There is something comforting about the idea of upstart financial technology companies addressing the unaffordability of homes for young adults.
Somebody’s got to do something, right? Politicians have been ineffectual on the issue of housing affordability, and the traditional real estate industry just wants to write mortgages and sell homes. If ever a sector was begging for some disruptive thinking, it’s housing.
Some of our keenest entrepreneurial minds are jumping on this opportunity by offering fractional investments in homes and rent-to-own plans. As a business model for squeezing more money out of the Canadian home ownership obsession, these new ventures are noteworthy. On the issue of housing accessibility for young people, they are more problem than solution.
In a time of growing fractiousness, we are building at least one all-Canadian consensus. Owning a home is the main source of wealth in life and, if you can’t actually own a house, real estate is where your money should be as an investor.
This financialization of housing is a direct cause of unaffordable home prices for first-time buyers. Bank of Canada deputy governor Paul Beaudry made this point in a speech earlier in the week about stability of the financial system. It was the central bank’s first direct mention of investors as a cause of rising prices.
Turning houses into investments is a natural result of what’s been happening in the real estate market. The national average resale home price of $716,585 in October is up 18.2 per cent over the previous 12 months and 36.5 per cent over the previous 24 months.
Spectacular overall investing conditions are part of the story as well. Financial assets of all types have soared in value in the past year or more – stocks, commodities, crypto and more. Participation in this booming market for almost everything has been unusually broad-based thanks to digital investment platforms that have attracted large numbers of young investors.
Hot housing combined with a revved-up investing environment has given us a growing number of startups aimed at getting young adults into property ownership. As described in a recent column, you can invest as little $2,500 with BuyProperly for what amounts to a fractional share of a house occupied by renters. When the property is sold, investors get a share of any gains.
Rent-to-own ventures are also emerging. Key, which has former Bank of Canada governor Stephen Poloz on its advisory board, offers the opportunity for someone to buy as little as 2.5 per cent of a property along with other investors and then live in it. Monthly costs for living in the property cover rent and a small amount that goes toward building equity.
Carpe Diem offers a rent-to-own plan targeting young adults with parents who are willing to spot them a down payment to buy a share of a home. Addy is an example of a platform for investing directly in commercial properties. A yet-to-be-launched venture called Willow is using the term “PropSharing” to describe its process of offering ownership units in properties such as apartments, office buildings and shopping centres.
The history of investing is full of stories such as these. Hot trends emerge, followed by a burst of investment vehicles to exploit them. If the past is any guide, investment vehicles such as these often appear much closer to the end of a bull market than the beginning. Even in housing, it’s possible to lose money.
What makes the invest-in-real-estate trend unique is that it works against young people owning a real house or condo on their own, free and clear. When investment companies buy up houses to offer to investors, it means more players competing for a limited pool of properties for sale and higher prices.
The saddest aspect of young adults investing in property this way is that it’s so utterly second-best. As much as everyone who owns a home can’t stop talking about their rising equity, the real joy of home ownership is owning an actual home. Get someone talking about their house and you’ll hear about children, pets, guests, favourite rooms and best experiences.
Expensive housing is a huge problem for millennials and Gen Z, generations that have seen massive amounts of money made in housing and want their fair share. But financial ventures that give young adults access to real estate are a symptom of expensive housing, not a solution to it.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, November 24, 2021