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Large institutional investors are an almost insignificant share of Canadian housing. That was the takeaway from a new Statistics Canada (StatCan)<\/a> report examining the influence of institutional ownership of rentals in 2022. Even more shocking is the agency just discovered that Canadian real estate is the most perfectly competitive market in the world. All they had to do was improvise a methodology and use a timeline that makes no sense.\u00a0<\/p>\n Before we discuss the investor data, let\u2019s make sure we\u2019re all on the same page\u2014no data nerd left behind! The agency uses the Herfindahl-Hirschman Index (HHI), a regulatory model of competition. It quantifies competition by squaring the market share held by every firm in an industry. For those who forgot their bankster to English dictionary at home, it turns market competition into a number from 0 to Galen Weston. Kidding. It ranges from 0 (perfect competition) to 10,000 (a perfect monopoly).<\/p>\n The agency used the US Federal Trade Commission\u2019s (FTC) HHI threshold to show where trade concerns typically mount:\u00a0<\/p>\n The US FTC believes an HHI above 1,800 warrants investigation. For context, Canada\u2019s banks range between 1,800 and 1,900<\/a>, and the country\u2019s manufacturing has an average HHI of 4,500<\/a>. It\u2019s effectively an oligarchy.\u00a0<\/p>\n StatCan applied this concept to analyze the institutional ownership of rental properties. Due to their scale and power, this investor class skews markets faster than mom & pop investors. The fallout is a more aggressive rise in the cost of living, creating an economic drag due to the concentration of non-productive spending. Their risk profile is very different from a mom & pop investor, who doesn\u2019t get subsidized capital and bailouts if they fail.<\/p>\n Calculating the HHI would typically require measuring the number of homes each company controls. However, Canadian real estate is more opaque than any tax haven, so there\u2019s no count of units owned by institutions. \u201cTherefore, the assessed value of the properties serves as a proxy variable for the number of units,\u201d explains StatCan economist and the author of the report, Joanie Fontaine.<\/p>\n The agency\u2019s improvised methodology shows Canadian real estate may be the world\u2019s most competitive industry. Seriously.\u00a0<\/p>\n What investors? All 12 Census Metropolitan Areas (CMAs) examined had HHIs of below 1,500\u2014a lot lower. London, ON is the worst offender with an HHI of 133.9, less than 10% of the way to a concentrated market. Toronto (6.1), where investors buy roughly 70% of pre-construction<\/a>, is a nearly perfect market. It\u2019s only behind Vancouver (6.1), where the market is so free that taxpayers are bracing for a bailout. So. Much. Competition. Perfect, actually.\u00a0<\/p>\n The study concludes \u201cthe existence of potential competitiveness among landlords in the CMAs studied, despite the significant presence of institutional investors in some of the CMAs.\u201d<\/p>\n Their share of total assessed value of housing in 2022 ranged between just 2.9% and 6.0% in the provinces studied. When looking at \u201chouses\u201d (freehold, non-apartments) they only own between 0.1% and 0.4% of housing.\u00a0<\/p>\n Adam Smith, the godfather of capitalism and free market theory, famously noted that land is a \u201cnatural monopoly\u201d because its supply is physically fixed. You can\u2019t manufacture more of it to satisfy a free market. Land-based resources inherently can\u2019t be in perfect competition. However, you don\u2019t need to know that to understand that StatCan made a wrong turn at Albuquerque.<\/p>\n There are a few problems here, the most obvious being the distribution. In Ontario, rentals owned by institutions had a median assessed value of $187,000 in 2022. Contrast that with $260,000 for all rentals, and $306,000 for owner-occupied rentals. One takeaway is that institutions are concentrated in the lower-end (a.k.a. affordable) side of the market. More importantly, it\u2019s a red flag for using assessed values as a competition proxy.\u00a0<\/p>\n Let\u2019s do a quick example for the under-caffeinated. There are 3 rental homes, each owned by a different owner. Their assessed values are the same as the above medians (convenient, I know). The owners are named Institution, Average Investor, and Mom & Pop. Don\u2019t make fun. Their parents weren\u2019t creative and a little lazy, but at least they didn\u2019t go with something like Brad Bradford.\u00a0<\/p>\n By property count, they each have a third of the market (not units, though, since we don\u2019t know). When using assessment values, Mom & Pop are the supervillains, dominating 40% of the market. Institution, with a meagre 24.8% market share, needs 39% more properties to catch up to Average Investor, and 64% for Mom & Pop. Fire up a few billion on the printing press, Institution needs subsidies. You know\u2014to make things affordable and competitive, right?\u00a0<\/p>\n A little on the bonkers side. However, the bigger distribution problem is stock vs flow.<\/p>\n In economics and finance, it\u2019s important to differentiate stocks and flows. Stocks are the value of all assets at a point of time, and flows are the value of assets during a period. For example, stocks would be the value of every gas station, residence, warehouse, farmhouse, henhouse, outhouse and doghouse in an area. Flows would be the value of those items added in a year.<\/p>\n This study clumsily relies on stock, using the total value of all properties purchased ever. The rise of cheap capital in the low-rate, post-Global Financial Crisis era, which sparked institutions into chasing yields in housing, is never considered. It treats every home sold on the market in the same way, as though every year has always been the same. It doesn\u2019t matter that Gen Z didn\u2019t have the same opportunity for ownership; their share was on the market in 1960.\u00a0<\/p>\n While the agency didn\u2019t provide raw data needed to calculate a pure \u201cflow\u201d HHI, they left a smoking gun in their caveats: when isolating rental properties built since 2011, institutional investors owned a staggering 63.1% of the assessed value in Nova Scotia and 61.5% in New Brunswick. This isn\u2019t a competitive market; it\u2019s a corporate hijacking of the supply in those regions.\u00a0<\/p>\n Previously released Ontario investor data provides even more data points to show there\u2019s a bigger problem.\u00a0<\/p>\n In Ontario, non-owner-occupying investors grew their share of housing from 20.2% to 20.9% between 2020 and 2023. The province\u2019s housing stock grew 3.1% over the period, but its share grew over double that rate (+6.7%). In absolute terms, the province saw net growth of 191,130 homes, and these investors saw 43.4% of that growth. If you already owned a home, no biggie. If you\u2019re competing with them, you have really stiff competition.\u00a0<\/p>\n The most important issue is the marginal price pressure investors provide. Prices aren\u2019t set by all consumers, they\u2019re set by a marginal buyer. That\u2019s the person actually making the transaction, not the person who did it 20 years prior. Whether it\u2019s real estate, stocks, or any investment\u2014only a small number of transactions set prices. A group of money launderers can represent a small share of buyers. However, if they concentrate in one area, what they paid becomes the comps for everyone else<\/a>. It doesn\u2019t matter if a buyer knows what\u2019s happening; they\u2019re competing against buyers that don\u2019t.\u00a0<\/p>\n StatCan was so close to hitting this, but fell short. Though clearly not because they didn\u2019t understand the issue.\u00a0<\/p>\n \u201cNevertheless, there could be concentration in some market subsegments, such as in specific neighbourhoods or for certain types of dwellings,\u201d notes the agency. They further gloss over a note that market coordination can amplify pricing pressure. However, organized coordination isn\u2019t the biggest problem\u2014it\u2019s unorganized coordination through comps. The vacant units held by institutions, which are better vacant than taking a cut for valuation, now set the pricing narrative for all landlords.\u00a0<\/p>\n The problem is amplified through an economic concept called bubble contagion<\/a>. As market pressures rise in a small area, the existing consumers are pushed further out. Regions with fewer amenities see prices rise, as people discount fundamentals and try to find a place wherever they can.\u00a0<\/p>\n When a person can\u2019t find shelter to rent in their price point, it doesn\u2019t matter that 1 in 19 rental units in Toronto are vacant<\/a>. They\u2019re in a game of chicken, the winner is whoever holds out longer\u2014the institution with a vacant unit or the person who needs a home. In natural competition, it would sort itself out. When policymakers back the vacant units, prospective tenants get to pick between paying higher rents, homelessness, or moving to a new city. In cities like Toronto, that\u2019s turning into a critical failure as policymakers support the vacant units, and have yet to realize the region\u2019s young people are fleeing<\/a>. Often leaving Canada as a whole<\/a>.\u00a0<\/p>\nAbout Today\u2019s Data<\/strong><\/h2>\n
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Canadian Real Estate Is Perfectly Competitive, No Concentration?<\/strong><\/h2>\n
Canada\u2019s Premium Property Skew<\/strong><\/h2>\n
Stock Vs Flow\u00a0<\/strong><\/h2>\n
Bubble Contagion: How Speculation Spreads Like A Virus<\/strong><\/h2>\n