Banning investors helps homebuyers but hurts renters

Evidence from Rotterdam

From Francke et al, June 2023

Sometimes you hear people say that building a lot more new housing isn’t going to help, because investors will just buy it. A popular proposal is to make it illegal for an individual to own more than one home: “one SIN, one home.”

I'm not sure why "investors will buy it" is an argument against building more housing in places like Toronto and Vancouver. After all, there's lots of people who rent. Rents and prices reflect scarcity: it's very difficult to get permission to build more housing in Toronto and Vancouver, so we end up with a mismatch between housing and jobs. So rents have to rise to unbearable levels, forcing people to leave, matching those remaining with the limited supply of housing.

Build more housing, creating more vacancies, and rents come down. Some recent evidence that higher vacancies results in lower rents, even in expensive cities:

Of course rents coming down also makes housing less attractive as an investment. But even if investors are stubborn or irrational and want to keep buying, more housing resulting in lower rents is a good thing for renters, which is a lot of people.

Fundamentally, if we don't have enough housing for people to live in (as illustrated by vacancy rates near zero in places like Vancouver and Halifax), then trying to redistribute housing between investors/renters and homeowners isn't going to solve the problem. The problem can only be solved by building more housing.

Rotterdam’s buy-to-let ban

Redistributing homes from investors to first-time homebuyers would benefit homebuyers, but at the expense of renters (who tend to be lower-income). There's evidence from Rotterdam, where "buy-to-let" investment was banned from certain areas. Comparing those areas to those without the ban, the result is that first-time homebuyers did indeed replace investors, but the ban also reduced the supply of rentals, pushing up rents.

Dutch News, June 2023: Buy-to-let ban is good for first-time buyers but bad for tenants.

Kareem Kudus of Generation Squeeze writes:

Does a "buy-to-let" ban really harm renters? Sure there are less rental units available, but there are also less renters (since those first-time homebuyers are no longer renting), right? It seems to me that this sort of scheme shouldn't affect the balance of rental units to renters?

For each property that's converted from rental to first-time homebuyer purchase, there's one rental unit that opens up (previously occupied by the homebuyer). If there was a single renter household in the property, then there'd be one more renter household looking for a place, and the overall supply and demand hasn't changed.

But at least in Vancouver, there's often multiple renter households in a single property. For these cases, there will be multiple households looking for a place, and only one vacancy freed up.

So the overall effect of converting a rental property to owner-occupied is that
(1) it doesn't help renters, in the case where there was a single renter household, and
(2) it increases rental scarcity, in the case where there were multiple renter households.

An additional impact: in jurisdictions which have rent control, like BC, long-time renters often have controlled rents which are significantly below current asking rents. When their rental is converted to owner-occupied and they need to find a new place, they end up paying much higher rent.

Individual investors are pursuing a risky strategy

I think it's also useful to break down investor demand into two parts:

(1) Institutional ownership of purpose-built rental housing. This is a low-risk, low-return investment. Vacancy rates are low, so there isn't much downside, but there also isn't much upside - it's not like investing in Microsoft or Nvidia. Typically held by pension funds and REITs.

(2) Individually owned rentals, like condos. This is a very different business. Typically the investor would put down a 20% down payment and borrow the rest. In places like Toronto and Vancouver, it's difficult to get "positive cash flow": because investors expect prices to go up over time, they're willing to bid up prices so much that the rent doesn't cover their expenses. Canadian Press, May 2023. Their strategy is what Wall Street Bets would call "hodl": to hang on as long as possible, putting money in every month and watching prices go up, and then make money when they sell.

This is much more speculative and risky (especially compared to something like the Canadian Couch Potato). You're making a leveraged bet that prices will go up.

So even if a ban would be bad policy, I think an education campaign which encourages people to save using low-cost index funds instead of undiversified, leveraged bets on property would be a good idea.

More

Video on Rotterdam’s buy-to-let ban by Oh the Urbanity!

A good summary by u/redbladezero on r/urbanplanning.

Buy-to-let restriction in Rotterdam: stimulating households or bullying investors? Pieter Rietsma (master thesis), July 2022.

Buy-to-live vs. buy-to-let: the impact of real estate investors on housing costs and neighborhoods. Francke et al, June 2023. Twitter thread.