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Housing costs have risen in many parts of Canada in recent years. This has raised some concerns among policymakers about monetary stability and housing affordability. However, little is known about how other types of buyers have contributed to the dynamics of real estate markets in Canada.
In this article, we document a novelty in the reading of home purchases in Canada. Using a combination of other microdata sources, we calculated the percentage of mortgage-financed home purchases related to 3 types of buyers:
We then take a look at the demographic and monetary characteristics of those teams to get a first look at the monetary vulnerabilities related to other homebuyers.
We combine two anonymized datasets at the loan level, available from 2014 onwards:
We extended a set of rules suitable for finding the same borrowers in those two anonymized datasets. The ruleset includes variables such as loan amount, origination date, lender name, and borrower path classification region (the first 3 characters of your zip code). code). We achieved an adjustment rate close to 90% in maximum primary banks.
To test whether the home acquisitions in our combined knowledge set are representative of home acquisitions in Canada, we compared our data to that of the Canadian Real Estate Association (CREA). As shown in Figure 1, the year-over-year sales and value growth rates in our knowledge set largely mirror those of their CREA counterparts, albeit with a slight lag. Such a delay is not unexpected since the loan budget is complex when the name of the assets is transferred, which takes position after the sales contract is finalized. Please note, however, that the acquisitions in our knowledge set are based on a different definition than those captured through CREA. This is because we have loans issued for the acquisition of new homes in addition to those for the acquisition of existing homes. However, purchases made solely in cash or those made through companies will not be taken into account.
Alternatively, the data is available for download at:
Alternatively, the data is available for download at:
With the combined dataset in hand, we broke down loan home purchases into contributions from three distinct groups: first-time buyers, repeat buyers, and investors.
We identify purchases made by first-time homebuyers through the first appearance of a loan on the borrower’s credit report. We know that first-time homebuyers are the largest organization of buyers, accounting for a portion of all home purchases since 2014 (Exhibit 2).
Alternatively, the data is available for download at:
In order for a customer to be classified as an existing homeowner, the issuance of their new loan will also need to be related to the cancellation of a previous loan. Repeat customers have accounted for 31% of home purchases since 2014.
This category represents buyers with mortgaged properties. This means that investors are home buyers who:
Since this dataset includes loans issued through Canadian monetary institutions, we primarily captured domestic buyers. Purchases from foreign buyers would be included if the buyers had received a loan in Canada. By those metrics, investors have accounted for 19% of loan purchases since 2014. .
Housing investments here can come with the acquisition of recreational properties, such as cabins. However, its inclusion particularly supersedes our results. To investigate this question, we took a look at the percentage of investments acquired in non-urban spaces. 4 Specifically, take a look at investors living in 11 major cities in Canada (as shown in Figure 5) and find that their acquisitions in non-urban spaces represent only 4% of all their acquired investments since 2014. Although small, this percentage has increased over time. from about 3% in 2014-15 to about 5. 5% in 2020-2021.
We then look at how the home purchases of the other 3 teams have been replaced over time. Figure 3 shows a maximum degree of coevolution in the rates of expansion of home purchases through these teams. Interestingly, while purchases across all 3 teams have increased during the COVID-19 pandemic, this trend is more pronounced among investors. The last time expansion in the investor category outpaced first-time or first-time homebuyers was in 2017, during an era of exceptionally strong increases in space values in and around Toronto.
Alternatively, the data is available for download at:
As a result of these dynamics, the percentage of investor purchases increased in 2017 and 2021 (Exhibit 4). 5 Today, investors account for just over one-fifth of home purchases in Canada. Regular home buyers have also noticed their percentage of activity. increasing over time. On the other hand, the percentage of purchases made through first-time buyers has declined since 2015, reaching a new low in 2021; Over the same six-year period, space costs have risen much faster than disposable income.
Alternatively, the data is available for download at:
Investor activity also varies among Canada’s major cities (Exhibit 5). At the lower end of the scale, since 2014, investors have made 14 per cent of home purchases in Winnipeg, compared to 21 per cent at the high end of Toronto. During the same period. We are also seeing an increase in the percentage of home purchases through investors in almost every major city in Canada.
Alternatively, the data is available for download at:
To amplify vulnerabilities related to other types of homebuyer loans, we looked at their demographic and monetary characteristics.
Starting with age, we find that first-time homebuyers tend to be particularly younger than other types of buyers (Figure 6, component a). Their average age is 36, compared to around 50 for other types of homebuyers. The source of income distribution of other types of homebuyers also reflects these differences over the life cycle (Figure 6, component b).
In terms of measures of monetary vulnerability, we find that first-time homebuyers also tend to have the highest loan-to-income ratios at the time of loan origination (Figure 6, component c). As a result, they have a significant effect on the overall percentage of new loans with a loan-to-income ratio above 450%, a key measure used by the Bank of Canada to monitor household debt vulnerability.
However, focusing solely on debt related to the last loan issued will tend to underestimate the monetary vulnerability of investors who hold loans. One of the benefits of our combined set of knowledge is that we have complete credit histories on all home buyers. As a result, we can take a look at the notable balances of all loans held through investors. When we recalculate the loan-to-income ratio based on total credit debt, investors are obviously particularly more indebted than other types of homebuyers (Figure 6, panel d). ).
The top point of investor leverage is also likely to be reflected in the overall debt service ratio calculated at the time of the issuance of the last mortgage. In principle, this measure takes into account the bills of all debts, adding up beyond mortgages and non-mortgage debts. 6 Figure 6, component e, shows that investors tend to have higher overall debt service ratios than non-investors. In particular, a particularly high percentage of investors have overall debt service ratios above 44%. 7 Highly leveraged investors would likely find it difficult to repay their debt due to the loss of a source of income (employment or rent) or rising interest rates.
A significant hole in our research is that we can’t be sure of the resources investors have in their documented source of income. Regulatory returns come with a single chart for the source of income and do not distinguish between source of income from employment and rent. source of income. In addition, the underwriting practices of rental income sources would likely vary among lenders. For example, some lenders allow applicants to use only 50% of their rental income source to get a mortgage.
It’s also unclear whether investors declare their entire source of income when applying for a new loan or just enough to qualify. If the source of income of investors with investment properties is not properly declared, parts d and e of Figure 6 would possibly overestimate the vulnerability. Without more data on how the rental revenue source is managed, we can’t smoothly assess the vulnerabilities and dangers that investors bring to the real estate market.
Alternatively, the data is available for download at:
Alternatively, the data is available for download at:
Alternatively, the data is available for download at:
Alternatively, the data is available for download at:
Alternatively, the data is available for download at:
In this note, we document the creation of a new set of knowledge to track home purchases related to a Canadian mortgage. The main merit of this body of knowledge is the ability to break down space purchases into the relative contributions of other types of buyers. A key takeaway from our initial research of this knowledge is that home purchases are increasingly driven by existing homeowners. Within this group, investors saw the largest increase in their percentage of home purchases during the COVID-19 pandemic.
The increased presence of investors in the real estate market has contributed to strong demand and could reflect confidence that real estate prices will continue to rise, known as extrapolative expectations. 8 Investor demand for housing is also likely to be higher. more susceptible to adjustments in market sentiment than other homebuyers. 9 By exacerbating boom-bust cycles in housing markets, investors can also simply be a source of instability for the monetary formula and the broader economy. At the same time, investors are a vital source of rental housing sources. We want to conduct more in-depth studies to read about the delicate balance between expanding rental sources while also cutting new structures and resale sources in a real estate market that is already experiencing source limitations.
More broadly, the dataset has the potential to answer many questions about household debt and real estate market imbalances, adding the role of genuine real estate investors. This is an active domain of studies for the Bank.
Footnotes1. To protect the privacy of Canadians, TransUnion has not provided any non-public data to the Bank. The TransUnion data set has been anonymized, meaning it does not include data that identifies individual Canadians, such as names, social security numbers or addresses. [←]2. In this analysis, we do not have any data on the end use of the investment properties, which would likely be rented long-term, short-term through an online vacation rental platform, or left vacant. [ ←]3Array Purchases made through other people who buy and then resell houses after a while, can also be considered here. However, according to data from Teranet, houses purchased and resold within six months only represent around 1% of national real estate transactions in recent years. This percentage is approximately 2% for homes purchased and resold within 12 months. [←]4. We delineate non-urban spaces as spaces located outdoors of census metropolitan spaces or census agglomerations. [←]5. Due to innovations in the algorithm, the series presented here differs from that of the Financial System Review 2021. [←]6. The overall debt service ratio compares required bills on all mortgages (principal and interest) and other products (such as installment loans, lines of credit, and credit cards), as well as taxes on assets and costs of heating, with eligible gross source of income. of the borrower. [←]7. This 44% represents the general debt service threshold for insured mortgages. For unsecured mortgages, overall debt service limits are left to the discretion of individual borrowers. [←]8. See U. Emenogu, C. Hommes and M. Khan, “Detecting Exuberance in House Prices across Canadian Cities,” Bank of Canada Staff Analytical Note No. 2021-9 (May 2021). [←]9. See, for example, A. Haughwout, D. Lee, J. Tracy, and W. van der Klaauw, “Real Estate Investors, the Leverage Cycle, and the Housing Market Crisis,” Federal Reserve Bank of New York Staff Report York No. 514 (September 2011). [←]
Bank of Canada Staff Analytical Notes are short articles focusing on existing issues similar to the existing economic and monetary environment, written independently of the Bank’s Governing Council. These paintings may or may challenge the prevailing political orthodoxy. Accordingly, the views expressed in this note are solely those of the authors and may differ from the official views of the Bank of Canada. The Bank shall not be liable for them.