The Rent Bomb

A recent Urbanation survey found rents have been falling. The lease cost of a condo, for example, is down 7% in the last six months.

But don’t get too excited. This cannot last.

What governments have done in their haste and ignorance is birth a set of laws, regs and punishments aimed at making houses cheaper and coddling tenants. But this will lead to a crash in vacancy rates. And, thus, higher rents. Probably a lot higher.

Much of it stems from the war currently being waged on mom-&-pop landlords along with those who buy units for capital appreciation and rent them out until that happens. Both of these groups provide a huge amount at the country’s housing. In fact, a third of all our rental stock. In major centres, one in five households also owns an income property, housing others.

But now, landlords are the enemy. The word ‘greedy’ almost always is attached. Sometimes ‘blood-sucking’ or ‘rentier’ while all investors become ‘speculators’ and ‘flippers’.

Politicians have fallen for this childish mentality. We’re all going to pay for it. Over the past months we’ve told you why. More taxes do not make houses cheaper or bring down rents. Punishing investors jacks the cost of accommodation. Depressing the market with curbs on capital results in fewer places to live, a construction crash and a far worse supply/demand situation in the future.

Reflect on what we’ve allowed governments to do, in the name of ‘affordability’.

There’s a years-long ban on foreign buyers. Recurring taxes on owners in Toronto, Vancouver and elsewhere on homes that the state thinks are ‘underutilized’. Taxes federally (and double in BC) on people who sell property sooner than the state thinks is reasonable. Protections for tenants and inadequate remedies for landlords that allow non-paying renters to live free. Caps on rents when there is no cap on costs. In Toronto a costly engineer’s report required before a landlord can remove a tenant in order to renovate. In Vancouver an owner wanting to move into her own unit must give a tenant four month’s notice, which appeals can drag out. And now the capital gains inclusion rate has been jacked, arbitrarily whacking small-time investors selling income properties they’ve owned for years.

All this to – in many cases – rent out a home with negative cash flow. It’s estimated that half the landlords of leased condos in Toronto, for example, subsidize their tenants. There’s no way many of the people living in those units could afford to own them. And yet they live there and benefit.

At least, benefit for a while. There’s a rent bomb coming. Because we’re actively killing off the investor class. Read yesterday’s post. Look at the graph of available condo listings. Ask yourself why thousands and thousands of units have hit the resale market, and why twenty thousand more new ones are sitting empty and unsold. This represents a huge amount of rental housing stock, much of which may no longer be available.

Given what politicians have done, egged on by the wanton envy of the houseless, it’s a wonder anyone would wish to landlord. Now that residential real estate has started to depreciate, money can enjoy a far higher rate of return, for less expense and with lower taxes, being deployed in financial assets.

A boring B&D portfolio of exchange-traded funds is ahead double digits this year. The S&P 500 has hit more than three dozen new highs and sits 17% above its January level, despite this week’s volatility. Even a crappy high-interest ETF, a revved-up bank account or GIC can churn out 4-5% – which is more than real estate will generate. As well, financial assets don’t need to be insured. They don’t come with land transfer taxes or fat realtor selling costs. There’s no property tax. No condo or monthly strata charges. You don’t need to replace appliances or fix a toilet. No need to seek a tenant who won’t grow weed on the balcony or raise fish in the tub. There’s no mortgage interest. No CMHC insurance payment. You can sell assets in two seconds, with one click. And with a financial portfolio you can collect dividends at a preferential tax rate.

No vacancy tax. No flipping tax. No cap on returns. No speculation tax. No mortgage rate roulette. No special assessments. No incessant, meddlesome, overbearing, intrusive and arbitrary policy changes flowing from overlords who make everything worse with their very attention.

This, in part, is why listings are swelling. Landlords are bailing. And why – at a time when homebuilding is shuddering to a halt – rentals will be fewer with rents drifting higher.

It was the non-owners who made this happen. Talk about irony.

About the picture: “Here is 4 year old Ozymandias(Ozzy for short), a standard little white condo dog,” writes John in Vancouver. “I wrote a little poem about him to share with your readers. Thanks for all you do.”

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To be in touch or send apicture of your beast, email to ‘garth@garth.ca’.