07/05/2023
Will Banning Investment Properties Cool Home Prices? Probably Not.
21 Jun 2023 - Ruth Saldanha
With house prices being so high, buying a home in large Canadian cities is a struggle for many, and with rising interest rates, affordability is lower than ever.
“Affordability has probably never been worse. In part, because we have very, very high interest rates right now. And on top of that we've seen some acceleration in home prices since the start of the year. We're certainly not at the peak of the market, but prices have been trending up, and that's obviously putting pressure on affordability right now,” John Pasalis, president of Realosophy, said.
In an effort to tame house prices, some suggest a ban on investment properties. But a recent study found that that does not help.
New Study Finds That Banning Investment Properties Does Not Reduce Prices…
A new study by Matthijs Korevaar, Marc Francke, Lianne Hans, and Sjoerd van Bekkum has found that while the removal of investors from the housing market increases the share of first-time buyers, this has no effects on house prices, and instead, suggests an increase in rent prices.
“As economic conditions improved and the housing market tightened, concerns grew about investors driving up home prices, pricing out first-time home-buyers, and decreasing neighborhood livability. Despite a wide-spread, global articulation of this idea, little well-identified empirical evidence exists regarding the extent to which homeownership versus investor ownership affects local housing costs, housing market transactions, and neighborhood change,” the authors note.
To address this gap, they decided to examine the evidence. They looked at the property holdings of any natural person and entity in the Netherlands, as well as tax valuations of each property, and identified for each transaction whether the buyer is an owner-occupier or a buy-to-let investor. They also gathered data on rental prices and applied the data to a recent policy change in the Netherlands that enables municipalities to ban investors from buying properties for rental purposes if these are below a predetermined tax value (in Dutch: Opkoopbescherming, or “purchase protection").
“The policy ban led to a reduction in properties bought by investors while increasing the number of first-time homebuyers. In a country with housing in short supply, removing investors from the market did not significantly impact house prices or the likelihood of selling property,” the authors found.
…But Could Result in an Increase in Rents
In their analysis, the authors highlight that by changing the composition of buyers, the buy-to-let ban also changed the composition of residents of these properties.
“The changes in buy-to-let conversions following the policy would also affect the rental market. This could lead to increased rental prices on incumbent rental property. Such higher prices could make treated neighborhoods even less accessible for low-income renter households,” they find.
“Residents in properties bought by investors have substantially lower incomes compared to residents of equivalent owner-occupied property. These differences explain the entire effect the policy had on the average income of residents in regulated properties. Residents of investor-owned property are also more likely to be young and foreign, move out of the property quickly. This shows that investor activity can have significant consequences on neighborhood composition, particularly over the long run, even when their direct price impact appears limited in the short run. Accordingly, the neighborhood effects of policies that affect local home-ownership rates might come predominantly from redistribution where lower-income tenants and higher-income home-owners live, rather than being a direct effect of home-ownership itself,” the authors conclude.
What Does This Mean for Canada Real Estate?
There is no question that home prices have been rising in Canada. Pasalis explains why.
“Prices have been driven up by underlying demand. I think there's a lot of buyers who hit pause in 2022, thinking prices would go down further. When home prices plateaued at the start of the year, when the Bank of Canada was signaling that it was done hiking, it led to confidence in buyers, and many rushed in. Part of it is sentiment as well. Some buyers thought they were getting ahead of the market, which they expected to heat up as rates went down. That didn’t happen. The bigger issue is that we're not seeing a lot of listings. There's not a lot of homes to choose from. That's probably the bigger factor that's creating this price for that we're seeing,” he said.
And what will it take for prices to reduce? At present, not a lot. Pasalis says that as rates stay high for longer, we might see more pressure, especially on overleveraged households.
“I don’t know how much pressure that would put on prices. I think we would need a recession, or job losses, to see prices come down. I don’t know if we're going to see those things happen. Certainly, we need more housing in Canada, especially with our population rising so rapidly, we need to effectively triple the number of homes for building. Of course, that type of acceleration and construction is not going to happen anytime soon. It's unlike we're going to see solutions on the supply side,” he said.
Selling Your Home? Here’s What to do Right Now…
“The advice we are giving right now is that the market is turning right now. We were seeing bidding wars, tight competition. It’s still a seller's market, but we're seeing inventory pick up through more homes being listed. We're seeing some offer nights failing because they didn't get the price they wanted. The market is slowing down. This is something to be mindful of as a seller,” Pasalis said.
Want to Buy a Home? Here’s What to Do
And if you’re a buyer?
“Buyers are rolling in feeling like they have a few more options tomorrow, as we start to see more inventory, so I think that's sort of going to be the trend to keep an eye on, especially as we move to the spring market,” he said.
