Institutional investors: A new housing affordability bogeyman?
By Andrey Pavlov, Ph.D., Goodman Report
In British Columbia, we seem quite skilled at finding people to blame for our housing affordability troubles. From evil speculators to greedy developers, there’s always somebody who messes up our otherwise perfect cities. It’s a good thing we have unlimited “tax, regulate and destroy” ammunition to devastate each of them. From the punitive “speculation and vacancy” tax to draconian restrictions on new supply, especially for purpose-built rentals, we’ve deployed everything.
Yet housing affordability remains elusive, especially in the rental market. Rents continue to increase, and vacancies still hover around one percent, a far cry from the three percent required for a normal market.
Instead of reversing course and addressing the causes of our housing shortage, however, we invent yet another bogeyman. This time the villains are institutional investors, as has been suggested by the BC Non-Profit Housing Association (BCNPHA) and reported in the August 15 Vancouver Sun article on the issue.
Institutional investors are easy to blame. They’re faceless corporate suits from faraway lands. Never mind that most of these institutional investors, many of them public companies, represent our own retirement savings. Never mind that they offer professional management and low-cost, long-term capital. And never mind that they bought only two rental buildings in all of Metro Vancouver in the first half of 2020, as tracked by the Goodman Report.
Now that we’ve identified a new bogeyman, real or not, we can feel good that the housing shortage isn’t really our fault. Even better, we’re morally justified in yet again opening the “tax, regulate and destroy” toolbox. The BCNPHA is already at it, proposing a $500-million capital fund that would come from the province. This is the “tax” part, as the only way the province can increase spending is to increase our taxes even further. Next comes the “regulate” part. The proposal is “to enable non-profits to buy apartment buildings when they come up for sale … before institutional investors can acquire them,” as reported in the above-mentioned article. Details are scant, but no doubt the intent is to acquire the buildings on government-mandated preferential terms.
Then comes the destroy part. Except this time, it’s not even the bogeyman – the institutional investor – that’s being destroyed. Institutional investors have no particular need to be in Vancouver to begin with. Instead, the targets are current landlords. Restricting and regulating how and to whom they can sell would be yet another assault on them. We’ve already made it near-impossible for them to redevelop, renovate or even maintain their buildings. Limiting their ability to sell will very likely be the proverbial straw, or more like a brick, that breaks their backs.
And here’s the most concerning part. Restricting how and to whom a property owner can sell increases the risk of the investment. Increasing the risk increases the cost of capital. Higher cost of capital makes many projects non-viable, and the ones that remain viable would need to charge higher rents to cover the increased capital costs. Either way, we’ll have fewer new rental buildings going forward, and the ones that do get built will require higher rents.
In the end, it’s the renters, the very group that we’re presumably trying to help, who would face even less availability and higher rents. Ironically, less availability and higher rents only benefit the presumably evil institutional investors.
None of this should be a surprise. As Diamond, McQuade and Qian explain in a recent paper published in the American Economic Review, heavy-handed market manipulations such as targeted rent control end up hurting the very people they’re intended to help.[1]
So how about instead we remove the regulatory obstacles to new housing supply? We need all investors, big and small, for-profit and non-profit, so that we can maintain and rejuvenate our aging rental stock and add to it quickly and abundantly.
It’s not rocket science. Just look at Seattle, which built 17,450 rental units in 2018, about 13 times more than Vancouver did in the same year.[2] [3] It’s not perfect, but rents there are stable, there is a variety of housing options, and one actually can find a place to live.
The BCNPHA actually understands the need for more supply. They’re right that despite historic investment in housing, we still don’t have anywhere near enough. Instead of trying to reallocate stock from one market segment to another, though, we should all join forces and vastly expand all segments.
And the best part: substantial increases in rental stock would give B.C.’s non-profit organizations a lot more choice for potential acquisitions, both old and new. They wouldn’t need to compete with institutional investors, as there would be plenty of investment opportunities for all.
Andrey Pavlov, PH.D., is Professor of Finance, Beedie School of Business, Simon Fraser University.
[1] Rebecca Diamond, Tim McQuade and Franklin Qian, “The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality: Evidence from San Francisco,” American Economic Review 109, no. 9 (2019): 3365–3394, https://doi.org/10.1257/aer.20181289.
[2] The Seattle Times, April 2, 2019. https://www.seattletimes.com/business/real-estate/seattle-rents-growing-at-among-slowest-rates-in-country-as-apartment-boom-reaches-record/
[3] The Goodman Report. 2018 Rental Apartment Review. January 2019. https://goodmanreport.com/content/2018%20Year-End%20Report_web.pdf