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Mexican Cars, Indian Cobras, And Canadian Homes

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Economic forces have an uncanny way of exacting revenge. Markets arise out of need, when a buyer and seller agree that each is better off from the exchange. If there are more buyers than sellers, prices rise, which attracts new sellers to meet the demand. It works, if prices are free to adjust.

Every so often, prices move too high - or even too low - and governments feel the need to intervene. People don't always respond in the intended way. However, economic forces do.

If an advantage is found between a buyer and seller, a transaction takes place, even if it's not the law's intended target. Governments have always overlook this effect, even though there are hundreds of years of history prove it.

Outcomes can be spiteful, sometimes humorous, but never work out as intended. Governments never learn from others mistakes. Politicians believe their laws are the exception. But as philosopher George Santayana said, "Those who cannot remember the past are condemned to repeat it."

Mistakes have happened in every corner of the world. Below are a couple of humorous outcomes that resulted from governments intervening with prices. Canada is next. However, if we can understand these forces, investors may be able to profit from a government that can't remember the past.

Hoy No Circula

Spanish for "No Drive Day," this was Mexico City's response to the intense pollution problem in 1989.

To economists, the problem was simple: Driving was cheap. Make it more expensive, perhaps with tolls, and people will drive less. But no lawmaker wants to raise prices - it's bad for votes. So they came up with another solution - Hoy No Circula.

Politicians said if your license plate ended with the number one or two, you can't drive on Monday. If it ended in three or four, you're off on Tuesdays, etc. It was a simple, elegant, and faultless plan. What could go wrong?

More cars, more pollution.

Nobody wants to miss two days of work each week - that's a 40% cut in pay. Citizens responded by buying junk cars, provided the license plate ended in numbers that allowed them to drive on their restricted days.

The law, despite good intentions, created a market for carbon-monoxide-spewing imported clunkers.

When buyers and sellers of a product can agree on a price, and both parties benefit from the exchange, a market always forms. Governments must always be mindful of the incentives these laws can create.

Why'd it Have to be Snakes?

If Mexico's problem was bad, India's was worse.

During the 19th Century, India had a different kind of poison problem - cobras. They were everywhere. People screamed, "Out of all the possible problems, why'd it have to be snakes?"

The government figured a simple law would fix it, so it hatched a hunting plan: Bring us a dead cobra, and we'll pay you. It was a simple, elegant, and faultless plan. What could go wrong?

More cobras.

The law made snake prices too high, so people responded by breeding cobras - and cashing them in. Once the government caught on, it quickly removed the law. It was a simple, and well, you know what's coming.

More cobras.

Once the incentive was removed, snakes became worthless, and breeders turned their inventory loose.

Mexico and India fell victim to the 'Law of Unintended Consequences' - outcomes that are overlooked from the intended purpose, which happens every time governments meddle with prices.

The history is clear: If a transaction makes buyers and sellers better off, a market always forms. If only governments could remember.

Canada's Next

If Mexico and India had problems, Canada's is bigger. It may not be as life threatening as smog or snakes, but it's equally undesirable.

Canada's housing is in a bubble - roughly the size of the ozone. But this is the market's way of saying "We need more homes!"

But Premier Kathleen Wynne believes the rising prices are not fair, so she hatched a plan for the Golden Horseshoe. Unlike failed leaders of the past, her plan is a simple, elegant, and faultless two-part plan: 1) Impose a 15% housing tax for foreign investors 2) impose rent controls.

Increasing taxes to foreign investors will curtail foreign investment - she got that part right. But people are moving to Ontario because of the city's success - and property values should rise in response.

Booming cities naturally attract highly educated, brighter minded, and super-motivated entrepreneurs - many of them foreigners. Jobs are created, and everyone benefits. Trying to control this market may not have the effects she intended.

Rent controls, on the other hand, always end up the same way: run-down homes, and more homeless people. Landlords let properties deteriorate, effectively saying "If you want cheap property, that's what we'll provide."

Lower prices reduce the incentive for people to build - but increase the incentive to move to the city. The result is more homeless people.

Toronto's problem is simple: There's no more land, so we must make smaller homes.

If property values could rise, speculators would buy properties, tear them down, and build two in its place. In the short run, prices will rise.

In response, people economize by getting roommates, living with relatives, partitioning rooms into smaller ones, or other solutions to keep the cost per person down. Everyone who wants a place to live has one.

That's how New York City and England's high-priced West End solved the problem, with some studio flats measuring 300 square feet - and renting for tens of thousands of dollars per month. How could anyone think laws could turn those into 2,000-square-foot homes at affordable rates?

The message is clear for potential home-buyers: Toronto's property values are moving higher. We may experience price convulsions as leaders try to create homes for nothing.

For short-term emotional thinkers, this spells fear. For long-term rational investors, it spells opportunity.

Ontario's government is presenting a long-run opportunity just like Fifth Avenue and London's West End. You'll ride through short-term price swings, but it's a small price to pay.

At least it's not snakes.

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