When Did it Become Us Vs Them?

April 25, 2017

"

By definition, if a market is unsustainable, it will correct itself." 

 

This post is longer than my usual ones, because I think the situation warrants it. I've spent almost all my time over the past few days absorbing, analyzing, reading about, and discussing what the Ontario government announced last week with their "Fair Housing Plan". Oddly enough, it was announced on "4/20", which might explain the reasoning behind some of their decisions (bad joke, I know, but it's been a long few days). I won't go over all 16 items the Wynne government has introduced, but I will highlight the two headline grabbers that I think were ill-advised in their implementation. Here we go:

 

"This tax was introduced on speculation that there is a foreign buyer problem in Toronto. Maybe that's where the name came from."

 

1 - A 15% Non-Resident Foreign Speculation Tax
Was it just me, or did the government just pull a PR stunt by adding the word "Speculation" into the name of this new foreign buyer's tax? As if trying to fool people into thinking this was targeting only speculators. Make no mistake, this is a tax on foreign investment in Ontario's housing market, plain and simple, and I know everyone reading this is too smart to think it's just a "speculation" tax. I have worked with several non-Canadian citizens and non-permanent residents who work in Canada, pay taxes in Canada, who are now going to face a 15% tax on their purchase of any property in Ontario. This is effectively a ban on foreign ownership. In Premier Wynne's speech, she prefaced the announcement with "Ontario is still open for business and we welcome foreign investment". Really? I laughed out loud. This tax was introduced with absolutely no hard evidence on how many foreign buyers are actually in the resale market today. Wynne and Sousa were grilled for numbers. Their response "all we know is that these price increases are unsustainable, so we had to do something". I was speechless. By definition, if a market is unsustainable, it will correct itself. That's how markets work. I've already seen more new condo listings come up in the past week alone than in the past month, which would have naturally tamed the market on its own. By saying "the prices are unsustainable" and following it with "so we had to do something", they are exhibiting a clear misunderstanding of market forces and are admitting to market manipulation. Couple that with their own admission that they don't know how many foreign buyers are actually in the market, and you get two politicians clamoring to just do "something" to grab votes. "We don't want to control the market" they say. Well, what did you think you were trying to accomplish with this tax then? That's all it was meant to do. And if the true intent was not to control the market, as they say, then it's just a tax-grab. This tax was introduced on speculation that there is a foreign buyer problem in Toronto. Maybe that's where the name came from. There is still no hard evidence on how much foreign money is purchasing Toronto real estate but this new tax will, at the very least, add a level of uncertainty to some parts of the market just by nature of introducing it. And markets don't like uncertainty. Policy without evidence. Sounds irresponsible to me.

 

"Landlords and tenants are partners and they both need each other."

 

2 - Rent control guidelines will now apply to all rentals in Ontario, including private condos.
I had started to write about each of the ways you can apply for a rebate on the foreign buyer tax and how ridiculous each of the proposed rebate procedures are but I would rather focus on something more concerning to me. That is, the way this recent rent control issue has pitted Landlords against Tenants. I am in full support of some sort of predictability for tenants in determining what their rent will be from year to year. And I don't think anyone would argue that landlords deserve the same. I think that's only fair for both sides. And no matter what is proposed/changed/argued, someone will be upset. But the conversation of late has turned into "Us vs Them", "Landlords vs Tenants", "Rich vs Poor", etc and that's not a healthy society or economy. I personally have raised the rent on my tenant ONCE in three years, by 2%, while my costs have far exceeded that. My wife? She actually lowered her tenant's rent last year because she has such an awesome tenant. One of my clients hasn't raised his tenant's rent in FIVE years. My other client (a tenant himself) hasn't had his rent raised in 4 years. Why are we not telling these stories? Are they not juicy enough for the media? Do they not create enough divisiveness to warrant TV ratings? I'm sure someone out there will even try to argue that these are but a few rare examples of where landlords are actually kind to their tenants. But the stories we've all been hearing about where landlords have taken advantage of tenants are few and far between and are blown up by the media. In fact, they are a microscopic minority in an otherwise healthy relationship between landlords and tenants. Yes, unfortunate events happen (to both tenants and landlords) and in a perfect world they never should. And I have good friends who have been taken advantage of by their landlords, and vice versa. But no matter what policies are put in place, some people will always try to take advantage of others. So please, let's not assume that these unfortunate events represent the majority and that bad policy like rent control will magically prevent them from happening. What we're living through now is an environment where all landlords are unfairly being portrayed as the villain. Thanks CBC. And CityTV. And CTV. Nobody is telling the positive stories of when the system actually works. Landlords and tenants are partners and they both need each other. The latest irresponsible reporting on the need for rent control by the media stemming from a bankrupt (and corrupt) developer screwing tenants has created a divide that has attempted to make all landlords look like evil millionaire slumlords, and tenants as helpless, poor victims of "the system". And I'm sure neither party wants to be portrayed that way. No system is perfect but more regulation is never the answer, especially regulation that is based on political desperation and not economics.

 

"Rent control has been proven to be ineffective in balancing housing costs in major cities time and time again."

 

I'm going to try really hard not to go on a rant here. Rent control in its broadest form has been proven to be ineffective in balancing housing costs in major cities time and time again. Every economist out there agrees. It creates a two-tiered rental environment no different than what we had in place in Ontario already, except it will now extend to people living within the same building, rather than people living in pre and post 1991 buildings. More importantly, it reduces mobility of renters looking to move closer to jobs, family, get more space, etc. It has been shown that renters in rent controlled buildings stay in their units longer out of fear they will not find a rental they can afford elsewhere, and this lack of mobility has the effect of actually reducing supply for new entrants to the market. Exactly why resale prices for houses (and now condos) in Toronto continue to skyrocket; Owners have chosen not to sell because there is nowhere for them to go, straining supply even further. We've all seen what is happening to resale prices and the rental market will surely follow suit. When a tenant does move, the rents for those units will be much higher for new tenants from the start (there is no restriction on what the starting rent for a new tenant can be set at, obviously, because this is still a free market). Since the annual rent increases are now capped, landlords will have no way to recoup any increases in their ownership and maintenance costs over the period a tenant remains in the property, so expect prices to start higher from the get-go. Even if a landlord didn't think about this before, they surely will now. I'm already seeing it and it's only been four days. Landlords have already started asking more because they want to be protected as well. This will hurt anyone looking to come to the city or move out of their parent's house. So how has this helped Toronto's rental crisis? These policies just made things more expensive on balance, just as economists and market-experts have warned over and over again. But Wynne chose not to listen.

 

For the Ontario government to cap annual rent increases at 2.5%, while not offering to cap hydro increases, property tax increases, water charge increases, etc by the same amount is truly a slap in the face for landlords. Condo fees increase far higher than the rate of inflation and the cost to maintain a building and all its services and amenities is not capped. So who takes the hit? The landlord. If you want to argue that landlords should suck it up, that's another discussion. Furthermore, Premier Wynne sheepishly decided to ignore the fact that the 2.5% figure is the maximum rent increase the government could allow while conveniently forgetting to mention the fact that the rent increase guideline is set by her government each year and it is actually 1.5% for 2017. Yes, for all you landlords out there, your rent increase for 2017 is capped at 1.5% this year, not 2.5% as the media headlines (or premier Wynne) would like you to believe.

 

"No intelligent investor will rent his new condo below market rates if there is a chance his tenant will stay for several years."

 

Developers have stated (and economic models have proven) that annual rent increases of around 3.5% are needed to make building apartments in the city viable. That's not based on greed. It's based on economics. So all those new apartment projects we've been hearing about over the past couple years? They won't happen, restricting rental supply for the future even further. People have argued that eliminating rent control for buildings built after 1991 did nothing to help spur the building of purpose-built rentals over the past 25 years but nobody bothered to publicize how incredibly expensive it is to get approvals for, build, and maintain an apartment buildings in Toronto. Rents in the city finally increased enough (through natural market forces) where the equation made sense for builders, which is why all the interest in apartment building finally saw new life in the past three years. Now those deals will die because they are no longer economically viable with rent increases capped at 1.5%. Or even 2.5%. Think I'm exaggerating? Brad Lamb just publicly stated that he is cancelling 9 apartment projects he had planned across Ontario for the next 8 years. Thanks entirely to Premier Wynne's announcement last week. Oh and remember how I wrote about all those new condos with inexpensive units for rent as soon as the buildings are ready (in my previous blog)? Those deals will be gone. No intelligent investor will rent his new condo below market rates if there is a chance his tenant will stay for several years. Because that investor will never be able to raise the rent fast enough to achieve market rates within a reasonable amount of time. I'm not talking about charging exorbitant rent. I'm talking about market rent. I don't think any tenant should/would complain about paying market rent at the end of their initial lease term, if they knowingly agree to pay below market when they start their lease. It's really a win-win for both the landlord and the tenant. Tenant gets a deal for the first year and the landlord's unit isn't sitting empty. And both parties agree that market rents will be applied after that first year. But no concession was made for these new condo situations (or for new apartment buildings for that matter, which can take several years to accurately determine their true cost of operating) in Premier Wynne's housing proposal. In a city like Toronto, where new construction is such a huge part of the economy, how could she ignore this?? I guess I shouldn't be surprised.

 

If you have a comment, feel free to leave it below. And remember, if you haven't already, please "like" my Facebook page and check back regularly!
 
Your Toronto condo lover,
Adil Dharssi
 
#AdilKnowsCondos #TrustSomeoneWhoKnows

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