It used to be that only mom and pop landlords rented out houses. But the single-family house has quickly become the darling of Wall Street and soon, maybe Bay Street. Big companies and institutional investors are on a purchasing spree similar to what we saw in the aftermath of the subprime crisis.
Toronto condo developer Core Development Group recently made headlines when it announced that it is buying houses throughout Ontario, and has plans to purchase 4,000 rental units in Quebec, BC and Atlantic Canada over the next five years. Also just announced, New York investment firm Blackstone Group reached a $6 billion US deal to purchase Home Partners of America, a company that owns more than 17,000 rental houses throughout the US.
Until Core got the ball rolling, the rental-house-as-lucrative-investment had only been an American phenomenon. While some hail large-scale single-family rental in Canada as answering a need for more rental stock in the face of prohibitive real estate prices, others worry that it will only exacerbate the affordability crisis -- particularly in Vancouver and Toronto. University of Toronto’s David Hulchanski, professor of housing and community development, says single-family rental is another example of the growing wealth inequality as it relates to housing.
“First, there’s some foreign ownership of housing units as bank vaults, then increased multiple ownership of housing units by wealthy local residents -- and now, big pools of national and global wealth taking the process to the next level,” says Hulchanski.
“The houses become financialized units of investment. Nothing new is being developed or built for the community. What is developed is yet another new way of extracting income and wealth from the housing system.”
The Core plan is relatively modest. A decade ago, American investment companies spent billions on foreclosed houses that they fixed up and rented out. This time, the major players have faith that the seemingly recession-proof housing market is going to stay that way. They say the fundamentals are there. During the pandemic year, house sales have soared and the majority of renters continued to pay rent. At the Vancouver Real Estate Forum in April, developers and brokers cited a vacancy rate of around 2% and noted that rents had not fallen.
The detached house market skyrocketed as residents sought out real estate that offered space from other people. Millennials ready to settle down and eager to get into the market drove single-family house sales, and the expectation is that they’re just getting started. Add to the mix low vacancy rates in big cities and booming secondary markets, and a lack of affordable housing options, and the single-family rental model -- even an untested Canadian version -- has obvious appeal for institutional investors and any company with deep enough pockets.
Blackstone made headlines in the aftermath of the subprime mortgage crisis when it scooped up financially distressed houses through a company called Invitation Homes. Blackstone sold its interest in Invitation Homes a couple of years ago, but last year it invested $240 million US in Toronto’s Tricon Residential, which buys single-family rental homes in the US. As well, Toronto’s Brookfield Asset Management acquired a controlling stake in Conrex, a landlord that rents more than 10,000 American houses.
The single-family rental business would seem like the next step for BC’s hot real estate market. In the last five years the Vancouver region has seen an influx of institutional investors moving into the apartment rental sector, attracted by low vacancy rates and high demand. However, a large-scale house-rental business is so far non-existent in the region.
Hulchanski says massive public investment into residential infrastructure, both financial and social, was built to serve the needs of the working population, not to generate wealth for a few.
He argues that the process of buying houses for rental will only inflate house prices because corporations driven by the bottom line will control prices.
“The process will inflate house prices for all, and allow the owners of large numbers of houses to influence prices now and into the future based on when these mass owners choose to buy or sell. The object is not rental income. Renting is a temporary measure, even if it goes on for several years, and [it’s] not a very great source of income. Break-even rents, let alone profitable rents, will have to be very high, given the inflation in house prices.”
In Canada, the model makes more sense in secondary markets, which have seen record sales during the pandemic year and have also seen low vacancy rates. Core’s focus, for example, has been on midsize Ontario cities, such as Hamilton, London, Barrie, Peterborough, St. Catharines, Cambridge and Kingston.
The majority of houses in those cities are owner occupied, according to urban planner and analyst Andy Yan, director of the City Program at Simon Fraser University. Yan used Statistics Canada data to determine the homeowner occupancy rates in each of the cities where Core has been buying. In Cambridge, 93% of houses are owner occupied, which means the remaining 7% are likely rented out (or sitting empty). In London, 89% of houses are owner occupied, and in Hamilton it’s 88%. In St. Catharines, Peterborough, Kingston and Barrie it’s 86%.
Overall, owners occupy 83% of Ontario houses.
Yan plans to use the figures as a baseline for future analysis. He says that any market activity from buyers with deeper pockets than the average income earner could have significant impact on the overall market.
“Marginal players with tremendous wealth dictate the market and they shove individual buyers out as they push prices higher,” says Yan. “We’ve already seen the phenomenon in recent years due to global wealth that flowed into the Vancouver housing market, and now we might be seeing it happen again as these corporations move in.”
Or, as Hulchanski puts it:
“What is politically interesting is that [this buying] attacks the presumed entitlements that are associated with homeownership. Yet more households will be denied the opportunity to own in the most desirable and lucrative part of Canada’s housing system.”