First National Financial LP

Residential Market Commentary - Investors, increases and instability

  • First National Financial LP

The Bank of Canada is pointing to “investors” as key contributors to higher home prices, and a greater risk of a housing market correction.

In a recent speech Bank of Canada Deputy Governor Paul Beaudry presented information showing that the number of new mortgages held by investors has doubled over the past year. The number of new mortgages taken on by repeat buyers is up by about 60%.  First-time buyers have increased by about 40%.

Data collected by Teranet suggests more than 25% of homebuyers are investors. Making them the largest group in the market. Ten years ago they were the smallest segment, at about 15%. 

The information from the real estate research and analysis firm is specific to Ontario, but the same phenomenon hit Vancouver a decade ago and there are signs it is happening in Montreal as well.

This means that first-time buyers are simply being out bid by people or companies with more money, or that have access equity from their existing properties. The BoC is concerned that these investors are wantonly driving up prices based on “extrapolative exuberance”: the expectation that prices will continue to climb even though the increases are not supported by economic fundamentals.

The “trickle down” effect of these high prices is that some households are being forced to take on extremely high debt levels, which could add to the risks from a correction.

The household debt-to-income level in Canada has risen to about 173% – they owe $1.73 for every $1.00 of disposable income they have. That makes them extremely sensitive to interest rate increases and inflation.