What a developer’s plan to buy $1B in homes could mean for Canada’s housing market

Toronto-based Core Development Group’s plan to buy $1 billion worth of single-family homes and convert them into rentals has triggered intense debate over the potential impact of the investment strategy on Canada’s housing market.

The company has said it intends to buy 4,000 rental units in Ontario, Quebec, B.C. and Atlantic Canada, as first reported by the Globe and Mail. The company hasn’t provided an overall timeline for its acquisitions, but the idea is to buy homes that can be split into two units — for example, with a second unit in the basement — and turn both over to the rental market.

Corporate investors like private equity firms, real estate investment trusts (REITs) and financial institutions have become an increasingly large presence in Canada’s multi-family apartment rental sector. An investment strategy focused on turning single-family homes into rentals, while already common in the U.S., is thought to be a first in Canada. If it is profitable, experts say it will likely invite imitation from other corporate real estate investors.

Core says its plans will add housing supply to satisfy a growing demand for rentals.

“For each single-family rental house that comes on the market, two rental units are provided, thus doubling the housing supply,” the group told Global News via email in reference to its strategy of carving two rental units out of every property purchased.

“There is a significant lack of rental availability in the low-rise single-family market. Increasing density through renovating existing homes is the most expedient way to add supply to the housing stock.”

But the move has sparked concern that corporate investors pursuing profits in the rental market could put further pressure on Canada’s already tight stock of single-family homes available for ownership while also eroding affordability in the rental market.

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While the abstract idea of broad-scale investment in single-family home rentals isn’t new in Canada, market conditions currently make for “a good business case” for it, says Howard Tam, principal, CEO and founder of ThinkFresh Group, a Toronto-based boutique city building consultancy.

One of the key reasons for employing this strategy may be a growing demand for rentals from those who have been shut out of home ownership amid an unprecedented rise in home prices, Tam says.

Home prices were up a mind-boggling 24 per cent year-over-year in May, the Canadian Real Estate Association said on Tuesday. And some communities, particularly in southern Ontario, have seen unprecedented price appreciation of up to 40 per cent or even 50 per cent over the course of the past year.

As a result, a growing number of prospective homebuyers are turning to renting as an alternative, Tam says.

Core’s plan to buy up homes at a time when housing prices have reached record highs is markedly different from the trend seen in the aftermath of the financial crisis of 2007-08, when corporate investors swooped in purchase properties on the cheap.

But the rising demand for rental housing — including from families looking for single-family homes — may be a key aspect behind the company’s belief it can turn a profit, Tam and several other real estate experts told Global News.

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It is unclear whether and to what extent broad-scale involvement by large investors in the single-family home market could result in fewer of those homes being available for regular homebuyers to purchase.

It is possible that corporate players like Core would focus on buying up single-family homes that are already in the rental market, says Paul Anglin, a professor of economics at the University of Guelph.

According to the Globe and Mail, Core is currently eyeing mid-sized Ontario cities for its single-family rental strategy. The company has reportedly started buying properties in Kingston, St. Catharines, London, Barrie, Hamilton, Peterborough and Cambridge and will soon start buying in Guelph.

Anglin believes the company will likely focus on homes currently owned by mom and pop landlords, many of which are currently rented out to university students in cities like Guelph.

In that scenario, the investment wouldn’t have a significant impact on supply. It would mostly be a transition from retail to corporate landlords within the existing single-family home rental market, he notes.

And corporate investors like Core could give families that can’t afford the hefty down payments required to buy a home at current market prices the ability to live in a single-family home with a backyard, he adds.

For this set of renters, companies like Core could “provide value,” Anglin says.

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But a corporate foray into the single-family home market is highly unlikely to improve housing affordability, all experts consulted by Global News said. If anything, it could make it worse.

Large investors buying clusters of single-family homes in the neighbourhood or city may be able to leverage economies of scale, as well as their own professional expertise, to provide higher quality property management at lower costs compared to small landlords, Anglin says.

Core told Global News it is “substantially renovating” the units it buys to “provide a safer living environment, including upgrades to heating, plumbing, insulation and lighting to the highest energy standards.”

But Martine August, a professor at the school of planning at the University of Waterloo, says large corporate landlords have a track record of “systematically” pursuing rent increases in order to extract profit from their real estate investments.

And while small landlords are also usually motivated by financial gain, large corporations are more effective at finding ways to increase rents, according to August.

“They typically have a very sophisticated way to try to extract more value,” August says.

“(They) will invest in all sorts of things in those buildings that will allow them to extract more value from it — the types of building renovations that allow them to charge more rents, (or) above-guideline increases.

“They will go in and start doing that right away.”