House prices have grown rapidly in many parts of Canada in recent years. This has raised some concerns among policy-makers about financial stability and housing affordability. Yet, we know little about how different types of homebuyers have contributed to the dynamics of housing markets in Canada.
In this note, we document a novel approach to study home purchases in Canada. Combining different sources of microdata, we compute the share of mortgage-financed home purchases associated with three types of buyers:
We then study the demographic and financial characteristics of these groups to derive initial insights into financial vulnerabilities associated with different types of homebuyers.
We combine two sets of anonymized loan-level data, both available from 2014 onward:
We develop a matching algorithm to detect the same borrowers across these two anonymized datasets. The algorithm includes variables such as the mortgage amount, the origination date, the lender’s name and the borrower’s forward sortation area (the first three characters in their postal code). We obtain a matching rate of close to 90% across most of the large banks.
To test whether the home purchases in our combined dataset are representative of home purchases in Canada, we compare our data with those of the Canadian Real Estate Association (CREA). As shown in Chart 1, the year-over-year growth rates of sales and prices in our dataset closely mirror their CREA counterparts—but with a slight lag. Such a lag is not surprising since mortgage funds are typically advanced when the property title is transferred, which happens after a sales agreement is finalized. Note, however, that purchases in our dataset are based on a different definition than those captured by the CREA. This is because we include mortgages issued for the purchase of new homes in addition to those for the purchase of existing homes. However, we do not capture purchases made using cash only or those made by corporations.
Chart 1: Matched data show growth dynamics similar to the usual resale statistics
Sources: TransUnion, regulatory filings of Canadian banks, Canadian Real Estate Association and Bank of Canada calculations Last observation: 2021Q2
With the matched dataset in hand, we then break down mortgaged home purchases into contributions from three distinct groups: first-time buyers, repeat buyers and investors.
We identify purchases by first-time homebuyers by the first-ever appearance of a mortgage on a borrower’s credit file. We find that first-time homebuyers are the largest group of homebuyers, accounting for one-half of home purchases since 2014 (Chart 2).
Sources: TransUnion, regulatory filings of Canadian banks and Bank of Canada calculations
For a purchaser to be classified as a repeat homebuyer, the issuance of their new mortgage must also be associated with the discharge of a previous mortgage. Repeat homebuyers have accounted for 31% of home purchases since 2014.
This category represents homebuyers with multiple mortgaged properties. This means investors are homebuyers who either:
Since this dataset includes only mortgages originated by Canadian financial institutions, we capture mostly domestic buyers. Purchases from foreign buyers would be included only if the buyers obtained a mortgage in Canada. Under these parameters, investors have accounted for 19% of mortgaged home purchases since 2014.
Housing investments here may include the purchase of recreational properties, such as cottages. However, their inclusion does not alter our results in a material way. To investigate this question, we examine the share of investment purchases in non-urban regions.4 Specifically, we look at investors residing in 11 major cities in Canada (as in Chart 5) and find that their purchases in non-urban areas account for only 4% of all of their investment purchases since 2014. While small, this share has increased over time, from about 3% in 2014–15 to about 5.5% in 2020–21.
Next, we examine how home purchases from the three different groups have evolved over time. Chart 3 shows a high degree of co-movement in the growth rates of these groups’ home purchases. Interestingly, while purchases from all three groups have seen a rapid increase during the COVID‑19 pandemic, this is most pronounced for investors. The last time growth in the investor category outstripped that of first-time or repeat homebuyers was in 2017—during a period of exceptionally strong house price gains in Toronto and surrounding areas.
Sources: TransUnion, regulatory filings of Canadian banks and Bank of Canada calculations Last observation: 2021Q2
As a result of these dynamics, the share of purchases by investors rose in 2017 and then again in 2021 (Chart 4).5 Currently, investors account for just over one-fifth of home purchases in Canada. Repeat homebuyers have also seen their share of activity increase slightly over time. In contrast, the share of purchases by first-time homebuyers has declined since 2015, reaching a new low in 2021; in the same six-year period, home prices have risen much faster than disposable income.
Sources: TransUnion, regulatory filings of Canadian banks and Bank of Canada calculations Last observation: 2021Q2
Investor activity also varies across Canada’s major cities (Chart 5). At the low end, since 2014 investors have made 14% of home purchases in Winnipeg, compared with, at the high end, 21% in Toronto over the same period. We also note an upward trend over time in the share of home purchases by investors in nearly all major cities across Canada.
Sources: TransUnion, regulatory filings of Canadian banks and Bank of Canada calculations Last observation: 2021Q2
To better understand vulnerabilities associated with different types of mortgaged homebuyers, we analyze their demographic and financial characteristics.
Starting with age, we see that first-time home buyers tend to be significantly younger than other types of homebuyers (Chart 6, panel a). Their median age is 36 years, compared with around 50 years for other types of homebuyers. The income distributions of the different types of homebuyer also reflect these life-cycle differences (Chart 6, panel b).
Turning to measures of financial vulnerability, we see that first-time homebuyers also tend to have the highest loan-to-income ratios at the time of mortgage origination (Chart 6, panel c). As a result, they greatly influence the total share of new mortgages with loan-to-income ratios above 450%—a key metric the Bank of Canada uses to monitor the vulnerability related to household indebtedness.
However, looking only at debt associated with the latest issued mortgage will tend to understate the financial vulnerability of investors who hold multiple mortgages. An advantage of our matched dataset is that we have the complete credit histories of all homebuyers. Therefore, we can observe the outstanding balances on all mortgages held by investors. When we recalculate loan-to-income ratios based on all mortgage debt, investors are clearly much more highly indebted than other types of homebuyers (Chart 6, panel d).
The larger debt load of investors is also likely reflected in the total debt service ratio calculated at the time the latest mortgage is issued. In principle, this measure should capture payments on all debt—including prior mortgages and non-mortgage debt.6 Chart 6, panel e, shows that investors tend to have higher total debt service ratios than non-investors. In particular, a noticeably higher share of investors have total debt service ratios above 44%.7 Investors that are highly indebted could face difficulty servicing their debt following a loss of income (either employment or rental) or an increase in interest rates.
An important gap in our analysis is that we cannot be certain what sources investors include in their documented income. Regulatory returns include only a single field for income, and it does not distinguish between employment income and rental income. Moreover, underwriting practices for rental income may vary across lenders. For example, some lenders allow applicants to use only 50% of rental income for mortgage qualification.
It is also unclear whether investors report all income when applying for a new mortgage or only enough to qualify. If income is underreported for investors with multiple investment properties, then panels d and e of Chart 6 may overstate the vulnerability. Without having more information on how rental income is being treated, we cannot easily assess the vulnerabilities and risks that investors bring to the housing market.
Chart 6: Housing investors tend to be older, earn more income and be more indebted
Distribution of homebuyers based on different metrics, 2014–2021H1