Classifying Home Buyers in Canada's Real Estate Market

According to a report from the Bank of Canada called Housing demand in Canada: A novel approach to classifying mortgaged homebuyers the share of mortgage-financed home purchases associated with first-time homebuyers, repeat homebuyers, and investors has risen rapidly in Canada, but little was previously known about their characteristics.

It turns out that investors residing in 11 major cities in Canada buy about 4% of all the investment properties in non-urban regions, and this share is increasing over time.

Since 2015, investors' share of home purchases has risen and even more so in 2021. Repeat homebuyers have also seen their share of activity increase slightly over time.

TransUnion found that since 2014, 14% of home purchases in Winnipeg were made by investors, whereas investors made approximately 21% of all home purchases in Toronto.

It also seems that first-time homebuyers tend to be younger than other types of homebuyers. First-time homebuyers tend to have the highest loan-to-income ratios, a crucial metric the Bank of Canada uses to monitor financial vulnerability.

When looking at debt associated with the latest issued mortgage, we can see that investors are much more highly indebted than other types of homebuyers. Investors have higher total debt service ratios than non-investors, a ratio that captures payments on all debt, including prior mortgages and non-mortgage debt.

The Bank of Canada is unsure what sources investors include in their documented income because regulatory returns and underwriting practices vary across lenders. Also, investors are underreporting income when applying for a new mortgage, so the housing market's vulnerability may be overstated. This may not be a good sign when it comes to the housing market in Canada because investors in the housing market have increased their demand, which means they likely believe prices will continue to rise in value. This may actually be a source of instability for the financial system and the economy more broadly.

TransUnion did not provide personal information to the Bank of Canada. A 44% cut-off for the total debt service ratio for insured mortgages was used, while the cut-off for uninsured mortgages was left to the discretion of individual lenders.

What does this mean?

Economists have argued that Canada's biggest cities and their surrounding areas are experiencing a real estate bubble mainly because the market is being driven by investment speculation. Currently, the main issue with Canada's real estate market is limited inventory and rapidly rising property prices.

Time will soon tell whether increasing interest rates and new Government policy will flatten the housing curve.

As always, if you'd like to discuss mortgage financing options, please call or write.

Sarah A. Colucci
Senior Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Email: sarah.colucci@coluccimortgage.com

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