“When I look at the actions of governments, I cannot figure out whether they are mostly stupid or mostly dishonest.”

“For most of us, housing is our biggest expense. One out of every five dollars we earn goes to build, buy, rent and run our homes. Facing high home prices, large personal debts, and an uncertain economy, fewer Canadians can buy a new home today than in the past, and they are choosing to rent instead.
Unfortunately, in many cities finding an affordable place to rent is nearly impossible. The most immediate problem is supply. Vacancy rates under 3 per cent push rents up. In Vancouver and the Greater Toronto Area, it’s 1.4 per cent.
Vacancy rates this low force our young people to move out of the city, threaten seniors on fixed incomes, and have a negative impact on local businesses.
That’s why this spring’s federal budget must put Canada’s rental housing market on solid ground, by pursuing low-cost, high-leverage policies that get jobs on the ground and build housing Canadians can afford.
Building and renovating rental housing will give cash-strapped Canadians more affordable housing options at a time when they’re being increasingly priced out. It will also create thousands of construction jobs to replace the 50,000 lost to slower new housing starts.
We’re calling on the federal government to use its spring budget to introduce cost-effective market incentives to encourage private-sector investment in rental housing.
These include:
• Low-interest loans underwritten by the Canada Mortgage and Housing Corporation (CMHC) to finance new rental construction.
• Tax reform to encourage owners to renovate and retain rental properties, providing an incentive to preserve affordable rental housing.
• Help for landlords to make rental housing more energy efficient, reducing costs and easing pressure on rents.”

Gregor Robertson, Mayor of Vancouver, in an article co-authored with Joe Fontana (Mayor of London, Ontario) in the Toronto Star, 7 Mar 2012

This from the discussion at vancouvercondo.info 12 Mar 2012:

“Why build apartments when developers can make quick and obscene profits on shabbily built condos and walk away even before the expiration of their faux warranties?
The only thing that will truly encourage construction of rental stock is a return to sanity in housing prices.”

– chilled, 12 Mar 2012 10:30am

“…“they” will start building affordable, quality rentals when people stop buying high-priced, crappy condos.
The construction industry is simply doing what makes them the most money. If you want someone to blame, blame the buyers and the governments which enable them.”

– patriotz, 12 Mar 2012 5:02pm

“Right, like the current government that decided to give ten grand to people buying a first home, which is to say, they decided to give ten grand to any developer who sells to a first time buyer, which is to say that they arranged for it so that rentals would have to bring in ten grand more to be competitive with sales. As often happens when I look at the actions of governments, I cannot figure out whether they are mostly stupid or mostly dishonest.”
– N, 12 Mar 2012 5:45pm

By the way: A plan for “tax reform to encourage owners to renovate and retain rental properties” means that tax-payers will be subsidizing landlords; this will apply even more government-backed upward-pressure on housing prices in Vancouver.
Governments can really make a hash of markets. Case in point: the CMHC itself was created with the idea of making housing affordable; by mis-pricing the risk of lending, they have supported a speculative mania in housing and made housing less affordable.
Frequent readers know our position very well:
No government can design a solution for Vancouver’s dilemma; we are trapped in a monstrous speculative mania, there is no way through but price collapse.
Government policies may precipitate the collapse, or they may give cocaine to the dying racehorse and let it limp along for a while longer (drawing in even more buyers for the slaughter), but, whatever a government does will not put off the inevitable outcome of a bubble.
– vreaa

33 responses to ““When I look at the actions of governments, I cannot figure out whether they are mostly stupid or mostly dishonest.”

  1. Ralph Cramdown

    If “fewer Canadians can buy a new home today than in the past, and they are choosing to rent instead,” how is home ownership at an all-time high?

    I don’t think it’s too hard to find affordable rental accommodation in too many places, either, excepting Fort Mac. All those stretched homeowners are renting suites (not counted in vacancy rates), freeing up apartments and rental condos for those who don’t want to live below ground.

    If you agree that home prices are high compared to rents AND you think that rents are unaffordable, where is everybody living? Googling “canada household formation” finds lots of charts that don’t support the notion of a nation of couch surfers. People who can’t afford a unit to themselves on McWages need to upgrade or move away, pushing wages (or labour efficiency) up and rents down. And don’t forget the adage “two can live as cheaply as one.”

    This may sound hard-right, but I don’t know that we do the right thing when we subsidize renters or landlords (equivalent, really) in high priced areas. We end up with substandard housing stock and employers paying sub-subsistence wages. I’m open to suggestions.

  2. advocating government intervention? I thought we were all “hands off” and “market forces” on this site. No CMHC, no stimulus, no artificially low interest rates. Let’s let market forces prevail. No rent controls, no BC Housing, no gov’t run or funded rentals. Let’s see how much closer rent:own ratio will get without intervention.

    • F1-> Huh? Your reading skills appear to have deteriorated further.
      Nobody here is “advocating government intervention”; least of all your host. Read the post again, slowly, and in its entirety.

      • yes vreaa, read slowly…comprehend.

        “We’re calling on the federal government to use its spring budget to introduce cost-effective market incentives to encourage private-sector investment in rental housing.
        These include:
        • Low-interest loans underwritten by the Canada Mortgage and Housing Corporation (CMHC) to finance new rental construction.
        • Tax reform to encourage owners to renovate and retain rental properties, providing an incentive to preserve affordable rental housing.
        • Help for landlords to make rental housing more energy efficient, reducing costs and easing pressure on rents.”

      • Yes, F1, the words you’ve quoted there are those of the Mayor of Vancouver, in his article in the Toronto Star, words that we then proceed to criticize.
        Reading is one thing, we suppose, comprehension another.

      • Nem -> hahaha. We do what we can.

      • 4SlicesofCheese

        F1 Have you ever admitted being wrong about anything in your life?


        Be a man do the right thing. Apologize.

      • 4Slices -> F1 always, always, always simply moves on, oblivious.
        That is why we are convinced that he will simply disappear when the bubble implodes. Frustrating, but just another (very minor) irritating consequence of this great big mania.

  3. What people don’t realize is how much rental housing is penalized from a taxation standpoint compared to condominiums.

    In Toronto a rental building pays 3 times more in property taxes than the average condo. Then there’s the other “taxes” we pay as a result of having tenants.

    I just paid $1200 for a false fire alarm to the city.

    The city charges more for garbage removal than a private contractor by 45%. They charge me for all compacted garbage when only half my garbage is compacted.

    I get charged $170 for applying to the courts to have a tenant who doesn’t pay evicted.

    When I have to get the sheriff it takes 8 weeks and costs $330. In my commercial properties the same service costs $95 and takes 2 days.

    All these costs are included in the rent I must charge and we barely break even every month. Sure we’re building equity but you don’t get to spend that money on operations.

    Tenants don’t understand that to get lower cost housing they should be fighting for landlords costs to be reduced especially those tax costs.

    The city of Vancouver is equally retarded. Buildings in a low interest rate environment are bound to decrease in value as mortgage servicing costs go up. Maybe Warren Buffet could afford to pay to subsidize tenant’s rents but once you start to multiply the number of units you realize that it becomes impossible. For instance before I took over this portfolio of properties the owner used to lose 20K per month. It’s unsustainable. So counting on capital gains for buildings is sheer madness. No one is going to buy 200 units without expecting some kind of return on equity. Why would anyone buy into this when you can get a nice GIC that pays you more?

    • Rachelle -> Thanks for the comment; sensible, as always.
      However, we have to disagree with you on some points.

      You say “All these costs are included in the rent I must charge”.
      Yes, and that’s the way it should be. You should be able to cover all costs and make a decent positive cash flow, above those determined by current low risk investment instruments. But the problem prospective serious landlords are facing is not with the inevitable incidental charges, it’s with the cost of buildings in the first place…

      “Tenants don’t understand that to get lower cost housing they should be fighting for landlords costs to be reduced especially those tax costs.”
      The most important cost that should be reduced is your capital outlay in buying the building in the first place.
      If prices plummet to levels at which sensible investors (like yourself) can again buy a building, cover financing and maintenance costs (and other incidentals such as those you list), AND make a decent yield while steadily acquiring the building over 20-25 years, then all would be fine. But RE prices have been bid up in a speculative mania, such that they are 2 to 3 times the levels that would satisfy those requirements (in Vancouver, anyway; less severe elsewhere in the country).
      So, no, tenants should not be fighting for government to reduce landlords incidental/tax/etc costs.
      Any government intervention to “reduce costs for landlords” would simply lengthen the life of the bubble, delaying its inevitable demise.
      The solution is for prices to correct.

    • I agree with a lot of you say. While I don’t believe reducing landlord costs will automatically reduce rent being charge or nice/better maintained buildings, I do think some costs/taxes for rental buildings are too out of line, especially if the city is also complaining about a lack of affordable rentals. Personally I don’t see why rental buildings are being charge much higher rates for things like garbage than condos. Yes the rental building is a business but if you want affordable housing, you don’t want to drive up the landlord’s operating costs too much.

  4. So, now incentives to landlords? Basically more incentives to buy and drive up prices further?

    Some days I feel like a chump for owning one house on which I paid a 25% downpayment and for which I have been making accelerated bi-weekly payments on a standard 25-year amortization. And, when I say “own” I know that the bank still owns 1/3 of it 6.5 years after we bought it. I’m not delusional either. And I expect to fully own it in a few more years.

    When I read junk like this, though, it seems like I should have put down 5% and amortized out as far as I could. And I should be paying minimal mortgage payments and using the rest to “buy, baby, buy!”

    It’s a strange world, and there are virtually no incentives out there to save. Other than the fact that those of us with imagination know that this can’t carry on like this forever.

    My biggest fear is that when things finally do go south, the government will again step in to rescue all of the turkeys who would otherwise be getting their comeuppance.

  5. I hate to disagree Vreea…

    Buildings are generally bought according to cap rates. Many people do not understand how interest rate dependent buildings are. As cost of financing went down, building prices went up.

    There is a spread of about 2% between the cost of financing and the operating expenses. This is supposed to be your profit margin. Apartment buildings run more like grocery stores in terms of margins than any other business.

    So when you buy a building you must try to increase that margin because any increase in services that you are unable to pass on to your tenants will result in a loss. 2% is not very much and unexpected expenses continually come up. Now as buildings have increased in value, so have the property taxes resulting in windfall for government. Then there’s all the incidental extra fees and charges which are extra hidden taxes.

    In Toronto any reduction in property taxes results in automatic rent reductions for the tenants. The government already has a very simple way to reduce tenant’s rents.

    Now let’s run this scenario in reverse, interest rates rise and cost of financing goes up, building values go down. Most commercial mortgages contain a clause about loss of value triggering cash calls to make up the shortfall.

    The spread of 2-3% is pretty constant.

    To give you an idea of how onerous the property taxes are in multires, a 71 unit building pays $146,000 in tax and a further $62,000 for city services such as water, sewer and garbage removal. It’s roughly $17K per month. It’s far and away our largest expense.

    Now it is true that because of the speculative mania more and more people are wanting to become landlords. There are very few people who can afford these buildings.

    Most purchases made recently are by REIT’s and they are bloated with cash as income trusts have died and people seek out income. That is as a result of the stock market and the mania as well as people who have no interest of becoming landlords themselves buy these stocks. Ironically you’ll hear many investors say that housing is overvalued and suggest buying a REIT as an alternative. It’s perfect storm.

    Now if we do end up with a real estate market crash, it’s going to be very problematic as people lose the rose coloured real estate glasses and the pendulum swings the other way. People will begin to think real estate is poison. It’s a perfect storm.

    • “The spread of 2-3% is pretty constant.”

      But you don’t have to succumb to this. If you are capitalizing over multiple decades you pay a floating rate above 5 at your peril. If you can lock in for a fixed 30, go nuts.

      Complaining about taxes, welcome to everyone’s world, it’s not just landlords. Net zero is the order of the day — low interest rates aren’t that free a lunch.

      I sympathize but it’s nothing lower prices cannot overcome. My only advice is that if taxes are taking a bite out of margins, perhaps the margins didn’t have enough, well, margin built in.

  6. All of these fears were regularly expressed by American “bears” as the bubble deflated down there. It’s SO critical to remember that Vegas, Phoenix, etc, etc didn’t come apart in a few weeks or months. It took years, and it *still* hasn’t stopped coming apart even today.

  7. Why is the vacancy rate so low when we’re led to believe that Vancouver has no high-paying jobs? Obviously people want to live here, even if they don’t want to buy here. The rental market is driven purely by supply and demand, so either is supply is low (unlikely, because we’re always told how many amateur landlord/flipper/speculators there are) or demand is high.

    • 15% of condos in downtown are sitting empty according to BC Hydro. Supply is indeed low, but could be a lot higher.

      “The rental market is driven purely by supply and demand”. Yes, and even if the vacancy rate is low, the rental rates a very cheap compared to ownership costs. If there was a huge imbalance between supply and demand (excess demand), rental rates would go to the roof. They are not.

    • From what people have discussed here, and what we hear elsewhere, true vacancy rates are higher than the ‘headline’ 1.4% figure; not surprising considering the high numbers of ‘illegal’ suites.
      It is still difficult to get decent rentals in some sub-sectors (3 bedroom units, for instance).
      Rents remain very modest compared to prices.
      If vacancy rates really were very low, and if “obviously people want to live here”, why are rents not climbing rapidly?

    • hahaha
      Makaya and I essentially prepared almost identical responses at the same time.

    • Contrary to popular belief, there isn’t a shortage of dwellings. There is, and will always be, a shortage of dwellings for what people want versus what they can afford. I want to live in the Shangri-La penthouse for $1000/month but that will never happen.

      Which is why the “markets are set by supply and demand” argument is so silly. It proves everything and nothing at the same time, a platitude best left for impressing gold diggers at up-scale bars and sugar water for free market op-ed demagoguery in the Province, but otherwise it has little practical use.

      • … or downwards sloping demand curve is sloping downwards.

      • To get into the Shangri La, it will cost you $3500 for a 1br, 670 sqft on a lower floor… (it’s furnished)
        What a deal…

        I agree there isn’t a shortage of supply of dwellings in Vancouver, otherwise that would be reflected on the rental market as it is in Paris or London for example.

        By the way, rental rates are determined by supply and demand, unless you feel like writing a new economic theory that would explain how these rates are determined. Build 50,000 shangri-la towers all over the lower mainland and you might get this penthouse for $1,000/month 🙂

      • Makaya, have you considered volunteering your time on the affordability task force? You sound like top notch supply-side material.

        Remember, if your only weapon is a hammer…

      • “Makaya, have you considered volunteering your time on the affordability task force?”
        No, I’ve found much better ways to waste my time… I’m sure I would qualify with such bright ideas 🙂

        By the way, it’s funny to read all those comments (wink F1) about immigration supporting permanent high real estate prices. What’s happening on the Sunshine Coast is really interesting. If there was a word to describe “worse than dead”, that would describe pretty well the RE market over there. Almost no transactions are happening there, and prices have obviously started their long and painful decline.
        Where are all those immigrants and retired boomers that were supposed to live there? Why would Vancouver’s fate be any different when price start their decline in Vancouver? Demand can vanish instantly, all it take is a tiny little needle to meet this very thin bubble…

    • I’m not familiar with the rental scene, however there appears to be no shortage of tenants.

      as at 2011 Dec 1st, in BC, there were …
      69,942 temporary foreign workers
      66,556 temporary foreign students


      • 4SlicesofCheese

        Very true there are a ridiculous amount of foreign students here. I think most are centralized in downtown area.

        But you have to remember many are doubling/tripling up in 1br units.
        A couple years back when I was looking for a dt condo every unit was tenanted by international students and my realtor would warn me that there are 2-3 tenants in the unit for a 1 br condo when we would go view them.

      • @Cheese
        I can’t find the stat and official announcement right now. But I believe BC takes in 150,000 temporary international students in recent years.

        “British Columbia attracts more that 150,000 foreign students each year who contribute more than $2 billion to the economy. ”

      • “B.C. is one of the top destinations for international students in Canada, and attracts more on a per-capita basis than Ontario. It is estimated that British Columbia’s public and private education sector educational institutions host approximately 150,000 international students a year.”

        Isn’t goggle amazing. 😀

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