The Bank of Canada announced that investors are likely one of the culprits in creating the aggressive home price increases which have swept through the majority of the country over the last year.
This is the first time the central bank has pointed out directly to investors for their role in heating up the housing market. The BoC said that investor purchase have doubled since the beginning of the pandemic, while purchases from first-time homebuyers have risen 45 per cent.
Canada's housing affordability was already in a precarious state pre-pandemic, and has only worsened, with the average home price increasing by over 30 per cent since the start of COVID-19.
"A sudden influx of investors in the housing market likely contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can become self-fulfilling, at least for a while,” said Paul Beaudry, deputy governor of the Bank of Canada, at a recent Ontario Securities Commission event.
“That can expose the market to a higher chance of a correction. And, if one occurs, the damage can spread far beyond the investors,” he added.
Mr. Beaudry's statements were part of a more expansive warning regarding the risks brought forth by the country's tensed housing market, as interest rates are predicted to rise by the middle of next year.
“The debt that households accumulated at unusually low interest rates will stay with them well into the future. In the meantime, interest rates can be expected to rise as the effects of the pandemic dissipate and excess capacity in the economy is fully absorbed,” explained Beaudry.
The financial structure alone, has maintained its strength, with many banks able to stave off any major or unforeseen jolts to the system. A housing market correction would undoubtedly leave considerable dents in the country's economy.
“A key concern here is that financially stretched households have little breathing room to absorb any disruption to their income. A job loss could force many to drastically cut their spending to keep servicing their debt,” said Beaudry
“A drop in housing prices could also reduce household consumption because many people use their home as collateral to secure a home equity line of credit or refinance their mortgage,” he added.
The central bank said it is in the process of "doing a lot of work to assess" in what way investors are affecting the housing sector. Many believe that investor purchases have lead to the surge of new condo buildings, where developers must pre-sell a certain number of units in order to qualify for construction financing. Many new condo projects are one-bedroom or studio units, which begs the question, were these condos actually built with investors in mind.
Mr. Beaudry was asked whether it was local investors or foreign speculators who were primarily responsible for the growth in real estate investments. “These are Canadians buying these investment properties, potentially putting them on the market to rent or just holding them,” he concluded.
Foreign investment in Canadian real estate remains a hot-button issue. In the most recent snap-election, both the Liberals and Conservatives pledged to place a two-year hold on foreign investors purchasing residential properties.