November 2, 2017 | buyers vs renters
We’re not New York. We’re not Vancouver. But Toronto is a more expensive place to buy property than many North American cities. No doubt about that. And with the multitude of government rules and regulations coming at us this year attempting to cool the market, it may seem that renting is just a better idea for now than buying any thing. Renting, however, is not looking so rosy. Here’s why.
The Federal Government is trying to discourage buyers from buying beyond their means, and the Provincial Government is bringing it rent controls to better protect tenants. But as with many well-intentioned government interventions, the results may lead to a faster rise in rents than prices.
To fully understand this, let’s review the recent government changes:
- The Ontario government has brought in rent control laws for all properties in Toronto. The new rules appear to help out tenants by limiting rent increases with existing tenants to what the province allows each year, usually matched to the rate of inflation or lower. This is on all properties now. They have also created laws that discourage landlords and landladies from evicting their tenants. By law, a homeowner is allowed to ask a tenant to move out so the owner can take over the property for themselves or a family member. With the new rules, however, landlords must give one month free to a tenant she or he asks to leave a rental unit to use for themselves or family members. Then they must occupy the property for a minimum of a year or else face steep fines from the government.
- On top of this the Federal Government has added a new law for all Canadians. Starting January 1, all uninsured mortgage borrowers will need to qualify at either the Bank of Canada’s five-year benchmark rate or at their contract mortgage rate, plus an additional 2 per cent. This is not the worst idea in the world. It will protect buyers from rising rates, which are anticipated to go up in the years ahead. So, The Feds are preparing the buyers for the increases they are going to make.
In a nutshell, it appears renting is a safer place than it used to be. With the new rules, renting seemingly protects tenants. New legislation makes it more difficult to buy a property. At the very least, renting certainly seems to appear easier.
Now, what’s that saying about the road to hell being paved with good intentions?
To understand why this may backfire, we need to look at the other side of the equation. We need to look and those people who own properties they rent. Now, I know this is a mix of well-intentioned people trying to make a living and evil slum lords who do not maintain their rental apartment buildings, but let’s just look at their bottom line. Landlords and landladies want to make money off of their property. If they feel it is too difficult to do, or does not make them enough money to offset the work and upkeep required by an owner, there will be less incentive for tenanted properties. Already, since rent controls have moved forward, many developers who have planned to build rental units have decided to stop. Toronto has lost over a thousand rental units that will lead to less rental stock. There will be more cancelled plans to come.
On top of that, the changes from the Federal governments will push those individuals who are planning on buying homes back into the rental market for a longer time so they can save up for their mortgages with the required stress tests. This, in turn, creates greater pressure on the rental market.
So to reiterate, recent legislation is creating less rental units and more renters. What is the result of that? You guessed it. Higher rents.
But how is that possible if there are rent controls? Well, a landlady or landlord can raise the rent as much as she or he wants between tenants. If you are currently a tenant, and you don’t plan on ever moving, then you may be fine. But real life tends to intervene. Often, you need to move. Relationships break up or begin. Your neighbour plays in a heavy metal band. You get a new job on the other side of town. When that happens, you’ll go to the look for a place to rent and find yourself shocked by the competition and the rising rent prices.
With the stubbornly low vacancy rate of Toronto, we can expect to see even fewer places to rent.
Governments fail to understand the importance of building more rental units. If you are discouraging landlords and developers of rental units from building more, you are creating a supply problem. How do you solve this kind of problem?
- Stop creating laws that discourage developers and landlord/landladies from bringing out tenanted properties. If you make policy that is too restrictive, those who build and buy rental stock won’t create the rental stock Toronto needs.
- Create More Rental Units Themselves. I don’t think the government has the will or big plans to do this in a meaningful way, but they could create more rental housing themselves.
With the turbulent market we have seen in Toronto in 2017, I think that there is a believe floating around out there, that renting has now become the safer option than buying. And who can blame people for thinking that? There has been a great deal of government policy coming through to cool the market. Some of it wise. Some of it not-so-wise. The thing is, these policies do appear to have a cooling effect on prices. On renting, it will very likely do the opposite.