Brian Milner is a former senior economics writer and global markets columnist for The Globe and Mail.
Rising borrowing costs, dimming economic prospects and stricter lending rules are taking some of the air out of housing bubbles in Canada, the United States and other markets in which strong demand, tight supply and speculative fever have driven prices to record levels and deepened an already serious affordability crisis.
The evidence that overheated markets are cooling is mounting. Canadian home resales slid 8.6 per cent in May from the previous month, and much more than that in such hot markets as Vancouver. Prices fell for a second consecutive month, after shooting higher through most of the COVID-19 pandemic, and some economists forecast a decline of up to 20 per cent this year as higher mortgage rates hit home.
Restoring a modicum of sanity to residential markets won’t do much for people seeking accommodation they can afford. But at least it will prevent the crisis from getting even worse, right? Well, not really.
Institutional investors, which have squeezed residential markets in many parts of the world, can be expected to pick up a purchasing pace that has turned them into the world’s biggest private landlords and transformed rental housing into a go-to global asset class.
“Institutional ownership threatens to accelerate the trends unleashed by the financialization of housing,” says a report commissioned by the Greens group in the European Parliament to buttress their case for a regional response to the crisis. “Deeper financial markets have not substantively increased either aggregate home ownership or housing supply, but instead have inflated house prices and pulled down rental yields.”
In Canada, the big institutional money has largely stuck with apartment buildings in major cities. But across the U.S., Britain and elsewhere in Europe, private equity firms, Wall Street investment banks, sovereign wealth funds, insurers, major pension funds (including the investment arm of the Canada Pension Plan), and their real estate partners and affiliates have been loading up on single-family homes.
The institutional crowd used to steer clear of this fragmented market that typically attracted small-scale mom-and-pop investors. But automated digital platforms have made it easier and cheaper to track, price, acquire and manage large swaths of homes in multiple communities. As they snap up properties, these bulk-buying acquisitors have helped drive up sales prices and rental costs, skewed development and, in some cases, exacerbated housing insecurity.
Defending a federal budget measure that calls for a two-year ban on home purchases by foreigners, Prime Minister Justin Trudeau declared that houses “aren’t supposed to be assets for wealthy investors. They are supposed to be homes where families can raise their kids and create neighbourhoods and communities.”
It’s a fine sentiment. But the fact is that investors will keep knocking on Canadian doors. Foreign capital can easily team up with Canadian partners, and domestic investors routinely outbid house-hunting families. The attraction? The prospect of steady returns, long-term price appreciation and inflation protection – rent hikes far outstrip cost of living increases – at a time when rising volatility, soaring public debt and heightened geopolitical risk are clouding the outlook for stocks, bonds and other investments.
The financial heavyweights’ move into housing has been aided and abetted by governments through financial deregulation, tax breaks, subsidies for home owners, historically low borrowing costs and relief for renters, which translates into stable income for investors.
Years of loose monetary policy “contributed to making government bonds less and less attractive and housing finance more and more accessible, shifting investments into the real estate markets and creating house price bubbles, which increased housing unaffordability,” says Sebastian Kohl, a sociology professor at Berlin’s Free University and co-author of the European report, titled My Home is an Asset Class.
“On one hand, we say housing is a human right. But we see more and more resources allocated to supporting home ownership and private rental,” says Yushu Zhu, an assistant professor of urban studies and public policy at Simon Fraser University, who has researched housing inequality and the impact of turning the sector into “an investment opportunity.”
The crisis has triggered a growing public backlash to the power of the investors, as angry residents demand government action ranging from rent controls and stiffer sanctions to more drastic intervention.
In Berlin, institutional investors have gobbled up €40-billion (about $54.8-billion) worth of rental homes, double the combined value of what they own in London and Amsterdam, their next largest European markets. A majority of Berliners voted in a referendum last September to expropriate holdings of landlords with 3,000 or more apartments. A commission is currently investigating whether such a law would be constitutional.
People are fighting the investment tide in other markets, too, with varying degrees of success. In the Netherlands, the government has given municipal authorities the right to block companies from buying homes in lower-income districts and turning them into rentals. This comes after more than one-third of the properties sold in the country’s four largest cities in 2020 ended up in the hands of investors.
In the U.S., some communities have adopted rules to make corporate or investor purchases of single-family houses less attractive. A homeowners’ association in Charlotte, N.C., passed an ordinance in 2019 forcing buyers to wait two years before renting out their houses. Others have imposed similar impediments, which have occasionally slowed but not halted the investor-led shopping spree.
The largest and most experienced institutional player in the residential game is Blackstone Group, a global investing powerhouse with US$550-billion worth of property holdings running the gamut from office buildings, hotels, housing and retail complexes to industrial space, warehouses, data centres and research facilities.
Blackstone last month opened its first real estate office in Toronto to expand its already substantial presence in this country, where it holds $14-billion worth of property, mainly in the logistics sector, but also commercial and residential buildings in Montreal, Toronto and Vancouver.
The asset manager has spent billions acquiring housing in the U.S. and other markets, from Britain to China. Responding to criticism of its aggressive expansion, Blackstone points out that its funds own less than 1 per cent of rental housing in the U.S. and other markets where it operates. In a company statement, it said, “Given our ownership levels, we have virtually no ability to impact market rent trends. Rents are going up because there is significantly less supply of housing across the globe than demand for it.”
It’s true that Blackstone, Canada’s Brookfield Asset Management Inc. and Tricon Residential Inc. and the rest of the institutional buyers club combined account for no more than about 2 per cent of rental stock in any country. But that amounts to about 300,000 single-family houses in the U.S. alone, largely concentrated in certain districts of fast-growing cities and surrounding suburbs, many of them in the lightly regulated sunbelt states.
Institutional investors’ “domination of some local housing markets gives them the power to increase rents and dictate lease terms,” Suzanne Lanyi Charles, an associate professor of urban planning at Cornell University, wrote last month in The Hill, a Washington political website. She noted that “where their rentals are highly concentrated, mega-landlords have outsized power over the lives of residents. They can undermine renters’ access to those neighbourhoods as well as housing affordability and stability.”
The biggest American operator, Invitation Homes Inc., a publicly traded company worth about US$23-billion created by Blackstone, jacked up rents last year by 18 per cent for new leases, 8 per cent for renewals and almost 30 per cent in such booming U.S. markets as Las Vegas, she said.
Blackstone began crafting its single-family investment strategy in the U.S. a decade ago, when the market was still reeling from the 2008 financial meltdown and ensuing Great Recession. In the immediate aftermath of the housing collapse, Blackstone and other specialists in distressed assets loaded up on cheap foreclosed properties and later flipped them for quick profits.
But Blackstone and a handful of other players subsequently adopted a model in which large-scale holdings would be converted to rentals, producing a steady stream of income. Persistent housing shortages – nearly 30 U.S. states report deficits – ensured that demand would support higher rents even in a flagging economy.
The single-family rental game has since grown so profitable that developers want to play, too. Imagine a house-seeking family trying to compete with the likes of Core Development Group, a Toronto-based condo builder that unveiled plans last year to spend as much as $1-billion acquiring detached homes in various mid-sized cities.
In the U.S., home builder Lennar Corp. teamed up last year with the real estate subsidiary of German insurer Allianz and other institutional investors in a venture to buy more than US$4-billion worth of new houses and hang “for lease” signs on them. Another developer put its entire 124-house subdivision in a Houston suburb on the rental market and then sold it all last year to Fundrise, an online property investment platform that manages in excess of US$1-billion for more than 260,000 small investors.
None of these investments will do anything to address the acute lack of affordable housing. And neither will some of the enacted or proposed restrictions aimed at reining in the money crowd, including foreign ownership bans, steeper property taxes, rent caps, limits on evictions or even full disclosure of who owns what.
Interventions in the marketplace need to do more than improve conditions for home buyers and renters. They have to persuade the major financial players that it’s in their interests to earmark a chunk of their investors’ capital for the construction of more affordable housing – as a few funds are doing, profitably.
“The idea is not to keep institutional investors and their huge savings glut from entering the housing sector, but to regulate it properly,” Prof. Kohl of Free University says.
At the same time, policy makers dealing not only with the current crisis but challenges posed by reurbanization and the effects of climate change ought to consider dusting off some of the successful instruments developed in the aftermath of two world wars. These created “a veritable housing production machine under state orchestration that overcame the pent-up demand and … housing shortages within about two decades,” Prof. Kohl says.
One way to get that machine in gear would be for governments to put non-profit housing providers on a stronger competitive footing with private developers. It would also be “a more strategic, long-term way to deter this financialization,” Ms. Zhu of Simon Fraser argues.
In Europe, non-profit housing accounts for as much as 20 per cent of the supply in certain markets, and in some cases even more. In Vienna, a social-housing pioneer, a majority of renters live in municipally owned residences or subsidized non-profit co-operatives.
In Canada, social housing accounts for just 10 per cent to 15 per cent of the entire rental market, Ms. Zhu says. “Social housing providers are totally siloed. They cannot compete with the private market developers and they receive only very limited support from government.”
That situation isn’t going to change any time soon, at least not as long as housing remains too lucrative an asset for institutional investors to ignore.
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