Front Burner - When big money buys up homes to rent

Episode Date: June 17, 2021

A real estate developer in Toronto is planning to spend a billion dollars buying Canadian houses and turning them into rentals. Today, former UN special rapporteur on housing Leilani Farha on what she’s seen when big money gets into residential rentals.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. Hi, I'm Jamie Poisson. So on Sunday night, I was scrolling through Twitter, and I see this story in the Globe and Mail,

and it totally caught my eye. It was about this Toronto condo developer, Core Development Group, and their plans to buy up a whole bunch of single-family homes and turn them into rentals. They'd already raised 250 million bucks to do this in mid-sized Ontario cities like Hamilton, and Barrie, Kingston, and Peterborough. And their goal is to get a billion dollars worth of houses right across the country. The story caught my attention for a whole bunch of reasons. First of

all, we've talked on the show before about how crazy hot the real estate market is right now and how it's putting home ownership out of reach for a lot of people. So would this corporate player with really deep pockets make houses even more expensive? I was also curious about what kind of landlords they'd be. So would their rentals be affordable? We've seen institutional investors get into the residential rentals game before with apartments here in Canada and houses in the US, and it hasn't always worked out that well for tenants. I wasn't the only one with these kinds of questions. We heard a lot of them on social media as well, especially after I said on Twitter that we'd be doing an episode on this subject.

Shortly after, we got an email from a public relations person asking if we wanted to speak to representatives from core development directly on the show. I thought, great, why not put our questions and our audience's concerns directly to them and hear what they had to say. We scheduled the interview for 4.30 p.m. on Tuesday afternoon. At 4.29, we get this email saying an unexpected emergency came up and CORE's executive vice president would not be coming on the call. By 10.30 that night, they'd canceled altogether. To be honest, I wasn't surprised. There's been a lot of backlash.

Even conservative party leader Aaron O'Toole tweeted, quote, how are first-time homebuyers supposed to compete with billionaire investors? So today, Leilani Farha is here. She's the former U.N. Special Rapporteur on Housing and current Global Director of The Shift, a housing advocacy group. And she's seen what happens when big money gets into the housing rental game. Hi, Leilani. Thank you so much for making the time today. Oh, it's a pleasure to be here, Jamie. Thank you so much for making the time today.

Oh, it's a pleasure to be here, Jamie. So I wonder if I could start by asking you what your reaction was when you heard that this core development group planned to, and I'm quoting from their website here, pioneer the single family rental asset class in Canada. I had a sinking feeling in my gut. I was pretty distressed. But I have been looking at this kind of financial activity in the area of housing for some years now. And I've, I've, I've seen this in the US or a version of this in the US and it doesn't bode well. And so that was that sinking feeling. And I'm hoping we can get into what you've seen in the US in just a few minutes. But before,

you know, when they did cancel on our interview, they did email us with a long statement. And I won't read all of it. But they did say that their goal is to provide, quote, stable, secure, long term rental properties for people who can't afford to buy but want more space than a condo, and that they're creating new rental supply by renovating these houses and putting in another unit. And so what do you think about that? Yeah, well, I mean, that's their narrative. And I can see how it is that they believe in what they're doing. But I think there is another narrative, which is that first of all, they have already been active. And in the places they've been active, the rent levels that they've set have been higher than the average rent. And so they might be affordable to someone, but they're not meeting affordability rates.

But also, I mean, the question is, was this needed? Who determined that this was needed? Who asked for this to happen? And what is this really about at the end of the day? And I think that what's at play here is that they see single family homes, as we call them, as underperforming assets. And by that, I mean, they know that by converting these homes into rentals and two rentals out of one, right, because that's what they're doing. of one, right? Because that's what they're doing. Basement apartments, which you mentioned rent, according to the Globe, they're going for $1,600 a month right now. And we looked into it and found that would be about 50% of the average Barrie residence annual income. And then the rest of the home would also be a rental. That's right. And so by doing this, by buying it and converting it into a rental, they can squeeze more profits out of every square meter of that home than if it just stands as a single family home. So, you know, what like what's what's really at play here is profit making, and it's corporate profit making. So,

you know, I'm not saying that they aren't creating rentals, they are. But I think those rentals are being priced higher than average rents. And I think that at the end of the day, this is about making money for a corporation. And then there are bigger questions, right? Like, what happens when a real estate corp, a Toronto based real estate corp that has access to liquidity and can leverage money quite easily? What happens when they start competing in the home ownership market? Don't they immediately have an unfair advantage or an advantage that is going to make it even more difficult for, you know, the regular family that's trying to get into the housing market?

Can we go back to what you mentioned at the beginning, this issue that you have spent so much time looking into, and this is a much bigger phenomenon at play, the financialization of housing. And talk to me about what that means. Yeah, sure. So since the global financial crisis back in 2008, we've seen a rapid and marked change in the housing landscape, where housing has become an uber profitable commodity, and it's being treated as a commodity. So I have a short definition of the financialization of housing that's really easy to get your head around. And it's simply when housing is used as a place to park, grow, leverage, or hide capital. Now, you might say, well, come on, this has been going on, you know, housing has been a commodity for a long time. True. However, what's new since the global financial crisis is the unprecedented amount of wealth, money that's being put into housing as an asset. What's new is the en masse purchasing

of housing by institutional investors. And institutional investors are pension funds, insurance companies, private equity firms, huge amounts of money going in buying you know thousands of units at once and what's also new is the harnessing of technology to make that happen so literally artificial intelligence and all those tech firms making it possible to bundle mortgages to buy, you know, apartment buildings en masse, etc. So we are in a new era of all of this. And it's very scary. It's scary for tenants in particular, because what the outcome of this is, it is a, there is a business model that's in place and the business model is very simple. Private equity or big capital, big real estate firms purchase, renovate, and increase rents, period. That's the model. And it is having dire consequence for tenants whose incomes obviously are not going up at the same rate that rents are going up.

So it's resulting in people self-evicting because they know, oh, God, my rent has gone up. I can't afford this any longer. Or it's resulting in evictions because of arrears. And then people have nowhere to live. They can't continue to live in their community because everything is so expensive. So then the question is, okay, well, you know, does what core development, what they're proposing fit into this model? Absolutely. I mean, look at the figures, a billion dollars, 4000 units, and it's a profit driven model. And, you know, so I see I now are they putting this on the stock exchange the way some of these big actors do in Canada, we have a large number of real estate investment trusts, which are really just a financial instrument, owning apartments across the country. They actually put, believe it or not, they put apartments on the stock market. I mean,

they have shareholders, and the shareholders are not individuals, the shareholders are pension funds, the shareholders are insurance companies, etc. Even BlackRock, which is another, it's an investment management firm, they will own shares in these companies. So suddenly your apartment is really a tradable stock, right? So we I don't know that that core development wants to go down that road and go public and all of that stuff. But where is this leading? And is this what we want our housing sector to look like in this country? Is it good for the country?

Is it good for tenants? Those are the questions I'm asking myself. Episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization. Empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own

household income? That's not a typo. 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Cops. I wonder if you could paint a little bit more of a picture for me of how this has played out in the United States, like just for a regular tenant family. Yeah. So, well, in the States, after the global financial crisis, this is when it really emerged. So what happened was, a lot of people were foreclosing on their mortgages because of predatory lending, right? So they couldn't make ends meet, couldn't make their mortgage payments, and the banks were foreclosing. And what that meant was the banks had all this bad debt on their books, right? All these loans they'd given that

weren't being paid back. And they started to sell those loans to private equity firms who bought them en masse, in particular, a firm called Blackstone. They really developed this model. So they, almost overnight, went from owning no residential real estate to becoming one of the most prominent landlords in the US. So what they did was they bought 40,000 mortgages cheap. So Blackstone then took those homes, did some renovations to them and put them on the rental market exactly what core development is doing. Except in this case, they were buying them cheap through this bad debt arrangement with banks. So homeowners suddenly became beleaguered tenants, having to pay huge rents on a monthly basis. And the modus operandi here is to constantly

raise the rent, because there are investors who need a good return on their investment. And the way to ensure that is to constantly increase rents, tenancy fees, other occupancy fees, etc. So that's how it played out in the United States. And it continues to play out that way. The pandemic has provided yet another opportunity for this to happen. Right. I understand that Atlantic has also done some really good reporting on this on sort of just living in some of these homes in the United States, tenants have found themselves dealing with this very far away corporate landlord, trying to get repairs or trying to get services, this kind of stuff too. Absolutely. And I mean, who do you, okay, you're renting,

who do you want your landlord to be? Do you want your landlord to be someone you can call, a warm body at the end of a text message or a phone call, who knows a little bit about you as a tenant and recognizes that things happen and they as a landlord have a responsibility to you? Or do you want your landlord to be a faceless, nameless 1-800 number? Lucky if you get someone at the other end of a phone call, right? I mean, these are just simple, regular questions. And I also think what's happened is tenants have been

extracted from the equation. They aren't part of the business model. They really aren't. And there isn't an opportunity for tenants to participate in decisions that so greatly affect their lives with corporate landlords. And so that's one of the things that disturbs me. I mean, there is a notion that governments have signed on to that housing is a human right. And part of that human right is ensuring that the people whose rights are at stake, have the capacity, the ability and the opportunity to participate in decisions that are going to affect their human rights. And that I really feel that that has is quickly slipping away from the from the housing landscape in Canada and elsewhere.

I want to talk to you about what you think should be done here. But first, I just, I do want to quickly point out that these stories of tenants having such difficult times with their big corporate landlords, the big rental companies here, the companies buying up family homes in the US, they would say that actually, they've, you know, quote, professionalized the sector, they've made it better by centralizing and streamlining it that they can take advantage of economies of scale. So, you know, I just, I just want to put that out there for our listeners. But Leilani, this concept of buying up single family homes, it isn't something we've actually seen very much of in Canada, even though we've seen it with apartment buildings, as we've discussed. And so at this moment, what do you think needs to be done? Yeah, well, I've been looking to governments to have some kind of response. And I am concerned,

to governments to have some kind of response. And I am concerned, obviously, with core development, but let's face it, they are operating legally within a legislative and programmatic system that allows them to do what they're doing. And so that then for me, requires a different question. So okay, how did Canada come to a place where this kind of thing is perfectly legal and allowable? And that then leads me to governments. And what are governments going to do about this? Do they not see this as problematic? I think a lot of governments have been pushing all and when I say governments, I'm using the plural because it's of course, the federal government, provincial territorial governments, and even city governments. So I think most governments view the housing problem in Canada as one about supply, and a lack of supply. And I think this model plays into that idea. But in fact,

plays into that idea. But in fact, my analysis is that it's not just any old supply that is at issue in this country. It's that there's a lack of affordable and deeply affordable supply for people who are most in need, those at the lower end of the income spectrum, people living in poverty, racialized communities. So I'm wondering if government isn't going to step in and say at some point, okay, wait a second, like, we need to get a handle on the needs in the country and make sure that any moves, especially sizable moves like this, are actually addressing the real housing needs in the country. I'm not sure core developments move, you know, getting into this single family homes and turning them into rentals, and charging above average rents, I'm not sure that that would pass the test that I'm suggesting. I think it was Minister Hussain's office said that they're monitoring the situation. I really feel we're past monitoring. I mean, I feel like I've been monitoring this situation since at least 2017, 2016. So monitoring, we got

to go beyond that. What about some action? And what about intervening and saying, hey, wait a second, we're the government, we have human rights obligations, we have to make sure everyone has access to adequate affordable housing. And we are going to step in and start regulating big capital, regulating institutional investors in housing to make sure that we get from them what we need as a country so that we can solve this housing crisis. I'd love to see that. I'm waiting for that. All right, Leilani, thank you so much for this. Thanks, Jamie. It was a pleasure. Okay, so before we go today, some news from Northern Ontario where a COVID-19 outbreak is ripping through a remote First Nation.

As of yesterday, there were 232 active cases in Kachetuan in a population of about 2,000 people. According to Indigenous Services Minister Mark Miller, children and adolescents make up a majority of those infections as vaccines are currently limited to those 12 years of age and older. Chief Leo Friday said the dramatic increase in cases is related to long-standing issues with overcrowding and substandard housing conditions and that 300 new permanent homes are needed to meet the community's needs. The federal government has sent 15 Canadian rangers and 15 nurses to help the community deal with the outbreak, as well as tents and domes to temporarily house those who don't have a safe place to isolate. That's all for today. I'm Jamie Poisson. Thanks so much for listening to FrontBurner.

We'll talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.