Thread by @JohnPasalis

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

Something economist Alp Simsek discusses ⤵️2/
mercatus.org/bridge/podcast…

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.

Investors were rushing to sell!
9/
movesmartly.com/monthly-report…

So, why does this all matter?

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 /