Last year I wrote about a trend I had been noticing in the Toronto area real estate market - whether at our office or at dinner parties, we were hearing from a greater number of investors looking to buy single family homes. This was not unusual. What was unusual is that unlike regular investors many of them were not particularly concerned about the rental income they could generate and were even willing to buy a property that didn't earn enough to cover all expenses. These investors were buying because of their belief that house prices would only continue to appreciate.
Readers of this blog will know I'm a follower of Nobel Prize winning economist Robert Schiller and Karl Case's assertion that this type of attitude shift is in itself a sign of a market bubble. When we began to see investors act on the assumption that the price of houses will continue to rise indefinitely, we start shifting from a market driven by an investor's mindset to a speculator’s mindset.
Toronto's real estate market is already at a critical point. While we have seen an average growth rate of 7% annually over the last twenty years, we now see detached house prices appreciating at a rate of over 30% year over year.
I wanted to see if there was any quantitative evidence that would confirm our anecdotal observations about investor demand for single family homes in the Greater Toronto Area (GTA) and assess the role this might be playing in the rapid price appreciation we are seeing. What I found was interesting - and worrying. The full report can be downloaded here
It is notoriously hard to find data that drills down into specific activities in the real estate market (and the lack of such data from our governments on things like percentage of foreign buyers in Toronto is frustrating as presumably they need this data to inform the policy changes they are making and asking us to approve us of).
However, looking more closely and carefully at real estate listing data, like the data contained in the Toronto Real Estate Board (TREB) Multiple Listing Service (MLS) database) which is used by real estate agents and brokers to list all properties being bought and sold in the GTA, can still tell us a lot.
I had to innovate a reasonable way to get a look at the investors I was interested in so to quantify this investor demand, I looked at every freehold house (detached, semi and rowhouse house as opposed to condo) that has sold over the past five years and then checked to see what percentage of buyers listed their property for rent shortly after taking possession.
What I found was that these investors are responsible for 17-21% of all sales in Aurora, Newmarket and Richmond Hill and 36-39% of all sales in some of the GTA’s hottest neighbourhoods.
Whitby, Ajax and Oshawa all saw the steepest increase in sales to investors of over 400% in just 4 years.
There were signs of rising investor activity across the GTA - and zeroing in showing that some areas and neighbourhoods were showing sharper increases than others.
Source: Realosophy; Toronto Real Estate Board MLS
By looking at actual sales and rental data, I was also able to estimate the monthly profit or losses that these single family home investments were generating. In doing this, I had to make the assumption of a 35% down payment with typical mortgage terms (I discussed my methodology in more detail in my full report).
Based on this, I estimated that 95% of the investment properties purchased in 2016 in the GTA would be losing money every month (meaning these owners would have to personally cover the carrying costs of the property because the rent alone is not sufficient to cover expenses).