Who Should Be Our Landlords? The REIT Debate Explained
Real Estate Investment Trusts often find themselves in the crosshairs of housing activists, but in Canada they only make up 6-10% of the market.
In this episode of The Missing Middle, Mike Moffatt and Sabrina Maddeaux unpack the controversy around REITs (Real Estate Investment Trusts) and their role in Canada’s housing crisis.
Are REITs really blocking affordable housing, or is the real issue deeper than greedy landlords? Mike and Sabrina break down how REITs work, why they’ve become political scapegoats, and what needs to change to build more truly affordable homes.
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Below is an AI-generated transcript of the Missing Middle podcast, which has been lightly edited.
Mike Moffatt: So, Sabrina, one of my favourite pet theories about housing - and we all know I have a lot of them - is that everybody wants to live in a society with robust rental options. You want to move to a town and you want to have a lot of different types of places you can rent, but nobody wants landlords.
Cara and I even did an episode about this in the early days of the podcast, and we'll link to that in the show notes.
But you kind of go down the list. We don't like mom and pop investors because they end up owning housing that could have gone to young families or other owner-occupiers, so we don't want them buying up homes. And corporations are bad because, well, corporations are bad. And REITs are continually getting bad press. And even the biggest advocates of social housing and government housing recognize that the vast majority of rental housing will continue to be owned by the private sector.
So we go down the list. Okay, no mom and pops, no corporations, no REITs. So I'll ask you the same question I asked Cara: who should our landlords be?
Sabrina Maddeaux: Yeah, the reality is, we do need healthy rental options. And that's never going to be fully covered by social housing or government, and nor should we want it to be, quite frankly, we live in a Western democracy. And I don't think the goal should be for everyone to live in government-owned rental housing. That said, obviously, there also are issues with financialization of the market that have led to what I will call some house hoarding and the idea that real estate will always go up by large amounts every year forevermore in Canada.
So my problem is less about who the landlords are, but more the psychology that's led to our current crisis, that you should be expecting 10%, 20% year over year and year and it only ever goes up, and there shouldn't be any risk involved. And then if there is some risk or a bump in the market, then it will be backstopped by the government.
So I think a healthy rental market would ideally have a mix of investors. That's some mom and pop, that's some corporate, that's some REITs, where not one is dominating to the point that renters are getting a bad deal, and they don't have any sort of mobility or ability to negotiate, and they're paying ever higher rents that are increasing.
So I think it's about having a healthy market that's truly a free market that comes with risks and rewards, and where renters are also protected.
But speaking of REITs, which again are real estate investment trusts, maybe you can break it down for our audience because I think people hear this term a lot, but they're not always completely sure what exactly it is. What are they and how do they work?
Mike Moffatt: Yeah, we've already thrown around the acronym REITs without actually defining it. So I'm glad you asked this question, and as you point out, it's a real estate investment trust.
Okay, well, what is that? Well, they operate a little bit differently in Canada than in the U.S., so I'm going to give everyone the Canadian answer, and I'm going to simplify a little bit, and if anyone listening thinks I oversimplified, please feel free to send us a note.
In Canada, a REIT is basically a publicly traded company; it has to be publicly traded by Canadian law, listed on a stock exchange. So, you or I or anyone else can buy and sell it like any other stock. REITs are, by their name, companies with large real estate holdings. Now that doesn't have to be housing, it can be apartment buildings, office buildings, shopping malls, etc.
For example, one of the biggest REITs in Canada is the REIT associated with Canadian Tire and all the Canadian Tire locations and other stores and warehouses. So it's not just apartments, it's any kind of real estate, though different companies focus on different aspects of the real estate market.
So, I said they're like a corporation, but they're different than a standard corporation. And in Canada, they have a legal classification of a mutual fund trust. And what that means is, by law, they have to return all their profits back to unit holders, which is what we would normally call shareholders - in a REIT, they're called unit holders. And because they don't retain those profits, they aren't subject to regular corporation taxation; they're treated as what's known as a flow-through entity, because the earnings that they earn flow back to investors, and then those investors are taxed on their income tax or wherever. Because REITs legally can't retain earnings, they are heavily reliant on debt financing for growth. So the decisions that they make are a little bit different.
So, there are only about 20 or so REITs of any size and in Canada, that is, with market capitalizations over a billion dollars. Despite all the discussions we hear in Canada about REITs, we actually have a pretty underdeveloped REIT system as compared to places like the U.S. In Canada, most real estate is still owned by traditional corporations, pension funds, large institutional investors, insurance companies, and then obviously, your mom and pop investors. So, when it comes to purpose-built rental apartments - these are apartments that are designed to be rentals, not condos, where mom and pop investors are renting out units, but actual rental apartment buildings - REITs only own about six to 10% of all units in Canada.
Depending on the study, about 40% of those rental units are owned by private corporations and 50% by individual investors. So, REITs are a small piece of the market, but not an insignificant one. And they're growing a little bit. They didn't really exist before 1996. Over the last 25-30 years, they've grown from about 0% of the rental market to about six to 10%.
Sabrina Maddeaux: Earlier you mentioned how REITs have been getting a lot of bad press. And one example I came across was just from a few weeks ago, it was in the Toronto Star, and it was an article titled, Ford government scrapped Toronto affordable housing requirements after pushback from three REITs documents show. Now, we know that a lot of people don't read past the headlines. But the article goes on to explain that essentially, the province rejected a city of Toronto proposal that some new buildings owned by REITs include affordable rental units. And according to the article, the REITs claim that having to include these affordable units would jeopardize their buildings’ viability.
Now, I think it's stories like this that make a lot of housing advocates reflexively hate REITs. And that makes sense. What are your thoughts on this whole saga? And do the housing advocates have a right to be mad here?
Mike Moffatt: Yeah, so we don't, you know, we can only see what we've read in the press. So it's hard to know the exact details. Now, I will say that housing advocates are absolutely right to be mad about the crisis. They are absolutely right that rents are too high. They are absolutely right that vacancy rates are too low. And those vacancy rates give apartment owners a substantial amount of market power. And they often use that market power to their advantage. So, you know, at a macro level, I agree with the advocates about most things. But any kind of specific instance, you know, again, it's hard to assess from the outside. So something like this, yeah, it could be the REITs or other corporations abusing their market power. But it also just might be that this particular agreement doesn't make sense in the current economic environment. And we're seeing that all over the place. A lot of stuff that worked when interest rates were low doesn't work in this economic environment.
So, you know, I don't want to suggest that the REITs are right or wrong here, because we don't have enough information. But I do think what we can say is that the current status quo is broken, prices are too high, and it is a very challenging environment for renters.
Sabrina Maddeaux: Now, there's a whole Reddit thread on this article with a very lively debate about who is to blame for affordable housing not getting built. Many people seem to be disappointed that the city wanted to force these affordable units, but then the province made them voluntary.
Mike Moffatt: Well, again, it's tough to know what the exact details are. My guess would be that the REITs, or the companies in this example, basically went to both the city and the province and said: ‘The economics of this don't work, we just won't build if our agreement says, okay, if we're going to build this, we have to do x, y, z. And now, under the current conditions, we just won't build. We won't build and then we won't have to do x, y, z.’ You can imagine them going to the province and saying, ‘Well, look, we would still like to build, we still want to get this done. But we have to make the numbers work.’
So I do think that's important. And it's hard to know from the outside whether or not the REITs, or whoever's involved, if they legitimately couldn't make it, or they were just trying to hold out for more money. It's always tough to know in a negotiation.
What I would say on top of that is that I think we do need to be looking at all of the other things that make it expensive to build, right? So we need to look at development charges, we need to look at the fact that the GTA has the worst approval times in North America, and all those other things that make for a negative climate for building.
But I can't blame anyone who looks at these headlines, looks at the need for affordable housing and gets upset at the situation and therefore gets upset at the REITs. I get that, I totally understand it. I'm just saying, as an analyst, I don't have the information I need to say, ‘Okay, do the REITs here have a legitimate case or not?’
Sabrina Maddeaux: Yeah, of course, you'd have to get into the nitty-gritty of the financials for that, which we don't have access to. And I do think there's an interesting argument to be made.
Okay, so you're sacrificing some affordable units, but how many more units wouldn't get built because of this requirement being placed on them, potentially? And we know that if there is more supply, and that supply is desirable, then that helps everyone. Eventually, that should help rents go down, which then would result in more affordable units, even if they're not mandated affordable units, because rents would hopefully come down because people would have more bargaining power and more options about where to live.
Now, in a number of your reports, you've advocated for more social housing, arguing that the market simply won't create the types of units that are affordable to low-income families. And you figure if these deals with the private sector aren't going to create affordable units, the only option left for governments is to just build them.
But, you know, I don't agree with you on this one. And it strikes me as just not overly optimistic about, you know, our state capacity to build in these numbers, but also just like massively expensive, causing taxes to go up and putting future debt burdens on the very young people who are already struggling to rent or buy a home.
Mike Moffatt: I think that's fair. And the point I always have to say is that at the end of the day, somebody pays, right? There's no free lunch here. And what we've done as a society over the last 30 to 40 years is try to hide those costs. Instead of governments building directly, which is visible to the taxpayer, how much it costs. Instead, we will come up with all of these hidden arrangements where we require developers to do a thing, which raises their cost, but then they put those costs onto the renters or the buyers of that project. So instead of taxing the entire population, we tax basically young renters and young condo buyers, and basically say, ‘okay, that's the group that has to pay for affordable housing, ’ instead of spreading that cost across the entire population. And it has all kinds of unintended consequences.
So one of the things I like to point out is that we have all of these models that say, ‘Hey, if you are building four apartment units, you have to build one deeply affordable unit, or social unit.’ Like, 20% has to be affordable or deeply affordable. But nowhere do we have any kind of arrangement that says, ‘Hey, if you build four large single detached houses, the fifth single detached house has to be deeply affordable, or well below market.’ And just saying that, like I say that to people, and they laugh, right? Like that would just be an absurd thing to do. But what that does is it makes apartment buildings inherently more expensive than building single detached homes, because we place all of these conditions on apartment buildings that we don't place on buildings in the suburbs.
So you've got governments who are constantly saying, ‘Oh, no, we need infill, we can't sprawl, we can't sprawl.’ But then they're putting like 37 different conditions on building condos and rentals. And then when it goes to build single detached, they're like, ‘Okay, just do whatever you want.’
So governments are trying to do the right thing when they're requiring these affordable units. But at the end of the day, all they're really doing is encouraging sprawl, because they're basically creating all these rules saying, the closer you build the downtown, the more difficult we're going to make your life. So you're just better off building at the edge of town, or maybe building two towns over and having people commute.
Overall, I think we'd be a much better society if governments built the housing, and they could work with private developers, but build the housing that they want to build. Do it in a transparent way, have it in our tax system and make everybody pay. Rather than this bizarre system, we have cross-subsidies and special deals, where basically young people have to pay for social housing.
And a Gen Xer like me, who got into the market 20 years ago, I don't have to pay a dime. Like, I don't think that's right. The system lacks transparency, and it lacks fairness. I think we got to do something about it.
Sabrina Maddeaux: For sure. There are always winners and losers. And someone does always pay. And for a long time now, that's been young people. Older generations, there are exceptions, but as a whole, have been reaping these lottery-like gains, and there needs to be some balance of that.
Another thing I think about when we talk about mandating affordable units is that people hear “affordable units,” and I think they're thinking, these are $500 a month or $600 a month rentals. And when you look at what the prices end up being on these, yes, they might be a little bit below the market rate, but the market rate is so high for rental units these days, especially if you're talking about anything that's two or three bedrooms. You look at the actual prices, and you're like, Oh my gosh, this is still like $2,000- $3,000 a month for some of these units. So they're not really affordable for the sorts of people who are making lower incomes that you would want these units to actually be affordable for.
So the system overall doesn't seem to be producing the outcomes that we actually need.
Thank you, everyone, for watching and listening and to our fantastic producer Meredith Martin.
Mike Moffatt: If you have any thoughts or questions about creating deeply affordable McMansions, please send us an email to [email protected].
Sabrina Maddeaux: And we'll see you next time.
Additional Reading/Listening that Helped Inform the Episode:
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