Focusing on institutional investors may overlook the real forces driving home prices and rents1
Canada is not alone in its housing affordability challenges. Similar concerns have emerged in the U.K., Australia and the U.S.
The U.S. administration has recently put forward a series of proposals aimed at easing affordability pressures. In a recent statement, the president said: “I am immediately taking steps to ban large institutional investors from buying more single-family homes, and I will be calling on Congress to codify it. People live in homes, not corporations. I will discuss this topic, including further housing and affordability proposals, and more, at my speech in Davos in two weeks.”
Economist Kevin Erdmann provides context for why these measures may have limited impact. He argues that in “a market with elastic local supply conditions, the price of new homes is anchored to the cost of construction. Mortgage access, changing incomes, financing costs, etc., change the yield on housing – or conversely the price/rent ratio.” He adds that “[w]here price is anchored to construction costs, factors that would increase the price/rent ratio largely cause rents to decline.”
Erdmann argues that the working-class owner-occupier market, which once set the marginal home price, has been cut out. Rents rose to levels that would induce new construction, but with working-class buyers excluded from the market, Wall Street became the only viable source of buyers able to participate at scale. Erdmann notes that, while institutional investors own a relatively small share of the market, they are seen as a key factor constraining home ownership.
According to Erdmann, the root problem is changes to lending standards, rather than investor activity itself. He argues that restoring the advantage families once had over corporate buyers could be achieved through “reasonable underwriting at the federal agencies and fewer regulations on private banks who would originate mortgages and retain them on their own books.”
While investors are not a big part of the market today, they are needed to ensure the supply of housing continues to grow.
Turning to Canada, institutional investors have never been a large part of the housing market. REIT ownership of purpose-built rentals has grown to around 10 per cent of the rental stock in Toronto and Vancouver, according to CMHC. Most of this rental stock is older and in need of maintenance and upgrades. In 2022, the average apartment building in Toronto was around 60 years old, and a significant portion of purpose-built rentals in Ontario are over 35 years old, emphasizing the need for substantial investment in renovations. CMHC’s study suggests “[t]here is no difference in rents in REIT-owned and non-REIT-owned purpose-built rental units when comparing similar properties.”
Turning back to the U.S., the President also announced that he will direct Fannie Mae and Freddie Mac to purchase and hold $200 billion in mortgage-backed securities (MBS) on their books. Would this decrease mortgage rates?
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that back the funding of mortgages issued by private lenders. After lenders issue the loans, Fannie and Freddie package thousands of mortgages into securities, which are then sold in the bond market. Homeowners’ payments are passed through to investors as income.
The timing of these purchases will determine their impact in 2026. If the $200 billion in GSE mortgage purchases is spread over the year, the effect on mortgage rates is likely to be minimal. A large, concentrated purchase would have a more immediate effect, but it would dissipate over time.
As we have seen in Canada, where the federal government has been buying Canada Mortgage Bonds, these purchases do influence the mortgage market. However, other factors, such as inflation, geopolitical events, and monetary policy, also affect mortgage rates, making it difficult for such purchases to have a direct, sustained impact.
1Kevin Erdmann used this Winnie the Pooh metaphor to highlight that governments and housing advocates are looking at the wrong tracks when looking at institutional investors.
Independent Opinion
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