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Government Interference Won't Fix Canada's Real-Estate Woes

04/04/2017 12:11 EDT | Updated 04/04/2017 12:16 EDT

Summer has finally arrived and Canada's housing market is warming up. The average home in Vancouver last year sold for $1.5 million and the average home in Toronto for $782,051. This despite the fact that the average yearly income in Vancouver was $71,660 and the median income in Toronto was $76,219.

locked house

(Photo: Ondrooo via Getty Images)

The Canadian real-estate market being hot as the air in a Sean Spicer press conference isn't new for Canadians -- countless volumes of editorial artillery have been unleashed on the subject for years -- with one blog I recently wrote discussing the prospect that foreign money laundering plays a role in both markets. What's intriguing about our new reality (however impermanent it may prove to be) is how Canadians have adapted to these increased prices.

Whatever the convoluted talk about the myriad causes behind recent price escalations, the reality can be summarized quite easily -- the demand for housing in Toronto and Vancouver is higher than the supply. The surplus supply therefore must find a place to go -- people must live somewhere, and housing is not an optional foodstuff like chocolate or marshmallows. Those considering the purchase of their first home are often currently renting one, and so typically decide to remain where they are. This has resulted in many Canadians who would ordinarily have departed the rental market remaining there, decreasing the number of residential vacancies and increasing average rents.

The average monthly rent for a one-bedroom condo in Toronto is around $1,800 a month and $2,400 for a two-bedroom. Vancouver is even worse, with an average rent of $1,900 a month for a one-bedroom condo and $3,130 for a two-bedroom. These prices are largely a result of people remaining in the market who shouldn't be there -- people who, in a more ordinary market cycle, would be homeowners but are instead trapped as tenants.

Consider how this affects the general order.

The only rule about government interference is that it always creates an unintended result.

Students and the young decide to remain at home for longer, as they cannot afford to move out. How does this affect their parents? Young professionals must now compete with older, more established mature tenants in order to find a place to live. This added competition increases their average rents and decreases their savings, forcing them to delay their first home purchase as they need time to save the down payment.

Meanwhile, the tenants who wanted to purchase a home but were outbid by $100,000 on each of the three homes they liked (I have clients for whom this has occurred) are stuck with rents as high as mortgage payments. A rent of $1,900 a month is equivalent to the average mortgage payment on a three-year, $400,000 mortgage with a fixed rate of 2.59 per cent. In other words, they are paying record-high rents for no return in value.

There has been talk of how to solve this latest crisis and it of course revolves around government interference. The only rule I've thus far been able to deduce as ubiquitous about government interference is that it always creates an unintended result.

construction high rise vancouver

(Photo: Temmuzcan via Getty Images)

"Rent control" is the meme of the hour, with advocacy groups insisting that unless rents in all buildings are controlled, people will be priced out of their homes. For a brief background, the current regime prohibits the increase of rent above a provincially determined guideline (usually one to three per cent per year) for any unit first occupied prior to Nov. 1, 1991. Lobby groups such as ACORN would like to remove this restriction, so all units regardless of when they were occupied are rent controlled.

The unintended consequence of any such action would be that fewer investors and builders would create new housing. Further decreasing the supply of rental units in an environment where demand is increasing. This would be a recipe for a shortage in overall supply and an explosion in the number of low-quality units and landlords willing to create new housing (but only if they cut every corner possible in its construction and management). An ubiquitous price freeze on rents (and that is what a one to three per cent increase per year is tantamount to) would paradoxically lead to less housing and decreased housing quality.

Both the housing dilemma and the rental dilemma -- two problems connected at the hip -- have the same solution: an increase in supply. And in time, so long as there is no government interference designed to spare the market from bubbles that grow too large and pop on their own, the system will re-balance and recover. Purchasers will realize that not all homes are worth $100,000 above asking price (how much capital is currently tied up in real estate that could be going to investments in small business or innovation?).

Those of you who find yourselves in one camp or the other, tenant or landlord, purchaser or seller, remember that all things go in circles. When the centre cannot hold, it will all fall apart.

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