CMHC has recently come under fire for its research on REITs and rent control. In this note, we’ll focus on the REIT side of the debate.
Over the past few years, numerous reports have argued that housing is being treated as a commodity, with financial firms acquiring purpose-built rentals and managing them with a primary goal of maximizing shareholder returns.
The Liberals’ 2021 platform included a pledge to curb excessive profits tied to the financialization of housing: “Large corporate owners of residential properties such as Real Estate Investment Trusts (REITs) are amassing increasingly large portfolios of Canadian rental housing, making your rent more expensive.” The platform called for a review of the tax treatment of large corporate landlords and measures to rein in profits.
In June 2022, the Office of the Federal Housing Advocate released its report, The Financialization of Housing In Canada. The report highlighted affordability challenges and noted that the withdrawal of federal support for social housing in the 1990s, along with rent decontrol, “created a lucrative incentive for landlords to acquire buildings, remove tenants paying low rates, and increase rents to ‘market’ levels.”
CMHC’s work is the first economic analysis to critically examine these claims about REITs. It uses a statistical approach called synthetic difference-in-differences to compare REITs to other multifamily landlords.
In simple terms, this approach helps economists estimate what would have happened to a group—such as buildings owned by REITs—if it hadn’t experienced a particular “treatment,” in this case, REIT ownership. They do this by comparing the group to a carefully constructed “synthetic” control made up of similar buildings that didn’t receive the treatment.
One key challenge in economics is the absence of controlled experiments. Analysts frequently address this by using panel data, which track multiple units over time, to compare outcomes between a “treated” and “untreated” group – in this case, REITs versus other landlords. The difference-in-differences methodology then allows researchers to make inferences about the two groups and isolate the impact of REIT ownership.
CMHC concludes that “while rents charged are higher, there tend to be sound financial reasons for this: they are newer buildings, larger units, include electricity fees, etc.”
My impression is that this is solid econometric analysis, though I have some reservations. It would have been helpful if the methodology were consistent across the two background reports. I also question whether REIT managers specifically targeted gentrifying neighbourhoods, given the limited stock of buildings. More likely, it reflects the age of this housing stock.
The key takeaway is that REITs are not the villains in this story. That’s not to say there isn’t an affordability concern. REITs do own buildings in lower income areas, which typically have higher eviction rates, but these evictions are usually related to issues such as non-payment of rent.
As part of the federal government’s recent Build Canada Homes announcement, there was a commitment to preserving affordable rental housing through a $1.5 billion Rental Protection Fund. My view is that REITs would likely be willing to sell units in these lower-income neighbourhoods.
While selling these buildings could ease some criticism of REITs, it won’t address the underlying challenges—namely, tenant affordability and building quality. Under the REIT business model, when a tenant vacates a unit, the REIT may renovate it and rent it out at a higher rate. This helps maintain or even improve building quality, which is important given that most purpose-built rental housing was constructed before the 1990s.
If the goal is to keep rents low for social groups funded through the Rental Protection Fund, these organizations risk having revenue shortfalls and future maintenance issues. Look no further than Toronto Community Housing: without the recent $1.34 billion over nine years from the National Housing Co-investment Fund to address a large capital repair backlog, a large part of the rental stock would have become uninhabitable.
In the short-term, low rents can maintain affordability, but over time this can compromise the quality of the housing stock. Without addressing both affordability and maintenance, we risk trading a short-term solution for a long-term problem.
Independent Opinion
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