of future price gains can expose the housing market to a higher correction chance. If this happens it is not just investors that will feel the squeeze. Many households have their wealth and access to credit tied to their home value. This could lead to a housing market crash of 2007 and 2008 in the United States. The good news is that our country’s financial system is quite resilient so we can envision a horizon with little to no calamity.
Still, if housing prices were to drop significantly this could affect household spending and even have repercussions on employment. So there’s a lot at stake as we watch Canada’s housing market prices.
Check out our last post on this topic and let us know your thoughts in the comments.read more