Higgs sleepwalking into massive housing crisis with rental reforms

Vacancy rates in New Brunswick are at record lows, and the province is facing the highest rental inflation in the country. Yet, the report, Review of the Rental Landscape in New Brunswick, released on May 7, does not mention the real estate investment firms at the heart of the housing crisis.

So far, Premier Blaine Higgs has refused to acknowledge the crisis of affordable housing, and has undermined suggestions that he might do something about it. “I am not a fan of rent control,” Higgs told the Telegraph-Journal back in February.

Higgs seems to feel more comfortable following the advice of the New Brunswick Apartment Owners Association, whose proposal to cut taxes on apartment buildings was part of the Conservative government’s election platform. The tax cut would take the form of extending a provincial property tax exemption to non-owner occupied housing, essentially making it cheaper to invest in rental housing.

In theory, we are told the tax cut would reduce rents because renters are subjected to higher taxation than homeowners, and extending the provincial exemption to them would help reduce rents. However, there are no rent controls in New Brunswick and no legislative mechanism to ensure tax cuts would be passed on to the ones who actually pay those taxes—renters.

Moreover, such a measure would do nothing to address the immense power imbalance between renters and landlords that present legislation allows. Surely, the New Brunswick Apartment Owners Association sees the irony of positioning themselves as leaders of housing affordability.

Financialized landlords

The reason addressing this imbalance is more important than ever is because traditional landlords are being bought out by new corporate entities steeped in shareholder value ideology.

Last summer, Real Estate Investment Trusts (REITs) suddenly began investing heavily in New Brunswick apartment buildings, often paying considerably above the assessed value of buildings, and then jacking up rents.

Any announcement this month that favours landlords without alleviating the power imbalance between landlords and tenants will attract yet more of the same speculative capital looking to invest in rental cash flow.

The province’s property taxation laws currently function much like the foreign-owner tax in Vancouver or Ontario: it reduces speculative investment in our real estate market by making speculative investment more expensive. Extending the provincial property tax exemption to non-owner-occupied properties and apartment buildings is a recipe for more housing inflation.

That is partly because the pandemic monetary stimulus also failed to address power relations and imbalances between wealthy investors and working Canadians, whose real average incomes have stagnated since the early 1980s.

Financialized buyers are distorting Canada’s housing market—by this, I mean that there is too much private wealth seeking higher returns buying up prospective rental properties. Moreover, the process doesn’t just stop at apartment buildings. It may also be rapidly spreading to the housing sector itself as investors buy up houses they expect will rise in value.

Since the 2008 financial crisis, government and corporate bond yields have been unusually low, reflecting the economy’s overall weakness. The Bank of Canada consistently resisted raising rates for fear of sparking another recession. Lacking adequate yield (i.e. rates of return), ‘non-banking financial intermediaries’ (e.g. hedge funds, pension funds, insurance funds, private equity firms investing in debt) have sought out new revenue streams by investing in rental cash flow.

The growth of ‘non-traditional’ mortgage finance companies has been one of the major preoccupations of the Bank of Canada for the last few years. Private lenders, operating outside the rules of traditional commercial mortgage regulations, are funding new types of investment in real estate.

Despite government attempts to regulate private lending, it has grown significantly. Some of this capital has gone into fueling real estate speculation, enabling more and riskier demand to enter the market with higher leverage levels. Mortgage Professionals of Canada CEO Paul Taylor has called for regulations—not unlike New Brunswick’s tax exemption for owner-occupiers—that protect affordability and market access for first-time home buyers. The Financial Stability Board, a multi-lateral organization that promotes international financial stability, has expressed concern about the systemic risk generated by some parts of non-bank financial lending, given its rapid growth over the past decade.

In Canada, its 2020 report identifies money market funds, real estate funds, as well as consumer debt factoring as potential risks. It does not specifically break out the volume of real estate lending, but non-bank lending has increased by double digit amounts in categories that include real estate.

Beyond supply and demand

Meanwhile, the Bank of Canada continues to rely on neoclassical arguments about ‘pent up demand’ after the pandemic to explain what has happened to housing. Whose pent up demand?, we might ask.

Bay Street skeptics of Canada’s housing bubble have drawn attention to the fact that wages are nowhere near keeping up with these price increases, but they too remain largely focused on traditional, neoclassical explanations of real estate price inflation.

According to the New Brunswick Real Estate Association, New Brunswick homes increased by an unheard of 32 per cent year over year in March, with sales volumes significantly higher than they were before the pandemic.

We are told the price increases are the result of more sales from people relocating from Ontario. That is possible, but Statistics Canada data do not show a significant increase in people moving to New Brunswick—in fact, population growth decelerated significantly in 2020.

Another explanation centers on what financial regulators in Canada are most concerned about: the rise of private mortgage lending. As Statistics Canada reported, the value of residential mortgage loans by non-banks grew to $47.9 billion in the second quarter of 2020 (just as the pandemic real estate boom got going), a 36.5 per cent increase over the previous year.

That is a lot of money chasing houses, so it is not for nothing that all regions of the country—not just the Maritimes—have seen historic housing price inflation, accelerating a housing affordability crisis for the vast majority of Canadians who depend on wages to live.

One of the key questions that policymakers don’t yet understand is who is using all that extra credit? We might assume that it is the same people as always: households looking to live in them.

But the rise of buy-to-rent housing post-2008 in the United States should give regulators more pause. The industry is moving North. Whereas in the US, it is dominated by large corporate landlords, in Canada, the shape of the industry may turn out to be different.

BRRRRing bubbles in New Brunswick

While large financial firms are key players in the transformation of Canadian real estate, so are bit-players, many of whom make the actual real estate investment. Online platforms like US-based Bigger Pockets play a role in accelerating real estate inflation similar to the way Reddit helped boost the price of GameStock. Its message boards are full of people looking to invest in multi-family and single-family rentals sight unseen, including in New Brunswick.

Social media is also awash in real estate gurus looking to become online content leaders for real estate investors.

Rather than just an increase in out-of-province buyers fueling housing inflation, it is just as likely that real estate inflation in New Brunswick is the result of increased investor-buyers. Regulators and industry professionals lack data that would help verify its extent, but new investor-buyers are operating in New Brunswick, and interest is growing.

Real estate investors large and small are employing a strategy called BRRRR—buy, renovate, rent, refinance, repeat—pioneered by social media real estate guru Brandon Turner and his firm Bigger Pockets.

While the ‘buy, renovate, and rent’ part of BRRRR is probably self-evident to readers, the ‘refinance and repeat’ part is what is key.

Investors—often people with relatively small stocks of capital to begin with—buy houses with no intention of living there, drawing on private debt lending for purchases and renovation costs. They will then rent them out for cash flow, and refinance them to new valuations. Having recouped their initial capital and then some, BRRRR investors ‘repeat’ the process again, relying on private lending to facilitate the process.

What makes BRRRRing possible is access to new and deeper pools of private capital than ever before.

BRRRR property investors are essentially buying ‘cash flow’ with borrowed money, and private lenders are gaining access to lucrative streams of passive rental income, especially as rental vacancies are tight across the country.

What New Brunswick should do

In New Brunswick, one factor that dampens this speculation and helps protect our ‘relative affordability’ is our property tax structure. The misnamed ‘double tax’ lowers cash flows for BRRRR investors, reducing the amount of additional capital that can go hunting for more houses in the province.

Extending the provincial property tax exemption to non-owner-occupied rental properties will accelerate speculative investment in New Brunswick and pour gas on a barn fire.

Instead, what is needed more than ever is rent control and eviction protection. The lack of these two measures in our landlord-tenant legislation is a major attraction for speculative capital.

The lack of tenant protections in New Brunswick doesn’t just hurt tenants. It can also lead to speculation in single-family homes, which are being bought to rent. In a tight market, it doesn’t take a lot of BRRRRing to blow big bubbles that someone will eventually have to pay for. Though the practice is much more widespread in the United States than Canada, as housing costs climb, more potential buyers will be forced to rent and the private debt market knows this.

Other measures are also needed from other levels of government, but New Brunswick has one thing right. It should avoid throwing out policies that actually serve the public interest.

Matthew Hayes is the Canada Research Chair in Global and International Studies at St. Thomas University and a member of the NB Media Co-op editorial board.