Updated: Sep 26
With the housing market continuing its tear upward, increasingly, real estate investors are being vilified and blamed for snapping up properties from first-time home buyers and overbidding on properties, thereby taking them off the plate of honest, hard-working Canadians who are just looking for a place to live. News articles point to increased investor demand, and the government puts out press releases saying they are going to change lending regulations for those who own more than one house. Ordinary Canadians create groups pushing for tighter regulations. All of these reactions are missing the point.
I see increased investor demand as a symptom of the problem, not the cause. There are many factors driving up the cost of real estate. I posted an article in November detailing the main factors driving the market. Here is a list. I won’t go into too much detail here.
A currency that is being devalued. Our M2 money supply has accelerated during Covid-19 at almost the same pace as real estate values. When money becomes more plentiful, its value goes down. Inflation is listed at 4.8% in December 2021. There is reason to believe that it is higher than that. (Gas, groceries, lumber, houses, cars, commodities, and everything else that you can think of is quite a bit more expensive today than it was last year.)
New housing starts and completions are low. This is due in part to shortages resulting from the pandemic and the increased cost of materials. At one point, lumber was three times as expensive as it had been before the pandemic started.
There has been a paradigm shift. People are realizing that they can work from home and live in the suburbs for cheaper.
The government has immigration targets set at approximately 1.2 million people over the next 3 years. I’m not against immigration, but they must have somewhere to go.
Low-interest rates. The cost of borrowing money is at an all-time low. The government has so much debt that they can’t afford to raise interest rates at a significant pace. They will make a series of changes moving forward to help get inflation under control, but interest rates must stay historically low. When you take interest rates and subtract inflation, you are bound to get a negative number. In that environment, hard assets like real estate go up in value.
Municipal red tape. It is hard to get the zoning approvals and necessary building permits to sever lots and develop new land. Nimbyism, regulations, protected areas (greenbelt), and urban sprawl all limit the accessibility of new land. It is expensive and time-consuming to create new properties.
There has been increasing investor demand. Investors are piling into the market because it is one of the few ways that the purchasing power of your dollar can be protected, and there is some overlap between investor and homeowner demand. However, investors are purchasing properties to make money. There is a ceiling that they can purchase at before the income the property can generate will begin to fall short of costs. Homeowners who have sold a home in a city center and are looking to purchase in the suburbs can purchase at whatever price they think will win them the property. This will drive up prices. The day that it makes sense to park your hard-earned dollars in a GIC is the day that we will see investor demand for real estate dissipate. That is why I say investors are only a symptom of the real problems behind the price increases we are seeing.
Investors like to purchase properties that they can add value to, such as creating secondary suites, buying multifamily apartment buildings, and rehabbing run-down properties. Homeowners typically aren’t looking to buy apartment buildings. With the lofty immigration targets set out by the government, rental suites are in high demand, and there will continue to be a need to create more units. Investors are creating value in the marketplace and are being rewarded for their efforts. Unfortunately, first-time homebuyers are the ones getting left behind. Rent-to-own programs, cost sharing, co-ownership models, private lending, and prop-tech will be a way for future generations to get a slice of Canadian real estate. Guess who will be able to put these programs together for those who want to buy real estate? Private real estate investors, not government entities.
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Real Estate Investor and Entrepreneur
Jonathan Beam is a real estate investor in the Niagara region who is passionate about helping you achieve financial freedom through real estate. He works with new and experienced investors to formulate a plan that fits your specific situation and provides market guidance and consultation on the best places and strategies to pursue within the Niagara Region. Book a free, half hour no obligation consultation to see how he can help you to achieve your goals. His travels are available at www.realestateandrepeat.com
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