Investors are taking over the Canadian real estate markets, especially in Ontario. Teranet, the county’s private land registry operator, looked at buyers from January 2011 to August 2021. Their analysis shows that the largest segment of buyers is now multiple property owners. Armed with cheap money, these investors now represent one in four home buyers in Ontario. The share is even higher in Toronto, where new buyers dominated the market just 10 years ago.
Ontario Real Estate’s Largest Buyer Are Multi-Property Owners
The largest group of home buyers in Ontario already owns at least one other home. Multiple property owners accounted for nearly 25% of Ontario home purchases in 2021. This was a new record, with their market share increasing by 8 points over the past ten years, an increase of approximately 50%. That’s right, one in four Ontario real estate buyers already own at least one other home.
Real Estate Cheaper in Ontario by Segment from 2011 to 2021
Share of Ontario real estate buyers from 2011 to 2021. 2021 figures are YTD and end in August.
Several property owners peaked in 2017 in particular, only to drop out until recently. Teranet attributes the decline to the stress test and the non-resident speculation tax. Both would have caused at the very least a psychological market shock.
Starters have seen their market share shrink in recent years. They represent just under 22% of purchases in 2021. This is a partial recovery from the generational low that reached market share in 2017. From 2021, first-time buyers will have nearly the share they had ten years earlier. However, one has to take into account the enormous trough between those years. There is now a huge backlog of startups that have been pushed out by investors.
Life event buyers are a much more interesting segment than it sounds. These are transactions where related parties transfer ownership. Usually this happens as a result of death, marriage, divorce or generational transfers. Either 2018 was a big year for deaths and divorces, or an odd trend hit after stress tests and taxes for non-residents were introduced.
Policies, new buyers and low rates
Since this is a broad trend in Ontario, it should be considered that the policy is only being applied in a few areas. The non-resident speculation tax applied only to the Greater Toronto area. A stress test is universal, but elsewhere in Ontario budgets were not pushed to the limit. It would have had a limited impact in the rest of the province, or even in some parts of Toronto.
Higher interest costs also arise during this period. From 2018 to 2020, interest rates rose, reducing profitability for real estate investors. In a high-demand market, this can deter investors more than start-ups.
Investors need profits to make sense, and higher borrowing costs reduce that. Rate cuts appear to be only a temporary relief for financing, as prices often rise to accommodate any savings. That doesn’t really help first-time buyers in the long run, but it’s a great incentive for investors. This is the exact opposite of the way central banks use low rates. Maybe they’ll look into that after they figure out what impermanent means.
Multiple property owners buy nearly a third of Toronto real estate
Toronto’s “urban center” is similar to the rest of Ontario – but more extreme. The city saw nearly 30% of purchases in 2021 go to buyers with multiple properties. Their share has increased by almost 10 points in the past decade. Impressive when you consider how much greater sales volume is these days.
Toronto Real Estate Buyers by Segment from 2011 to 2021
Share of Toronto real estate buyers in the “Urban Center” from 2011 to 2021. 2021 figures end in August.
Startups used to be the largest segment in the region, but those days are long gone. Ten years ago, this segment represented a third of buyers. Now it has dropped below 27% and the share of multiple property owners is now higher. The trend reversed from 2016 to 2018, when the market was declared ‘exuberant’. That’s what economists say when they don’t want to say ‘a bubble’.
There are a few insights into the Teranet numbers, but incentive and leverage are two big ones. Over the past decade, investors have come to dominate real estate in Ontario. With low rates and high prices, how could they not? Investors also have cheap access to money and they often have more resources to tap into to increase their leverage.
Bringing up the next important point – leverage. Multiple property owners often use equity as a down payment. The scale at which this happens may be a bit of an issue. We already know that a significant number of parents use real estate to give first-time buyers a down payment. The more leverage in the system, the greater the vulnerability to shocks.
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