Rent control will probably help Ontario's unpopular premier. Renters? Not so much: Neil Macdonald
Except in command economies, a government's power to thwart market forces is severely limited
There's a certain type of story the Toronto media loves. It terrifies the locals and thrills those of us who have chosen to avoid living there.
The headline is usually something like: "WAIT UNTIL YOU SEE WHAT THIS FIXER-UPPER IN A CRAPPY NEIGHBOURHOOD SOLD FOR."
Accompanying the article is a picture of some forlorn little dump with "$1.6 MILLION" stamped across it, and a caption explaining how the buyer paid $600,000 or so over the "asking price," which, in Toronto, is apparently an utterly meaningless concept, unlike "bidding war," which is horribly fascinating and real.
Toronto's housing market is like one of those forest fires that suddenly leaps into the tree canopy, exploding outward in a blast that releases more energy than an atomic weapon.
Rents, naturally, are following. The latest outrage was a landlord who doubled tenants' rent, suddenly, from $1,660 to $3,320. Everybody read that one, too.
Paying for location
This is all sensational news because Canadians persist in thinking they have some sort of right to live in a roomy home in a nice neighbourhood for an affordable fraction of their income, a fantasy most people in the developed world's big cities gave up long ago.
New Yorkers and Londoners, for example, have had to accept that their cities are desirable locations for people all over the world, and that the forces of supply and demand ultimately rule a free market economy.
But Ontario has a deeply unpopular premier who wants to be re-elected, and who shares the fervent liberal belief that government can re-engineer anything for the better. So what happened last week was probably inevitable.
Ontario is, as of now, using its taxation power to make a "non-resident" investor pay a great deal more than a Canadian citizen for the same piece of real estate – 15 per cent more, exactly the same amount British Columbia has imposed last year in an effort to make homes in Vancouver for affordable for Vancouverites.
Further, Ontario has decided in a single stroke to impose rent control on every rental unit in the province, capping annual increases at 2.5 per cent.
This will probably increase Kathleen Wynne's chances of keeping her job. There are a lot more tenants than landlords, and foreign investors don't have a vote.
But it's probably not going to help lower-income or even average-income people find better housing in Toronto.
Except in command economies, a government's power to thwart market forces is severely limited. (And command economies haven't worked out too well).
And retroactively changing the rules and capping rent is deeply unfair to all those small investors who bought dwellings as income properties, in the process supplying Toronto with the single biggest source of rental units since governments gave up on "purpose-built" rental housing years ago.
What Wynne is really doing is redistributing wealth not just broadly, from the wealthy to the poor, which is in a sense government's role, but something much narrower: taking money from landlords and handing it directly to renters.
Who is to say all those landlords are so much better off than their tenants?
What is certain is that no one is about to cap landlords' costs – say, taxes and utilities — at 2.5 per cent. Or protect them from inflation. And can the Bank of Canada guarantee interest rates on landlords' mortgages won't rise by more than 2.5 per cent?
For the record, I do not own an income property. But if I did, and if it were in Ontario, I'd unload it right now.
The special tax on non-resident investors, which, by the way, Wynne stated just last year she would not impose, is just as pathetically political in nature.
- Here are the proposed measures the province hopes will cool the Ontario housing market
Hot Toronto housing market driving prices up in small town Ontario
Beware unintended consequences as governments meddle in real estate
First of all, it has been suggested by the Toronto Real Estate Board that foreign buyers account for only a small percentage of Toronto residential sales.
Second, as Wynne herself warned when she promised not to impose it, such taxes have unintended consequences.
"National treatment," as the practice of treating all investors equally is known, has helped make the American and British economies what they are, and is why most of the world's capital is parked in New York and London.
"Foreign investment is good," says Sal Guatieri, senior economist at BMO. "You want global help to come to Canada."
Third, foreign investor taxes don't work in the long term. British Columbia applied its tax last August, and prices did fall, but are now on their way back up.
Guatieri, like most economists, will tell you that government's power to defy markets is extremely limited: "At most it can take some of the froth out."
But once the froth is gone, then what? Drop the foreign tax and rent controls? How Third-World do you want to get?
One thing governments in Ontario might consider doing is to reduce the ridiculous wait time for permits, and generally thin the forest of regulations that make it so difficult to build, especially in Toronto.
But, as RBC senior economist Robert Hogue politely puts it, politicians tend to take the path of least resistance, preferring quick fixes that will have an immediate effect, but which really only buy a little time.
King Canute, in the famous fable, ended up looking like a fool when he ordered the incoming tide to turn back before it wet the hem of his robe.
But of course Canute didn't need to curry favour with his subjects.
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