Historical article note: This article was originally published on 2018-07-09. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Why are housing prices in big cities becoming increasingly unaffordable? Are investors pushing up housing prices? CMHC released a report in February 2018, Examining Escalating House Prices in Large Canadian Metropolitan Centres, which analyzed the phenomenon of high housing prices in Canadian cities from several aspects. Whether investors are the driving force behind housing prices is the content of Chapter 8 of this report. As the most populous city, how does Toronto perform when it is favored by real estate investors? What is the fate of tenants? Let’s look at the report analysis. The analysis perspective and data source of this report are based on tax return records of rental income. The report is inconclusive as to whether investors have pushed up housing prices, but the data used in the analysis are extremely valuable and have never been published before, and the phenomena reflected are beyond everyone's expectations.
Introduction to background information on Toronto. Among all taxpayers in Canada, Toronto accounts for the highest proportion of taxpayers. Toronto’s taxpayer population accounts for 16% of Canada’s total taxpayer population, Montreal accounts for 11%, and Vancouver accounts for 7%. Among taxpayers who have declared rental income, Toronto also has the highest proportion of rental income taxpayers. Toronto’s rental income taxpayers account for 18.9% of the country’s rental income taxpayers, Montreal’s is 13.7%, and Vancouver’s is 9.3%. The average rental income of Canadians accounts for 5% of total income. Toronto’s rental income accounts for 6.3% of total income, which is the lowest among the three major cities. Vancouver is 7.4% and Montreal is 6.7%. Toronto is the city with the fastest growth in the number of people declaring rental income. From 2006 to 2014, the number of people declaring rental income in Toronto increased from 170,000 to 280,000, an increase greater than that of any other large city. Immigrants make up the largest proportion of Toronto’s taxpayers, and the number of immigrants reporting rental income is growing fastest.
The number of taxpayers reporting rental income is increasing year by year. The main reason is that income from real estate investment has higher returns than fixed-income financial assets. Especially in the low interest rate environment since 2010, the contrast is particularly obvious. The most fundamental reason why investors turn to real estate investment is higher return on investment. In 2014, Canadians spent $23 billion on rent. Toronto had the highest rental income among all metropolitan areas, totaling $4.4 billion, followed by Montreal at $4 billion and Vancouver at $2.5 billion.
It’s worth noting that average rental income for landlords has been on a downward trend over the past few years. The national average rental income was $18,165 in 2009, dropped to $14,991 in 2011, and rebounded to $15,456 in 2012. The trend is downward. The number of people declaring rent has increased, and the average rent has dropped, which illustrates a problem: In Canada, housing has become a pioneer of the sharing economy, and the number of landlords subletting their basements and bedrooms is increasing. The phenomenon of subletting is particularly serious in Toronto. In 2014, the average rental income in Montreal was $19,539, in Vancouver it was $17,666, while in Toronto it was only $15,721, even lower than Edmonton's $15,783.
Immigrants refer to Canadian citizens or permanent residents who were not born in Canada. In the field of real estate investment, immigration is very prominent. Immigrants are using real estate investment to catch up with the wealth levels of native Canadians. In 2014, 4.8 million taxpayers in Canada were immigrants, accounting for 18% of the taxpayer population. Toronto’s immigrant taxpayers accounted for 41%, the highest proportion among major cities. Vancouver’s immigrant taxpayers accounted for 37%, while Monterey only had 20%. It can be said that Toronto is an immigrant city. In 2012, among Toronto taxpayers who declared rental income, immigrants accounted for 50.1%, surpassing local residents for the first time. By 2014, this proportion had increased to 53.5%. Statistically speaking, the per capita rental income reported by Toronto natives is higher than that of immigrants. Among all major cities, the average rental income reported by immigrants in Toronto is the lowest. This shows that immigrants in Toronto have the most serious situation of subletting properties, or have the lowest rental income. It exposed the fact that immigrants in Toronto are buying more properties than they can afford in order to rent them.
Should the elderly in the city sell their houses and enjoy their retirement life, or should they still hold on to their investment houses and continue to collect rent? This report conducted a detailed analysis and the conclusion is very clear: the elderly continue to hold investment properties after the age of 65. From 2010 to 2014, the number of people aged 65 and older in Canada claiming rent increased more than any other age group. People will consider the opportunity cost when allocating their savings to various assets. In the past few years, the opportunity cost was the highest if they did not invest in real estate. Among the elderly who have the ability to choose, more people voted for real estate.
The final conclusion of the report on real estate investment in metropolitan areas is that rising housing prices have attracted private micro-real estate investment. The real estate market is indeed lucrative. Some homeowners sublet their homes to increase their ability to pay their mortgage debt. The presence of investors stimulates the supply of properties by builders. 5% of Canadian taxpayers report rental income. Among all those who have declared rental income, 40% are from the five major cities, indicating that real estate investors are highly concentrated in major cities. As the number of rental earners increases, average rental income falls. The increase in the number of rental income earners reflects the fact that people are choosing real estate as an alternative to low returns on financial investments.
The CMHC report did not conduct further research and analysis on the types of real estate investment, trends, the severity of sub-leasing situations, and the overall impact of real estate investment on housing prices. This may be because the government does not provide enough research funding.
Judging from the above information, my personal feeling is that in a low interest rate environment, real estate investment has better return on investment than financial assets. Therefore, the number of people choosing real estate investment has increased. These new people may not understand real estate investment, so the income situation may be uneven, and speculation is inevitable. Toronto’s sub-letting situation is fully proved by the rental income and the number of tax filers. In particular, the situation of immigrants renting their houses is very serious. On the one hand, it shows that the motivation of immigrants to buy houses is mixed with investment. On the other hand, it shows that some immigrants have bought properties that they cannot afford and need to rely on sub-letting to solve their mortgage pressure. It is said that there are tens of thousands of Chinese landlords in Toronto, and a certain proportion of them must sacrifice their living conditions and sublet their own homes. Strictly speaking, rooming is not a real estate investment, it is a kind of income subsidy. Buyers of rooming houses are not investors, but they are the driving force behind pushing up housing prices. Subletting must be within a certain limit. If it exceeds a certain limit, it is considered illegal subletting. Many vicious incidents, fires, and tragedies that have caused personal casualties in Toronto are mostly related to illegal subletting of houses. If four different families live in one house, they must be inspected and approved by the government’s fire department before they can move in. New Chinese immigrants and parents of international students should pay great attention to Toronto’s unique rental market situation. Where rents are cheap, safety hazards are usually greater.
It can be said that the Ontario and Toronto municipal governments have the same approach to solving problems in their management of the rental market. They are both completely different, but in different directions. One is over-regulation, the other is over-indulgence.
The City of Toronto does not take active management measures against illegal subletting. If citizens do not call 311 to report illegal subletting by their neighbors, it will cause hidden dangers to community safety. The city rarely takes proactive actions to rectify illegal subletting. This is an indulgence in illegal subletting.
The Ontario government is on the contrary. According to Ontario's rent management requirements, landlords can only increase rent by 1.8% each year in 2018 and 2019, instead of adjusting rents according to actual market conditions. Every landlord hopes that tenants will move quickly and rent at market prices when renting to new tenants. In view of the administrative requirements for rent control, large capital is unwilling to invest in the construction of apartments specifically for rental, and can only rely on private micro-real estate investment to solve the rental problem. In the textbook "Microeconomics", Mankiw mentioned two examples of government intervention that helped the economy far less than harmed it. One was to increase the minimum wage and the other was to control rents. These two textbook-level stupid things are happening in Ontario. Spencer mentioned in "Man and the State": "Every year, a large number of laws are enacted, restricting some things that used to be completely free, forcing citizens to do some things that they could do or not do in the past; at the same time, public burdens, especially local public burdens, are becoming increasingly heavy, so by reducing the share of income that citizens can freely dispose, increasing government income taxes, and further restricting the public "The increasing restrictions on individual freedoms take the form of countless restrictive laws in every country, which greatly increases the number, power and influence of civil servants responsible for their implementation."
Economic interests and vote politics are distorting real estate investment behavior in Toronto. The average rental income of immigrants in Toronto is the lowest among all major cities, which is embarrassing. Ontario has imposed a real estate speculation tax on non-residents, which has damaged the confidence of local buyers, and has implemented rent controls on local real estate investors. These two policies that artificially interfere with the real estate market are significantly pushing up market rents and promoting the booming development of the sub-let market. The victory of the city comes from civilization, order, opportunity and fairness. We admire the new citizens who are full of ideals and live in a corner of the city and are struggling. At the same time, we are worried about their living and living conditions. Living in a basement with a monthly rent of several hundred yuan requires a minimum of safety guarantees. There are too many deaths caused by poor living conditions that are reported in the newspapers every year, and we should do something to prevent these tragedies from happening. The professor told the graduates to look for opportunities in the city with the most expensive rent, where there will be the most opportunities. This is indeed the case. Shenzhen in China, Silicon Valley and New York in the United States, Seoul in South Korea, and Toronto in Canada are indeed cities of opportunity. However, as latecomers to prosperous cities, new citizens must first be able to afford safe housing and secondly have outstanding talents. Cities not only need passion and energy, but also harmony and security. When Toronto meets real estate investors, home prices are pushed higher? Are rents being pushed up? Or push the tenant to the basement? What would you like to see happen? What should the government do?