Pressure is building on Canada’s Liberal government to make good on its election promises to tax real estate investors.

During the recent election campaign, the Liberals promised to make housing more affordable by introducing an anti-flipping tax on residential properties, requiring properties to be held for at least 12 months. They also promised to “stop excessive profits in the financialization of housing” by reviewing the tax treatment of large corporate real estate owners, such as real estate investment trusts. The Liberals also pledged to “put in place policies to curb excessive profits in this area, while protecting small independent landlords” and to “review the down payment requirements for investment properties.”

In a recent speech, Bank of Canada deputy governor Paul Beaudry said the bank is “doing a lot of work to assess how the presence of investors is affecting housing-related vulnerabilities.”

Beaudry said a sudden influx of investors in the housing market “likely contributed to the rapid price increases we saw earlier this year. In such a case, expectations of future price increases can become self-fulling, at least for awhile. That can expose the market to a higher chance of a correction. And, if one occurs, the damage can spread far beyond the investors. That’s because, for many households, their wealth and access to low-cost credit are tied to the value of their home.”

In his speech, Beaudry said, “The risk of a correction in some markets is a concern that we need to watch. Let’s also not forget that the spike in demand for housing came while immigration was essentially on hold. As immigration resumes, the demand-supply gap could widen and last longer, which could put further upward pressure on house prices.”

A report from Teranet reported that multi-property owners accounted for 25 per cent of property transfers in Ontario during the first six months of 2021. That includes those who purchased recreational properties, which was a hot market during the pandemic. However, multi-property owners also accounted for a quarter of transfers in Toronto.

The report also highlighted another type of investor. In Waterloo, Ont., a university town, “for years anecdotal accounts of parents purchasing properties to house children pursing post-secondary education have been prevalent. This may now be validated by the steep increase observed in multi-property owners purchasing in the region since 2016.”

Some believe that investor demand will drop when mortgage interest rates rise in 2022. “Due to the speculative and elastic nature of investor activity, a larger share of investors in the buyers’ pool means demand might be more sensitive to expectations of higher borrowing costs and lower profitability,” says Farah Omran, an economist at Scotiabank. “While much of the buying frenzy in 2020 was driven by first-time homebuyers and buyers who planned to live in their houses, the story seems to have changed in 2021…This may result in a disproportionate fall in demand in response to rate increases.”

John Pasalis, president of Realosophy Realty in Toronto, says that “irrational exuberance” may be driving up prices. 

This is “when a key driver of home price appreciation is no longer fundamental factors (such as population growth, low interest rates, etc.) but rather the optimistic beliefs of investors who believe home prices will keep going up forever at a rapid rate,” says Pasalis in a report on his website. “This is when you hear about more and more people looking to invest in real estate themselves, after hearing about how well family and friends have been doing with their own properties.”

He points out that some Toronto condo investors are currently paying more for their carrying costs than they are able to recoup in rent payments. “They don’t care if they are paying $1,000 per month out of pocket because they expect that their unit is going to be worth $100,000 more a year from now.”

Pasalis says in this market, people who claim that “lack of supply” is the only issue making homes unaffordable are “not being entirely honest with you…The fact is that when the dominant buyers of homes are investors, no amount of supply can ever keep up with the appetite and lofty expectations of real estate investors.”

He also says that investors push home prices much higher than if only end-users were buying, which prevents those end users from being able to buy a home for themselves. “By financing new construction of homes, such investors may help keep renting more affordable but they make owning far less affordable,” he says.

Despite the threat of higher interest rates driving investors away from the market, Pasalis says a drop in house prices in 2022 is unlikely. Demand from first-time buyers is still strong and immigration will be a factor.

Alex Hemingway, a senior economist at the Canadian Centre for Policy Alternatives in Vancouver, says one of the reasons why investors find that city so appealing is because of its low property taxes. “As private land wealth has exploded in the city, these low rates are deepening inequality,” he says. “Low property tax rates also help fuel the housing crisis by encouraging residential land to be treated as an investment. Progressive property taxation can help address these problems. If we choose, we can harness this enormous source of wealth – created by all of us – for the public good, including a massive build of publicly owned affordable housing.”