A 🧵 on how real estate investors impact the housing market and why policy makers should be more concerned.
While there is no single cause for high house prices, real estate investors can have an outsized impact on the way up and down….1/ movesmartly.com/articles/are-i…
Avg home buyers & real estate investors have very different (heterogeneous) beliefs about the future direction of the housing market which affects their behaviours and leads to very different market outcomes
When prices are rising, real estate investors are more optimistic that prices will keep rising rapidly in the future which is why investors are typically willing to pay more for a property than an end user. 3/
Investors are often so optimistic they’ll buy a property with a negative cash flow (where the income isn’t high enough to cover expenses and debt payments) simply because they believe house prices will be higher tomorrow, something I’ve written about often. 4/
But the optimistic real estate investors also tend to be the most leveraged - that is, they use a lot of borrowed money to make their investments, which means they feel the effects of a decline in prices far more than an end user. 5/
It’s during a down market that beliefs about the future direction of the housing market flip.
The optimistic investor suddenly becomes the pessimistic investor eager to exit the market to mitigate the risk of a further decline in home prices and hits to their balance sheet 6/
Simsek "Now these guys will get disproportionately hit, because they were the ones loading up onto the risk in good times, so when the bad times come, their wealth share now will collapse disproportionately, & this means that now the swings on the downside will be much bigger" 7/
"because now a lot of the wealth is in the hands of the pessimists.....So that's actually going to generate a downward swing the other direction. So this makes the asset boom bust cycle much bigger than it would otherwise be." 8/
We have seen this to some extent in the past year.
When the condo market began to cool in 2020, we saw a surge in condos listed for sale which was disproportionately driven by investors, not end users.
Firstly, Canada is a country of real estate investors. 23% of homes in the Toronto are bought by investors – that is a significant number that leaves our economy vulnerable to the downside risks highlighted by Simsek 10/ bankofcanada.ca/2021/05/financ…
But on the other hand, we may not see these downside risks for some time.
Canada’s Liberal government is clearly motivated to keep boosting up home prices even higher by rejecting any policies that aim to cool the housing market….11/
And by ensuring our population is growing much faster than our ability to build homes for people.
As long as inflating home prices is the tacit goal of our federal government it's hard to say when we'll downside risks in the housing market /
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When a big investor sets out to buy 4,000 existing purpose built rental (PBR) units – or to build the equivalent – this has no direct impact on the price of houses/condos.
It may push prices for PBR buildings up pushing cap rates down but it doesn’t drive up home prices. 2/
When a big investor goes out and buys thousands of resale or pre-con units this has a direct impact on home prices.
Not only has the demand for single family homes increased, but the buyer is a billion dollar company 3/
In this discussion about the latest trends in the housing market, @greg_bonnell asked if I expect to see a pullback in the market this year...
At this point it's looking unlikely because the market is still very competitive....but 1/
I also mentioned that when thinking about how the housing market might start to cool, it's important to consider whether the trigger will be a fundamental shift in the market vs a behavioural shift in the market...2/
A fundamental shift would be something like a traditional recession where job losses actually lead to lower income and an inability for home owners to service their mortgage payments - leading some to sell.
“We have a very good system of foreign investment creating a lot of new housing in Canada”
Now that our government has said it’s a “good system” to sell off our new housing supply to foreign investors (vs domestic homebuyers), why is this a problem? 1/
First of all, it doesn’t really matter if foreign investors are buying a new home or a resale home – the problem this creates in our housing market is the exact same, it artificially inflates home prices.
Why does this happen? 2/
When a Canadian tries to buy a new house or condominium, their home buying budget is based on their domestic income and their down payment is based on the after tax dollars they have saved.
Can a young household compete against a wealthy foreign investor – of course not! 3/
When it comes to Canada's housing market, it's clear now that it was a deliberate strategy of the @JustinTrudeau Liberal government to put the interests of foreign investors ahead of of Canadians 1/ theglobeandmail.com/news/politics/…
The foreign investors benefited
Our Prime Minister benefited through multiple cash-for-access dinners.
Every home owner would like to see their home's value increase, but the reason for this increase should not be because our federal government decided to sell off our new housing supply to wealthy foreign investors. 3/
But this is largely a product of their own goals to use foreign capital to finance single family home construction which we know inflates house prices.
“We have a very good system of foreign investment creating a lot of new housing in Canada” 2/
He actually admits that our housing market is “a market that’s driven by speculation” and goes on to say that “it gets very very tricky to curb speculation”
It’s actually not tricky, many other countries have done it. Canada has no interest in curbing speculation… Why? 3/