“Canadian Housing Market Sees Surge in Investor Activity: What Does It Mean?”
Investors have made their presence felt in Canada’s housing market in a big way, accounting for 30 percent of all residential real estate purchases in the first part of this year, according to new data.
The COVID-19 pandemic has fueled investor interest in residential properties as an asset class, leading to a surge in investor buying as home prices continue to soar. In fact, investors were responsible for 30 percent of home purchases in the first three months of the year, up from 28 percent in the same period last year and 22 percent in 2020.
Changing Landscape: First-Time Homebuyers and Repeat Buyers
Conversely, the percentage of first-time homebuyers has declined from 48 percent in the first quarter of 2020 to 43 percent this year. Similarly, repeat buyers have decreased from 30 percent to 27.5 percent over the same period.
The Bank of Canada’s data highlights the growing influence of investors on the Canadian housing market. Low interest rates during the pandemic and increased marketing promoting real estate investment have encouraged both everyday Canadians and investors to buy multiple properties.
Impact on Housing Price Cycles
“The presence of investors in real estate markets can amplify house price cycles,” noted the Bank of Canada in a statement accompanying the data. During housing booms, a greater influx of investors adds bidding pressures and intensifies price increases. Conversely, when prices stabilize or decline, a decrease in investor activity can contribute to a downward pressure on housing demand and prices.
Government Response and Focus
Surprisingly, the federal government has primarily targeted foreign real estate buyers with a ban on purchases until the end of 2024, rather than addressing individual domestic real estate investors when formulating policies to tackle the lack of affordable housing.
Monitoring Economic Vulnerabilities
The central bank’s data focuses on two vulnerabilities facing the Canadian economy: high household indebtedness and soaring house prices. While there has been a slight increase in delinquencies for car loans and installment loans, mortgage delinquencies remain steady at 0.12 percent.
While the share of highly indebted borrowers (those with a mortgage that is 4.5 times greater than their annual income) has slightly increased, the share of new mortgage borrowers spending over 25 percent of their gross income on mortgage payments has remained relatively consistent. However, it is higher compared to the second quarter of 2022.
On a positive note, the share of homeowners who make a down payment of less than 20 percent has decreased over the past few years.
Home flipping, where buyers sell their properties within 12 months of purchase, has been on the rise in the past two years. However, it still accounts for less than 3 percent of transactions in the first quarter.
Closing Thoughts
The Bank of Canada intends to provide updates on these indicators every quarter. The increasing influence of investors in Canada’s housing market has both positive and negative implications. While it may contribute to increased housing prices during booms, it could potentially add downward pressure on housing demand and prices during stable or declining periods. As the government seeks to address affordable housing and economic vulnerabilities, considering the role of investors in the market becomes crucial.
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