A Bidding War With BlackRock

Steve Saretsky -

The Covid housing boom has spurred new riches for Canadian homeowners. Household net worth surged 21.5% year-over-year in the first quarter, the largest gain on record. Indeed rising home prices, at least on paper, are making Canadians feel wealthier. To no surprise, households that own their home accounted for almost all of the gains in the first quarter – $730 billion. The wealth of renters was up just $43 billion.

Of course none of this would be possible without some help from policy makers and the big banks ramping up mortgage lending. Printing mortgages is a profitable business, and the big banks are now sitting on $40.5 billion in excess common equity tier 1 (CET1) capital. The Big Six internally target an 11% CET1 ratio, but lenders have barrelled past that marker, booking an average 12.8% ratio with a combined total of $270.6 billion in CET1 capital — the highest on record. This excess capital has to be deployed, and the bulk of it is expected to be returned to shareholders.

If you’re noticing a common theme here, yes, the booming housing market has been great for existing asset holders. However, for those less fortunate who don’t own assets, they are falling further behind as wages fail to keep up with the rising cost of living. It’s no secret the Bank of Canada’s negative real interest rate policy and liquidity injections are impoverishing a portion of society.

This problem isn’t going away anytime soon, in fact, it looks poised to accelerate in the years ahead. With central banks effectively distorting interest rates and destroying the bond market, the hunt for yield or alternative assets is growing. This is encouraging massive financial institutions and corporations to ramp up residential real estate purchases. Institutions such as BlackRock (over $8 trillion in assets under management) are purchasing entire neighbourhoods and converting single-family homes into rentals. BlackRock is just one of many companies now competing with the average Joe & Jane in the resale market.

Imagine purchasing your next family home and being in a bidding war with BlackRock…

Corporations involved in the residential housing market is nothing new per se, but is definitely growing at a rapid pace and should undoubtedly raise concerns with a younger generation already priced out of the housing market.

While this is largely a US phenomenon right now, we have a new entrant here in Greater Toronto. Core Development Group Ltd, largely known for building new condos has raised $250-million from investors to buy approximately 400 properties, add basement apartments and turn the houses into two rental units.

Core founder Corey Hawtin and executive vice-president Faran Latafat questioned why there wasn’t a similar business in Canada, which has had a rental vacancy rate below 3 per cent since the turn of the century. “We were trying to answer the question: Why is nobody doing this in Canada? We could not come up with an objective answer to that. In Canada, it works as well or better than the U.S.,” said Ms. Latafat, who is leading Core’s single-family home rental division.

Core is targeting eight midsized cities in Ontario, and this year started buying properties in Kingston, St. Catharines, London, Barrie, Hamilton, Peterborough and Cambridge. It will soon start buying in Guelph. Its medium-term goal is to have a $1-billion portfolio of 4,000 rental units in Ontario, Quebec, B.C. and Atlantic Canada by 2026.

Three Things I’m Watching:

1. Household net worth in Canada jumped 21.5% in the first quarter from a year earlier, the largest gain on record. (Source: Bloomberg)

2. Canadian banks have $40B in excess CET1 capital above industry standard floor or $80B in excess against current requirements. (Source: Financial Post)

3. Bank of Canada holds rates, says inflation will be transitory. (Source: Bloomberg)

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The Saretsky Report. December 2022