The Elephant is in the room.

We need to have a conversation in Canada about housing, and some of what needs to be addressed is not going to be easy. People across all spectrums of the housing marketplace in Canada need to have a very candid conversation about the state of housing in Canada. Self interest needs to be relegated to the back seat while broader issues concerning the sustainability of the market is addressed.

One of the topics that never seems to get the attention it deserves is the consequences of turning tens of thousands of homes into hotels. There have been some intermittent reporting and assessment of this phenom created by the "gig" economy, but it has largely gone ignored. It has also resulted in a ever growing class of property buyers, the Investment Class, routinely out competing the Residential Class of buyers to acquire property.

Why is this being largely ignored by industry and only getting glancing attention by government and media? Money.

Real Estate and Mortgage Lending are multi billion dollar industries that account for the majority of Canada's GDP. To mess with this segment of the economy is not only risky, it is wildly unpopular with the loudest of special interest groups. This also drives significant revenue to government and they are loath to relinquish any of those funds.

But the reality is that no matter what people might say, short term rentals have an impact on housing in Canada. That should not be in debate, what should be is to what extent and how is it possible for so many people to 'break' the 'rules' and acquire real estate portfolio's that do not match up with their financial strength. By that I mean, how is it that someone who earns less than 100K and has little to no liquid assets can be approved to own millions of dollars in property?

Let's start at the top.

If you look back through news archives over the past decade there has been an increasing look at how short term rentals are impacting the housing marketplace around the world. This is not just a Canadian perceived challenge, it is global. The question that needs to be asked first, is there actually a problem?

It depends on who you speak with, but the general consensus when you actually dig into the numbers, the short answer is yes, there is an impact on the housing market in Canada.

BY THE NUMBERS:

It varies depending on who you speak with, but the actual numbers are often very different than what is being quoted by providers such as AirBnB, or government at different levels.

If you dive more deeply into each listing, you see that there are multiple properties that are listed by the same 'owner(s)' and the vast majority of them are not owner occupied, but rather are dedicated short term rentals. If you take the time to add up all of the listings between Canada's three largest metropolitan areas (Toronto, Montreal, Vancouver) there are over 80,000 short term rental listings as of 2022. Across Canada, an estimated 150,000 properties are listed as short term rentals, the vast majority of which are not owner occupied.

According to media reports from CTV, CBC, Global, and City News over the past ten years, the average rate of owner occupied short term rentals is around 25%. That means that of the 80,000 there are around 60,000 homes that are being used explicitly as short term rentals. Given the immense housing shortage, and the ever increasing long term rental rates, there might be an issue here - and that is in only three cities.

60,000 homes would provide housing for 150,000 Canadians based on the stats that the average Canadian household has 2.5 occupants. That is a lot of housing for a lot of people. Shouldn't housing Canadians be the priority if we want to build a strong, equitable, society? Perhaps yes, perhaps no. It depends on your perspective.

If you are a Mortgage Professional or Realtor you will likely land on the side of "this is not a problem", and it can be seriously considered this way. Housing in Canada is responsible for a massive portion of our GDP and drives huge employment and wealth. Housing, it could be argued, is the largest industry in the nation employing hundreds of thousands of people both directly and indirectly. The industry drives vast amounts of tax revenue which discourages government at all levels from curbing the break neck growth we have been experiencing in the last 3 decades.

3 DECADES OF GROWTH? Yes, there is clear evidence that the housing marketplace in Canada, with the exception of some "blips" has seen consistent upward growth since the 1990's. Even when factoring in the "great recession" of 2008/09 in Canada most markets were fully recovered by 2010/2011 with the biggest exception in Alberta. Alberta is however an outlier because of their historically very volatile economy that is so dependant on oil and gas. If you do however consider over all growth, Alberta is only marginally behind other provinces, and in recent years has been quickly catching up.

Most professionals will err on the side of generating more business, and that makes complete sense. Mortgage Brokers and Realtors are commissioned sales people, they will actively do everything they can to prevent any changes that may impact their ability to generate sales. The investor class of real estate owners in Canada is the fastest segment of home owners in the country accounting for upwards of 70% of all new condo purchases in some communities. That is a lot of dollars for sales professionals.

This investor class of buyer has deep(er) pockets than most, especially first time home buyers (residential class). The investor can leverage existing properties to out compete on price, and they can use the revenues from other properties to qualify for the lending.

A lot of people will probably be thinking, sure but if those properties end up as rentals, then it is still housing stock for Canadians. That is true, but it is not quite as positive as you might be thinking.

The average rent on a privately owned condo used to be about 40% higher than purpose built rentals. In Vancouver for instance, you could rent a condo in Yaletown for about $2400 in 2017, the average square footage between 450 - 500 square feet. At the same time period a 1 bedroom apartment in a purpose built rental building, 740 square feet, was renting for $1650.00 per month. Still expensive, but at least attainable for most.

Today, that same Yaletown apartment is renting for $3100 per month and the purpose built rental? Well it is now $2500 per month. The disparity between the two is reduced, but when you consider such a steep increase in only 6 years it must be recognized that there is an issue.

The investor class of buyer is there to make money, they are not there to provide housing solutions for Canadians, nor should they be expected too. That said, they also should not be held to the same standards as a person, or persons, who are buying an owner occupied residence.

One of the beautiful things about being in Canada is the ability to access public information. To test a theory I had regarding the state of mortgages on investor class properties, specifically short-term rentals, I did a search of registry records on 20 properties that are owned by the same person(s) listed on AirBnB. Here is what I found.

Of the 20 properties, 18 were listed as primary residence in the mortgage filings and 6 of the properties were all high ratio mortgages (less than 20% down and CMHC insured). Several of the others have been refinanced multiple times, of the 12 uninsured the average refinance since they were purchased... every 18 months. On all but 2 of the 20 properties, and from what I can tell on the registry records, there are a total of 9 that either currently have, or had, some form of insurance as they were financed as high ratio "owner occupied" units, that means that at some point 15 of the 20 properties carried a government backed guarantee of the financing.

Why is that a problem? There are two really big reasons. The first and most obvious is that in order to obtain high ratio financing the property must be owner occupied. To communicate to a lender, or insurer (CMHC, Canada Guarantee, Sagen, etc.) that the home is going to be owner occupied when it is not, is to be blunt, fraud. Not only have the owners declared a home as owner occupied when the intent was to never do so, the owners have likely not disclosed to the lender (or insurer) that the property is a short term rental. This omission exposes the Canadian tax payer to risk that simply should not exist, and there should be serious consequences for the behaviour, but there is in reality, none.

It is not our governments, nor the tax payers, responsibility to protect people who own multiple properties from risk, it is their job to house Canadians.

The other, and perhaps less obvious issue, is what happens if there is financial hardship? Let me explain.

Back before the rules were all seriously amended in the mid 2000's if you owned more than three properties you were required to qualify for the mortgage using commercial underwriting guidelines. That meant looking at the entire fiscal picture, including vacancy rates, maintenance costs, etc. and there was a requirement for the owner(s) to demonstrate a specific pool of liquid resources. That meant that if all of your net worth was derived purely from the equity in property that you owned, it could not be considered as it is not a liquid asset. The only way to access the equity is to incur more debt, or sell the property, thus making it less attractive to lenders. Without a strong pool of liquid resources the ownership is less likely to be able to deal with unforeseen financial issues.

On a condominium the strata fees cover the cost of maintaining the building and common areas. The owner is responsible for all other costs, including fines from the strata, special assessments, appliance maintenance and repairs, and more. If the owner cannot effectively deal with costs without resorting to borrowing more money, that is not a sustainable place for the owner to be in.

If, or when, the investor class owner needs, or wants, to sell the property the tenant is often left with few options. In most cases they will be evicted so the new owner can move in, or charge a higher rent to a new tenant given that they likely paid more for the property than the owner from whom they purchased it. Remember, these buyers are there to make money - not provide housing.

Now when you factor in the plethora of short term rentals into the mix, and the risk is exponentially higher for many reasons.

1) Insurance is not so easy to get on short term rentals. A property that is dedicated to short term rentals needs to have specific insurance in place which contains "commercial" clauses. If it is insured as a residential property - you will not have coverage and that incudes basic fire coverage. In fact there are several insurance companies that will not insure ANY home that has any short term rental activity happening.

2) Legal Liability. Owners have legal responsibilities to their guests that is unlikely to be covered by household insurance. If you have a guest that is injured on your property, and you do not have the proper coverage, you are going to face a legal nightmare. Yes, AirBnB has some insurance, but do a quick search online to see how difficult it actually is to do a claim (the lack of pay outs that occur are normally due to owners not following the rules).

3) In breach of regulations. In Ontario and many other jurisdictions in Canada it is illegal to operate a short term rental out of a property that is not owner occupied. If you are operating one you could be subject to fines and other penalties. Once those fines have been levied, or there is a need to renew your mortgage, you can be refused a mortgage for not being compliant with zoning or other regulatory guidelines. You can also be refused a mortgage for not disclosing the use of property, and in a worst case scenario be charged with fraud.

4) Unforeseen costs. There are horror stories from across Canada about the consequences of not following the rules. The most recent example being the devastating fire in Quebec that claimed several lives. We know that the short term rentals in the building were not licensed or registered, and that means that they would not have had appropriate fire coverage. Not only is there the tragedy of the deaths that happened, there is a good chance that the owners are going to face a legal nightmare in the coming years. Failure to have adequate insurance means no protection on the mortgage, no protection of the property as an asset, and exposure to civil liability.

5) These condos are not built for commercial use. When you are in a hotel, or any other commercial building, you probably have noticed the quality of the flooring and fixtures seems to be more robust than what you have at home. There is a very good reason for that.

Commercial flooring and other materials are specifically designed to accommodate high traffic usage. The materials used in residential builds is designed for home use, which generally means less wear and tear. We have a tendency to take much better care of where we live and that is why hotels typically do a refresh every 10 years or so. Even commercial grade items wear out eventually.

6) Mortgage Rules. What most people never seem to pay much attention too is the mortgage terms that are registered on title when you get a mortgage. These terms include clauses that relate to both the use of the property, and the condition is must be maintained in.

I did a review, and after having reviewed over 20 lenders forms I cannot find a single set of standard mortgage charge terms that allows for the property to be used exclusively for commercial purposes. Short term rentals, are by definition, commercial activity. While the risk of it happening is very low, a lender could refuse to renew, or even demand payment in full, of a mortgage that is on a property listed as a short term rental, but declared as owner occupied or as a long term rental.

7) Lastly, lenders in general will not accept short term rental income due to the harder wear and tear on the property, and the inability to obtain insurance. That wear has a direct impact on the value of the home, thus the security the lender has. That means that there are only two ways to get this approved for a residential mortgage.

(a) Tell the lender it is owner occupied, when it is not.

(b) Tell the lender it is a long term rental, when it is not.

The reality is that short term rentals only benefit the owners of the units. There are no jobs being created, it is not improving housing affordability (proven to do the opposite), and it is creating a high risk lending environment.

Does it create wealth for the investor class owner? Yes it does. Does it drive wealth for Realtors and others? Yes it does. Does it do anything to address Canada's housing shortage? No it does not. Would simply building more homes resolve the issue? No it will not. Not as long as the investor class continues to out bid, and out buy, residential class owners.

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So what does all of this mean? It means that the issue is not as simple as many would have us believe. The housing crisis is not only about building more supply, it is also about how we view and use property. 80,000 short term rentals in the three cities that have the most pressing housing issues is not a small number nor something that should be ignored. Putting all those homes back into the market will solve some issues in the very short term, but it will not address the larger issues facing us in the coming years.

We also need to be cognizant of the desire of Canadians to build wealth and use their hard earned money to invest as they see fit. The majority of people in Canada who own property are single property owners and only roughly 15% own more than 4 properties with the top 1% commanding nearly 30% of all income generated through short term rentals.

The proposed move to restrict short term rentals and the proposed move back to commercial lending guidelines for those that own more than three properties is, in my opinion, where we need to start.

Yes, I want to do the mortgages and make the money. The thing is, if we better manage investor class ownership and given the shortage of housing, there are going to be a lot of mortgages needed in the coming years. You see, I do not think it should be easier for someone who already owns 20 properties to get a mortgage, it should be harder.

If I own 20 properties, then I am not just a regular person buying a home. I am running a business, a commercial enterprise, and there is nothing wrong with me having to meet commercial guidelines. Nor is there anything wrong with there being restrictions on the use of property, regardless of the 'freedom' debate that seems to be cropping up lately.

There is not one single person in Canada who has unrestricted use of their property. Every municipality and county in Canada has bylaws that tell us what we can or cannot do. For instance, you cannot rent an office and turn it into a home and you cannot turn your home into a manufacturing facility.

A building that was purpose built as a home for people was not intended to be built as a hotel, and we really shouldn't expect that it is OK. Airbnb may not seem like a "hotel" per se, but it certainly is not residential.

This article is all my own opinion based on my 32 years working in Financial Services and research I have conducted. The numbers I have used are derived from online and archive searches and all of it is publicly available.