“When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”
But let's break this down a little.
Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it's the latter, then we know it's going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?
I would also add that in our current environment -- where investor demand for pre-construction homes has waned significantly -- the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they're not being outbid by investors? In my opinion, it's an ideal time to buy!
“When you have investors competing with first-time buyers who walk in with a couple of [baby] strollers, typically the investor is going to win,” Mr. Pasalis says. “They are well capitalized. They can pay a higher price. And this is why our home ownership rate is declining, because more and more homes are actually going into the hands of investors who rent them out, and amplifying home and amplifying condo prices. We are seeing that.”
But let's break this down a little.
Where are these first-time buyers walking into? Is it a resale home showing or is it a pre-construction showroom? If it's the latter, then we know it's going to be difficult / atypical for them to make a buy decision so far in advance. They already have multiple strollers in hand, do they want to wait 4-7 years for their pre-construction home to be ready?
I would also add that in our current environment -- where investor demand for pre-construction homes has waned significantly -- the development industry has not seen a marked uptick in end-user demand. Why are they not stepping up now that they're not being outbid by investors? In my opinion, it's an ideal time to buy!
One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it's for reasons of affordability, maybe it's a cultural bias, or maybe it's a genuine preference. Either way, let's turn our attention to resale homes. In this scenario, who is likely to pay the most?
If you're an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: "Here's the most that I can pay in order to meet my minimum returns. Do not exceed." But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.
The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they're all rented to people who own strollers, is this an even greater problem?
I suppose it is a problem if you're worried about Canada's homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.
There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.
All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It's a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.
But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?
In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.
Here's some data (via Jeremy Withers) explaining that a large portion -- about 61% -- of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower -- about 24%.
Now, the premise of Jeremy's tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don't think that a significant chunk of these homes are being left vacant. So isn't the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren't for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
One reason could be that people who own strollers still largely prefer low-rise housing. Maybe it's for reasons of affordability, maybe it's a cultural bias, or maybe it's a genuine preference. Either way, let's turn our attention to resale homes. In this scenario, who is likely to pay the most?
If you're an investor, then you are looking for a specific yield. And so in theory, it should be a mostly dispassionate decision: "Here's the most that I can pay in order to meet my minimum returns. Do not exceed." But the question is whether is this is going to be more or less than what a stroller-owning group of people would pay.
The answer is probably that it depends. However, if the answer is that the investor wins and they then turn around and rent it to people who own strollers, is this actually a problem? And if this same investor happens to own 25 other rental homes and they're all rented to people who own strollers, is this an even greater problem?
I suppose it is a problem if you're worried about Canada's homeownership rate, which has in fact declined from about 69% (in 2011) to 66.5% (in 2021). But what does this even mean? Is a higher homeownership rate always better? Does Canada have a target number? As of February of this year, the homeownership rate in Switzerland was only about 36.3%. And the last time I checked, it was still a rich country.
There is nothing wrong with renting. I know wealthy people who have opted to rent their entire life because they enjoyed the flexibility and/or had better places to put their money.
All of this said, the argument in the above scenario is that, but for investors outbidding people with strollers, these homes would be more affordable and that would in turn increase the homeownership rate. It's a similar argument to, but for foreign buyers or but for Airbnbs, these homes would be more affordable.
But in a city like Toronto, we are building very little in the way of new low-rise houses. New supply is virtually non-existent. Similarly in Seattle, they are now building more accessory dwelling units than they are single-family houses. So it is any wonder that demand is constantly outstripping supply and that prices are being bid up?
In my opinion, a better solution is to rethink how we build our low-rise neighborhoods. And here and here are two good places to start.
Here's some data (via Jeremy Withers) explaining that a large portion -- about 61% -- of new condominiums built in Ontario between 2016 and 2021 were not owner-occupied. In the case of low-rise houses, the figure is lower -- about 24%.
Now, the premise of Jeremy's tweet storm is that non-owner-occupied housing is bad and that the government should be doing more to discourage this. Simply taxing and restricting foreign buyers is not enough (and I agree that this is mostly symbolic).
But is non-owner occupied really such a bad thing?
First of all, non-owner occupied implies that somebody else is renting the place. I don't think that a significant chunk of these homes are being left vacant. So isn't the fact that somewhere around 61% of all new condominium apartments are becoming rental housing something that is potentially positive?
One counter argument would be that these investors are bidding up new home prices and squeezing out end users. But that brings me to my second point: small-scale individual investors are a critical ingredient in the delivery of new condominium housing in Ontario.
This point cannot be overstated.
The lender requirement to pre-sell suites in order to obtain construction financing means that developers rely heavily on buyers who are willing to purchase many many years before occupancy. And this is generally a lot more challenging for end users, as we have talked about many times before.
So if it weren't for investors, I am certain that we would see a lot less new housing getting built. And in turn, that would mean a lot less new rental housing getting built.
