In a science fiction tale by the late Iain Banks, the only way a huge computer can make a truly accurate predictive model is to create a near-perfect simulation, including recreating the realistic lives of all the people involved.
Governments don't have the computer power to do that with the Canadian property market. That's a good thing. They avoid the dilemma faced by the science fiction computers over whether to kill off all those virtual people in the simulation.
The point is that, currently, even our most exacting models are ham-handed at predicting how sweeping changes in policy will affect the real world. No one knows for sure how the property market will react to government meddling, but here are just a few of the many ways things could go wrong.
1. Popping the bubble
The current round of tools to cool the Ontario market is only the latest in a cumulative series of changes by federal and provincial governments. Like shifts in interest rates, alterations in rules can take a long time to work their way into the market — especially a market as disparate as housing. There is some danger that as foreign buyers, first-time buyers, owners of vacant homes and domestic speculators find themselves nudged out, the housing market will cascade into a tailspin, revealing what so many critics have predicted: that the real estate market is a dangerous bubble in need of a serious correction of between 30 and 50 per cent.
2. Market freeze-up
An alternative view is that rather than loosening up the market by encouraging people to sell, it is possible the uncertainty over the short-term future of real estate will inspire owners to hunker down and stay put. If history is a guide, as population grows, the supply of prime urban and nearer suburban housing will remain at a premium. Instead of selling into a temporary falling market, those who have no urgent need to move may decide to sit on their homes, further plugging up the market. There is some evidence this is exactly what happened following new real estate restrictions in Vancouver.
3. Trapped tenants
Even though renters don't own their properties, rent controls give them a stake in future property markets in a way that could make them, too, unwilling to move. In Ontario, the new rules wisely allow rents to rise when a tenant leaves, unlike in some places where tenants can pass on their rent-controlled apartment to a relative — effectively transferring the rising value of property from the owner to renter. But if rents in prime areas continue to exceed inflation over time, as they have done historically in thriving cities, people in existing rent-controlled accommodation will find it financially disadvantageous to move, leaving them trapped in a home that is the wrong size or in the wrong location.
4. Rental shortage
While some rental developers insist they have always done their planning based on rent increases at the rate of inflation, the traditional argument that rent controls discourage development has not been disproved. While the lifting of rent controls in buildings constructed after 1991 did not create the promised surge of new rental units, economic changes are complex and not simple linear relationships. Property markets traditionally go through cycles where higher prices lead to overbuilding followed by oversupply that leads to lower prices. The interruption in the cycle before its completion may mean a shortage of future rentals despite other government incentives.
5. Spreading contagion
Whatever the cause, the wild speculative rise in housing prices began in the country's biggest cities. Already unaffordable homes in the biggest urban centres have led to sharp price rises in once sleepy communities within commuting distance. Many analysts propose that restrictions on speculation in Vancouver contributed to the latest run-up in Toronto-area prices. At current interest rates, property remains a good investment expected to hold its value. Pushing speculators out of the bigger urban centres may have the effect of making buyers look elsewhere to communities such as Kingston, Ottawa and Montreal. That may mean future windfalls for current property owners, but could eventually spell the same affordability problems for renters and new market entrants.
6. Political change
Although it is hard to prove, changes in property rules in both B.C. and Ontario have been widely described as political moves to bolster a government's fading popularity. But rewriting the rules creates losers as well as winners. While the winners may move to support the leaders who changed the policy to help them, voters are notoriously fickle. Those hurt by the shift in rules, whether because they went too far or did not go far enough, might be motivated to vote for change. Even as existing owners, renters and landlords begin to adjust to the new rules, they must realize that those rules could alter again as soon as the next election.
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