“Try not to be political.”
That’s what I tell myself every time I sit down to write a blog post like this, but how can I not?
Politics can divide people and that’s never my intent here on Toronto Realty Blog. But I can’t stand the way this country is being run from a financial standpoint, so I can’t help myself.
I don’t understand.
It’s like “The Emporer’s New Clothes.” It’s like I’m watching this con job in 4K HD, right in front of me, and I’m the only one questioning it.
Except, I’m not the only one. In fact, criticism is increasing every day.
But it’s the people that have blinders on, or choose to remain willfully ignorant, that I don’t understand.
I mean, the ideas and the actions are just insane.
The government is going to “make groceries more affordable” by giving out cheques. That’s it. They’ll solve inflation and high prices by giving out $234 cheques to single people, $467 cheques to families, and this will only cost $2.5 Billion.
It seems like we need to spend our way out of declining economic prosperity?
This government doesn’t seem to understand supply-and-demand, and/or market forces, otherwise, they wouldn’t be providing subsidies that simply contribute to inflation.
But does any of this matter?
Who cares about economics when there are cheques to sign?
Sidebar, here’s a great article on that front:
“The Liberal Fixation On Addressing Complex Problems With $500 Cheques”
The National Post
March 29th, 2023
In any event, when looking over the federal budget, or the federal government’s planned expenditures, or while just simply laying back and thinking about how this government operates, it always gets me thinking:
How is this government going to pay for all of this?
No matter. That’s what deficits are for.
More importantly, that’s what new taxes are for!
But at some point, when this government realizes that their efforts to “increase affordability” are having the opposite effect, and when they realize that they can’t really invent any new taxes, they’re going to start to get very creative.
Especially when it comes to “affordable housing.”
Now, the government is unlikely to actually build affordable housing. I think we all know this. The public sector can’t and simply will not handle this.
But what if they could somehow magically make housing more affordable in the private sector?
Hmm. That’s a thinker!
After all, the private sector is, theoretically, private. Rents should be set as the participants of that market see fit, save for some regulations such as rent control of properties built before 2018.
But a friend of mine had an idea!
It’s an idea that, as you can assume from the title of today’s blog, I have always thought was an inevitability in our province and an idea that I might be introducing to you for the first time.
My friend, believe it or not, is on the other side of the political, economic, and socio-economic spectrum than I am.
So it should come as no surprise that, a few weeks ago, he sent me an article about a novel way in which rent increases are being determined in some areas of The Netherlands.
After explaining the idea to me, he signed off his email by saying:
“In a society with a capitalist economy that is designed to benefit the wealthy and is inherently winner-take-all…it kind of makes sense. Homes are for living, not for making money!”
I mean, the winner doesn’t take “all,” since we have tax brackets as high as 54%, but I understand what he’s saying.
Who says I can’t be friends with people whose opinions I don’t share, right?
All this is to say that, for years, I have mused that we are one small step away from the government tying allowable rents or rent increases to incomes, and when that happens, the entire system is going to collapse.
Remember: there’s a difference between public and private sectors, markets, entities, corporations, responsibilities, et al.
There are folks out there who spraypaint “build affordable housing” on Development Application signs, for properties being built by the private sector, as though it’s the job of the private sector to build affordable housing instead.
So is it the job of the government to regulate what the private sector, whether it’s a REIT or a single man named John J. Canadian, may charge in market rent?
Here’s a news release from a law firm in the Netherlands:
New legislation on housing in the Netherlands
In 2022 the Dutch government introduced several new regulations intended to stimulate the availability of affordable housing and to limit increases in rent levels in the residential market. This alert contains a summary of the most important regulations.
In an attempt to discourage investors from buying up owner-occupied homes in areas with a scarcity of affordable housing, the Dutch government on 1 January 2022 effected legislation allowing municipalities to ban the letting out of formerly owner-occupied homes.
Several municipalities have done so. The city of Amsterdam introduced a ban on the letting out of formerly owner-occupied homes with a listed value of up to EUR 512,000, representing approximately 60% of owner-occupied homes in Amsterdam. Buyers of owner-occupied homes in The Hague and certain areas of Rotterdam with a listed value of less than EUR 355,000 are also banned from letting out their properties. The same is true for homes in Utrecht, with a listed value of less than EUR 487,000.
LIMITATIONS ON RENTAL INCREASES
In the regulated housing sector, with initial rents of up to EUR 763, a Covid-era freeze on rent levels was replaced with a system of income-dependent rental increases:
Other newly introduced legislation limits the role of the listed value of homes in the regulated sector, in the calculation of the permitted initial rent. The points awarded to the listed value are now maximized at 33% of the total.
As a first, new legislation also introduces temporary rent-hike restrictions in the previously unregulated housing market of leases with an initial rent of more than EUR 763. From 1 January 2022 until May 2024 annual rent increases in this sector are limited to inflation plus 1%-point. An evaluation and decision on a possible extension of this restriction is expected before the end of 2024.
This government is banning the leasing of formerly owner-occupied homes.
What effect does that have on the market?
How does this play out?
For one thing, it crushes the rental market. If you’re not allowed to rent out a house that was formerly owner-occupied, then if you move out, you either keep it empty, or you sell it. Neither option helps the rental market.
Is there a “vacant home tax” here? If not, then this ban will encourage people to keep properties empty, in an appreciating market, rather than sell them.
And if somebody does move out of an owner-occupied house and does decide to sell, then again, that’s not creating a unit of rental housing.
Was the goal here to add to the rental housing stock or to the resale housing stock?
The next section is the meat-and-potatoes, however. This is where we see the tying of rent to income.
Whether it’s the rent or the rent increases need not matter. The point is that we have finally made a distinction between one tenant and another tenant based on how much money they make.
This is a slippery slope. This could be a point-of-no-return.
How do you undo this legislation down the line? How do you stop the momentum created here? How does this not escalate as more and more people seek to benefit from the idea?
And while I know I’ll have my dissenters here, I have to ask: how does this motivate a person to increase their income?
I know a lot of people disagree with my thinking here, but I’ve long maintained that if you paid somebody $30,000 per year in guaranteed income, they would be extremely unlikely to seek a job that pays $35,000 per year. What would be the point?
And if people don’t work, then they don’t create. They don’t contribute. They don’t add to the economic output of society and the collective prosperity declines on the whole.
If we start tying rents to income, then it disincentivizes people from doing better.
I told a friend of mine that I had planned this blog post for today and he said, “It’s a bit of a strawman argument,” which is to suggest I’m arguing against a point that nobody made, ie. that we should tie rents to income here in Toronto.
But this point will be made eventually. It’s only a matter of time.
Something must give in our real estate market. We can’t continue at this pace.
The population of the country is expanding at record levels and there’s nowhere to house these people.
And as expensive as Toronto is, people aren’t leaving! It’s become a right to live here, not a privilege. And when people can’t afford to live where they want, they look to the government for solutions.
The government, no matter which party is in charge, is never going to stand up and say, “Maybe some of you folks just have to accept that you can’t afford what you want.”
Meanwhile, more people demand to live in the city, and the ratio of participants in the rental market to the number of available units continues to spiral out of control.
This was a problem five years ago. It was a problem two years ago. It’s a problem now.
And a year, two years, or five years down the line, it’s going to be catastrophic.
So, short of traveling back in time and doing things differently, what could the decision-makers do?
Get creative, as they always do. And perhaps look elsewhere for an original idea.
That is why I think there’s a non-zero chance that we could see rents tied to income at some point in the near future, as is the case in the Netherlands per the article you just read above.
A “progressive” idea is all that we need.
But trust me, please, when I suggest that “fixing” a problem in this method will simply create a much larger one, which is something we’ve grown so accustomed to over the last decade when new policies are rushed out.
Just look at the problems in the Netherlands’ example above. Look at the unintended consequences resulting from banning the leasing of formerly owner-occupied homes.
Tying rent increases to incomes here in Toronto would force landlords to exit the market in droves and that would simply shrink the rental pool. What good does that do?
With all due respect to my friend who emailed me that article from the Netherlands, and others like him who feel that this is a step toward prosperity for all, I think your good intentions are getting in the way of your critical thinking.
April 28th, 2023.
If you’re Googling this topic years from now when it actually becomes a thing, remember that it was written here first…