The Financialization of Housing #94
My thoughts on the ongoing developments of investing in real estate
As a Canadian, the following headline caught my attention:
Condo developer plans to buy $1-billion worth of single-family houses in Canada for rentals
While I wasn't surprised, I was certainly taken aback. I've read articles about this happening across the U.S. In Toronto, we've already seen significant growth in single-family housing over the past 20+ years. However, the idea of single families competing with large investment funds to buy a house is fairly unsettling.
I believe I was raised in a generation that strongly believes that you have to participate in the real estate market to build generational wealth - whether that's in the form of owning properties or providing the picks and shovels (e.g. selling real estate, providing mortgages, doing renovations/property management) in the race to own a house/s.
It's not as if most of these investments actually generate cash returns. A lot of real estate investments in the Toronto area are made on the bet that prices will continue to go up - allowing investors to take a hit on their actual cash on cash return in the interim. As the prices of housing in major city centers go up, we've also seen prices/demand grow in secondary markets that were often overlooked.
Outside of the typical arguments that get thrown around (e.g. low-interest rates, immigration), there have been a couple of other interesting trends that have made this particular cycle a bit more widespread.
The Ease of Investing in Real Estate
Through the technology available today, it's now a lot easier to buy and manage real estate remotely in a way that's far more scalable. Similar to many other industries, the real estate industry has adapted to the idea of working with one another virtually. Some platforms (e.g. Redfin, Opendoor) have gathered enough data to make offers themselves - creating a frictionless experience for the buyer and seller.
Eventually, I'd expect investors to be able to buy real estate in a way that's no harder than buying cryptocurrency.
Predictable Scarcity
This is an area that Chris Spoke goes into in a fair bit of detail in his post on the Hub.
"Most people recognize that this is due to supply constraints that limit the amount of new housing being completed every year to house new people. That is, the price elasticity of supply (or responsiveness of supply to rising prices) is too low.
The CMHC studied this exact metric in a large 2018 research report on the drivers of home price growth in Canada’s five largest metropolitan areas between 2010 and 2016 and estimated that housing starts in Montreal, Calgary, and Edmonton rise one percent to two percent for every one percent increase in home prices. In Toronto and Vancouver however, housing starts only to grow by 0.5 percent and 0.3 percent, respectively."
Here again, we see a similar phenomenon to cryptocurrency (or any other fixed supply asset). Given that there are only so many houses, the demand for people to buy as many possible will naturally be quite high. The 'FOMO' effect is only heightened when you see prices continue to go up and everyone else around you benefiting from it.
Structural Incentives
In the push to drive up homeownership since WW2, we created an entire financial system to support homeownership. On the surface, people come across this via a number of financial products designed to extract value from single-family real estate. The ability and opportunities that come from having access to leverage creates a gap between the 'haves and have nots' that continues to widen at an alarming rate.
Check out this clip from the latest All-In Podcast for more:
My Thoughts
The most practical solution, as Chris points out in his article, is to simply build more housing. However, homeownership (from the very beginning) is an extremely politicized topic that impacts everyone in some way, shape, or form.
I suspect we will likely do a mediocre job of the following:
Forcing specific regions/types of housing to become affordable (e.g. rent control, first-time buyer incentives, higher taxation for investors)
Increasing the overall housing supply by providing incentives/eliminating barriers to build
However, we're also unlikely to move quickly - causing prices of affordable housing (e.g. less than $1M) to still grow at a healthy rate.
The irony of all this is seeing each generation perpetuate its own bubble - whether it is driven by housing, digital currencies/NFTs, stocks, or even businesses and criticize each other for being illogical.