Historical article note: This article was originally published on 2018-07-31. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
The Toronto real estate market has been characterized by a particularly low vacancy rate for many years. A low vacancy rate is definitely a good thing for the overall real estate market, because a low vacancy rate shows that houses are for living in and not for speculation; real estate investors can invest with confidence without worrying about being unable to rent them out; when banks consider borrowers using rental income to support loan applications, the vacancy rate used when calculating debt repayment ratios is relatively low, which is conducive to loan applications. Economists believe that the normal vacancy rate is 3%. At this vacancy rate, there is no waste of resources and it also gives tenants a certain amount of choice. The vacancy rate for apartments in Toronto in the first quarter of 2018 was 0.7%, which shows that the rental market is very unhealthy. Tenants basically have no choice. To rent a house, they must obtain it through bidding. They lack the ability to bargain with landlords. Market rents will also rise rapidly under this extremely unbalanced pressure. There has been a serious seller's market phenomenon in the rental market for a long time, and it is getting worse due to inappropriate government intervention.
The Ontario government announced the Fair Housing Plan in April 2017, which further restricted the legal rights and interests of landlords in Ontario, further expanded the scope of rent restrictions/rental control, and imposed stricter restrictions on tenant changes, resulting in a further increase in rent increases in Toronto from 2017 to 2018. In the first quarter of 2016, the average rent for a one-bedroom apartment was 1,662 yuan. In 2017, it rose to 1,791 yuan, an annual increase of 7.76%; in 2018, it rose to 1,995 yuan, an annual increase of 11.4%, a significantly higher increase. The rent situation for two-bedroom apartments is the same. In 2016, the average rent was 2,278 yuan, which rose to 2,432 yuan in 2017, an annual increase of 6.76%. In 2018, it rose to 2,653 yuan, an annual increase of 9%. At the same time, Ontario’s rent control regulations require landlords to only increase rents for existing tenants by 1.8% per year. The actual market rent increase is about 10%, which is five times different from the increase stipulated by the government. This restrictive measure that deprives landlords of their rights has all the final economic consequences borne by subsequent tenants.
Obviously, the above-mentioned current situation of increasing rent increases is the result of politicians' confrontation with economic laws. It’s not just the landlords who suffer, but also subsequent tenants, as well as the politicians themselves. There is one most basic law in economics: the law of second-order economics. First-order economics refers to self-centeredness, I want, I think, I stipulate... Second-order economics considers: "If I do this, what will you do?" Politician: I want to limit the increase in rent, I will stipulate the extent of the increase in rent... The law of economics: If politicians want to limit rent, I will reduce the supply. There were 6,670 apartments for rent in Toronto in the first quarter of 2017, and 6,171 apartments for rent in the first quarter of 2018, a decrease of 7.4%. Don’t politicians understand economics? No, Ontario politicians intervened in real estate before the provincial election to cater to some voters who have the "illusion of control." The "illusion of control" refers to the feeling of overestimating one's ability to control, for example, the behavior of carefully rolling dice in a casino, as if one's movements can control which side of the dice turns up. Some tenants complained to the government that they could not bear the rising rents and hoped that the government would take control. Then they listened carefully to see whether the legislators were under their control. In order to make these people with the illusion of control think that they have influence over the legislators, smart legislators immediately came to their aid and proposed regulations that further deprived landlords of their rights. Everyone has seen the final result. This group of provincial legislators was wiped out in the 2018 provincial election. Houses in the Ontario rental market have become more difficult to rent, rents have increased, and landlords have complained and become more picky about the selection of tenants. In socialist countries, it is rare to see government intervention in market prices. However, a welfare state like Canada actually uses administrative orders to limit prices. It seems that it was carried away by the votes. The homeownership rate in Ontario is 69%. The Fair Housing Plan not only restricts the freedom of landlords, but also imposes a 15% real estate speculation tax on non-residents buying houses. It artificially interferes with the real estate market and negatively affects the housing prices of 69% of households. Silent Majority/Silent Majority is a term invented by Nixon, which refers to the group of people who do not express their opinions but can determine the outcome of the election. Homeowners in Ontario are the silent majority and never cry out for government protection. However, when politicians’ stupidity harms their own interests, who has the final say will be seen on the ballot. From the perspective of social roles, people who rent a house in a city either do not plan how long they will stay or are not ready to buy a house. These people have psychological expectations for the instability of their living situation. In contrast, homebuyers are the ones who pay a large premium to ensure that future housing costs are relatively stable. The government provides guarantees for renters to ensure that their housing costs are relatively stable, which violates the laws of economics. The final result also proves: Stability will survive through fluctuations, and stability will perish through stability. Plato believed that the king of the Utopia should be a philosopher, but from my experience of living in Canada for nearly 10 years, today’s politicians seldom study philosophy, lack foresight and wisdom, and keep their eyes fixed on the votes. After being elected, they seem to hold on to the popsicle in their hands as if they are not their own. The tighter they are, the faster they melt.
After the implementation of the Fair Housing Plan/Fair Housing Plan, the vacancy rate situation further worsened. In the first quarter of 2017, the apartment vacancy rate in Toronto was 1%. In the same period of 2018, it dropped to 0.7%. That is, of the 100 houses available for rent, only 0.7 are empty and available for rent at any time, and the other 99.3 are already occupied. The vacancy rate of apartment buildings in the York Region, closest to Toronto, has also dropped, from 1.1% in the first quarter of 2017 to 0.9% in the same period in 2018. The "one" in "a room is hard to find" has become a well-deserved reputation. How did Toronto’s rental housing market become so tight? According to a special report from Ryerson University/Ryerson University Urban Institute in October 2017, in the 10 years from 2007 to 2017, a total of 2,400 commercial apartments were built in Toronto specifically for rental. At the same time, the number of apartments available for rent provided by private real estate investors was as high as 76,000. According to the report, if Toronto's vacancy rate is to reach a healthy 3 per cent, 8,000 commercial rental units will need to be built each year from 2018 to 2041. The name of the report is Getting to 8,000 and the subtitle is Building a healthier rental market for the Toronto Area. With the rental market so hot, why aren’t commercial organizations interested in building apartment buildings specifically for rentals? The reason is still the policy of restricting rent. If a tenant moves in, the landlord can only increase the rent by 1.8% per year. The longer the time, the less willing the tenant is to move out. If the landlord is a private real estate investor, the landlord can ask the tenant to leave on the grounds of taking back the rental house for self-occupation. However, as a commercial organization, it is difficult to ask long-term tenants to leave in the name of taking back the rental house for self-occupation. Because the rent is too low, the landlord will not have the financial ability or desire to repair the house over time, and the property will depreciate at an accelerated rate, which will have a negative impact on the market value of the house. Capital is profit-seeking, and investments with bleak prospects will not be favored by capital. Mankiw wrote in "Principles of Economics" that "Rent control is the most effective way to destroy a city, other than bombing." For Toronto tenants, they can only avoid being evicted easily if they live in commercial rental housing, but their willingness to invest in commercial rental housing has been hit to a freezing point by government regulations restricting rents.
How are the tenants protected by the government doing well? Will policies restricting landlords from raising rents really help tenants? The answer is no. Apart from the side effect of fewer and fewer commercial buildings being built exclusively for rental, the best effect of the government's protective umbrella is to make tenants trapped in the soft land of their existing leases. For tenants who have signed a lease, the rent will increase by 1.8% every year, while the rent on the market will increase by 10% every year. If the tenant wants to move, he must sign a new lease at the market price. The time to change houses is what Taleb calls "the turkey's Thanksgiving moment." A turkey that is usually pampered will go into shock when faced with the knife of killing chickens on Thanksgiving. A Ryerson University report shows that 20% of renters in Toronto live in houses with insufficient bedrooms. Insufficient means that according to the living conditions of a civilized society, children of the opposite sex over the age of 6 should have separate bedrooms. A family of four with children of the opposite sex needs at least 2 bedrooms. In addition, research also shows that 43% of tenants in Toronto have excessive rental affordability, which means that more than 30% of their monthly pre-tax income is spent on rent. The difference in median annual income between renters and homeowners in Toronto has doubled. In 2016, the median annual income of renters was $41,000, while the median annual income of homeowners was $88,500. 20% of renters do not have enough living space, and 43% of renters are overburdened with housing. Therefore, 63% of renters are unhappy and have asked the government for help. But contrary to expectations, the government's intervention cannot increase the income of tenants, increase the number of houses available for rent, and cannot stop the rapid growth of market rents. The only thing it can do is to make turkeys more content, happier, and less vigilant before Thanksgiving.
Vacancy rates are low and rents are rising faster, benefiting landlords. In 2010, the vacancy rate in Toronto was as low as 2.1%, of which the apartment vacancy rate was 1.8%. Since then, the vacancy rate has been below this level. From 2011 to 2017, apartment rents have been rising. The annual rent for a single room/studio has increased by 3.7%; the annual rent for a one-bedroom has increased by 3.5%; the annual rent for a two-bedroom has increased by 3.9%; the largest annual increase has been for a three-bedroom apartment, which has increased by 5% annually. During the same period, the annual inflation rate increased by only 1.8%. From 2009 to 2017, bank interest rates were at historically low levels, the cost of real estate investment was low, and leverage could be used, and the profits from real estate investment were much higher than those from other assets. From July 2017 to July 2018, the Bank of Canada calculated interest rates four times in a row, with interest rates increasing by 1%. Calculated using a 25-year repayment period, a 1% interest rate increase would increase the monthly mortgage payment by 10%. When interest rates increase by 1%, a 10% increase in rents can offset the impact of the interest rate increase on real estate investors. In Toronto, the rent increase in just one year from 2017 to 2018 was almost 10%. The rent restriction regulations only apply to existing tenants. When a tenant is changed, a new lease can be signed at the market price. The inconvenience caused by the government to investors is very limited. Regarding investing in apartments or other types of real estate, my personal opinion is: Apartments occupy less land, and you cannot hoard land capital when buying an apartment. The cost of apartments basically reflects the cost of steel, cement and government taxes. Therefore, the price and rent of apartments can best reflect the contradiction between supply and demand in the residential function of a house. According to a study by Ryerson University, to return Toronto's housing vacancy rate to a normal 3%, it is necessary to provide 8,000 apartments specifically for rental every year in the next 23 years. From the current situation, unless the government immediately abolishes rent control restrictions to stimulate investment enthusiasm, there will be no major improvement in Toronto's rental market in the next 20 to 30 years. As long as the central bank interest rate is below 4% (currently 1.5%), ordinary working-class people will have the opportunity to make profits by investing in apartments in downtown Toronto. Someone with good intentions drew a map for the tenants, marking the areas that were only suitable for renting and not for buying. For renters, areas that are only suitable for renting but not buying houses are the most densely populated areas and are also the most suitable places for investors to invest.
If you want to live in peace of mind and have a sense of certainty, you cannot rely on the government. Renting a house is a necessity, and you have to bear the pain of rent fluctuations and constant moving. Buying a house can avoid the pain of ups and downs, but you have to pay a huge premium first for stable living costs in the future. Whether to rent or buy depends on how long you plan to live there and your expectations for future income. It seems very inappropriate for government regulations to intervene in personal decisions. People who choose to rent a house are choosing a life of uncertainty. The government insists on using administrative means to change uncertainty into certainty and ensure that renters' rents are relatively stable. Taleb calls it "naive intervention" or "iatrogenic injury" in his book "Antifragility". "Iatrogenic injury" means that if you don't see a doctor and don't follow the doctor's plan for treatment, you may be able to live a few more years. The government needs to lift rent controls immediately, immediately, and completely, otherwise Toronto's problems of difficulty in renting and high rents cannot be solved.