Bridge Beat

The Investors Game – Are Investors the Cause of the Housing Crisis in GTA?



The housing crisis that is facing all new home buyers and existing home buyers trying to refinance their homes is top of mind with politicians and voters alike. There isn’t a day that goes by that there isn’t another article in the Toronto Star or the Globe & Mail on who is to blame, and what the solutions are. One of the most recent positions taken by the Toronto Star has severely criticized and blamed investors for creating both the housing shortage and housing unaffordability.  (Clarrie Feinstein’s article on December 2, 2023)

She espouses a theory that low interest rates and lack of rent control made condominium investing exceptionally attractive thereby diverting the market to investors and raising prices and rents. She does give a nod to the fact that because the provincial government got out of the non-profit housing business back in the early 90s when Mike Harris was elected, new housing supply became dependent on the private market. But suddenly the private market is bad and people investing to earn a good return is something that should be avoided. 

In fact, the lack of rent control did nothing to spur multi-purpose rental construction because market rents were far too low to justify the investment by institutional investors such as pension funds, REITs, etc. 

It was, therefore, left to the home building industry to develop a product that was affordable for purchasers and renters, on the one hand, and also attractive to investors whose investment was needed in order to get large projects off the ground. Relying upon home owner purchasers alone would not be enough to create the supply that was needed. A large project of 400 units cannot take 2-3 years to find a market whilst selling only to owner occupiers. 

The Toronto Star also ignores the housing policy enunciated by the former Liberal government in 2005 to limit low-rise sprawl and encourage very strongly intensification via higher density projects. This was accomplished by taking 2,000,000 acres of potential development land out of the marketplace and into the Greenbelt and also making regulations much tougher on low-rise housing. 

The only product left to be built was high-rise. Low-rise continued to be built but at much higher prices due to less land supply and, therefore, fewer houses for sale.

Some of the experts in her article complained that we are missing the mid-rise density with bigger apartments that allow for more variety of housing in the city. But of course, that can’t be done when land supply is constricted, 25% of the purchase price goes to taxes and the only way for developers of intensified projects to make money is to build larger projects at smaller units.  Smaller units, unfortunately, are more attractive to investors and without those investors, those projects won’t get built.

Blaming investors who potentially own over 50% of new condominiums (I don’t argue with these statistics) for creating overpriced housing, either from a purchaser perspective or a renter perspective, is backwards. If investors had not been encouraged to invest in high-rise condominiums, there would be absolutely no new rental supply since 1991. It took until 2015 or 2016 for rents to catch up to a level that institutions could start looking at getting a reasonable return for new purpose-built rental projects. Until then, the market had to rely on private builders and private investors buying significant portions of project and either selling them or renting them.  It wasn’t the ideal solution but unfortunately, the government had no other solution. In fact, by virtue of its intensification goals that were created and encouraged by the Liberal governments since 2005, there was no option but to build up.

When rents and returns finally got to the point where institutional investors were coming back into the market to build multi-purpose built rental, Kathleen Wynne, in her desperate effort to maintain a Liberal majority in the 2017 election, reversed the rent control legislation put into place in 1991 and essentially froze all new housing at current levels. That put an end to the embryonic purpose-built rental industry. In her infinite wisdom and against recommendations from her own staff, she refused to even allow rent increases that would provide institutions with a 3%-4% return on their new investments to encourage purpose-built rental. Again, politics stuck its ugly nose into a marketplace that was going to finally produce purpose-built rental and not rely on investors.

Now of course, with interest rates escalating and construction costs going through the roof during COVID-19, institutions investing in purpose-built rentals are finding that projects are no longer viable even at the increased rents. So many of these projects are on hold. But that will change when interest rates come down and the institutions realize that in the long-term, there will be a good return for their purpose-built rentals, as long as there is no freeze on rent increases for new rentals, at least for a reasonable period of time (at least 10 years).

But don’t blame the investors and the private market. Without them, the housing crisis would have been a total calamity the last 30 years.