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Last week, I wrote a post asking you Should the Government Mess with the Housing Market? If you’re a regular reader of this blog, you’ll know that I’m a huge proponent of saving yourself.
This is because I believe that solving problems yourself makes you stronger, not weaker. Having grown up under a totalitarian government in China, I learned that waiting around for the government to come save you is like waiting for an axe murder to cut you free after getting snagged on a tree branch. Yes, your immediate problem may get solved, but you may just end up getting your goddamned arm chopped off in the process.
So it shouldn’t come as a surprise what my thoughts are on government intervention.
But as it turns out, most readers disagree with me. Here’s what 356 readers said when I asked them “Should the Government Mess with the Housing Market.”
Of 356 readers who responded, 198 wanted the government to intervene. That’s more than half! Now, to be fair, government intervention (CMHC insurance, keeping interest low, etc) maybe a big part of the reason why we’re in this FOMO borrow-your-brains-out pickle in the first place, so their opinion is not exactly unwarranted. But, will the Liberal’s 16-point REALLY help?
Let’s see what you said:
Alrighty, let’s break down some of your responses. Of the 361 readers who responded, 32% think Cracking Down on Speculators is the answer, while almost the same amount thought Rent Control was it. And as many as 18% think none of these government fixes will do a damned thing. Vacancy Tax came in next at 12% and lastly Foreign Buyers Tax and Double Ending came in at a measly 6% and 1%, signalling the lack of confidence readers have from these minuscule changes.
Let’s talk about your top 2 favourite measures: Cracking Down on Speculators and Rent Control
Cracking down on speculators is definitely low hanging fruit, and an easy target, like this case in Vancouver, where a speculator was caught evading taxes–and subsequently not punished at all.
Nobody likes speculators. These are the people who buy up 8 condos, sit on them, not let anyone live in the damn things hoping to pocket a nice fat capital gain.
These people are just in it for the money. But don’t get me wrong, I’m all for free market. But housing is not like an ETF. If I own a unit of an ETF, it doesn’t prevent anyone else from buying the same ETF. But for housing, which is something people actually need, when people buy it just to sit on it SOMEONE out there is left homeless.
So that’s why two measures were introduced: a capital gains tax on speculators and a vacancy tax on owners who leave their units unused. The first measure is kinda stupid, since capital gains taxes already existed for speculators. The province was simply promising to actually enforce the damn thing. But the vacancy tax is new. And to see what effects such a tax would have, we need to cross the ocean to Jolly Old England. Specifically, to a city named Camden.
In Camden, however, the extra tax didn’t really work. It turned out it was not that easy to identify vacant properties, and local politics prevented them from making that tax too costly so it never really had the intended effect.
Rent Control, on the other hand, is a bit more complicated. There are two sides of the story. On one hand, you keep rents affordable, but on the other hand, you decrease incentive for builders to build for-rent only properties. And yet in NY, rent control is still in place because NY wants to avoid a situation where only the wealthy can afford to live there, like Tokyo or Shanghai. So in order to make rent control work, the city spends heavily by giving tax credits to builders to incentivize them to build more units. In London, where rent controls have been removed, the city spends $25 billion pounds a year to subsidize rent for low-income families. Looks like NY city government is definitely getting the better deal.
So I believe these two things will have a short-term effect on the housing market but won’t move the needle too much long term.
So what will have a long term affect?
Interest rates hikes.
Like the one that crashed the Toronto housing market back in the 1980s.
Now some people will immediately jump up and down and say 23% interest rates are of the past and will never happen again. And to that, I say, Canadians are so maxed out on debt that interest rates only need to rise 1% for nearly a MILLION Canadians to feel the crunch:
And for to see what type of affect an interest rate hike will have on our housing market, let’s take a look at our closest real-estate mirror, Australia:
After the Australian Prudential Regulation Authority (APRA) took a tougher stance on investment lending which encouraged key lenders to raise interest rates, housing prices stalled in April. Parroting our own government’s thoughts, their Federal Treasurer, Scott Morrison, calls this approach “using a scalpel, not Labor’s chainsaw”.
Which pretty much explains why the Canadian government has not and will not move to get rid of CMHC (Canada Mortgage and Housing Corporation) insurance to cause a housing crash.
Interest rates though, that’s another story.
Given that the US currently has an unemployment rate of 4.8% and inflation is ticking up to the 2% threshold, the Fed is expected to raise Interest rates 2 more times this year.
And Canada will follow suit. Because if Canada keeps its currently interest rate while the US one rises, that would kill the Canadian dollar relative to the American dollar, which increases inflation. And since it’s the Bank of Canada’s job to keep inflation in check (and not help out the housing market as so many people mistakenly assume), they will eventually be forced to increase interest rates too.
Which is great news for renters, who can now benefit from the newly-instated rent control. Your landlord’s mortgage rates will go up but your rent is fixed to inflation! And if those amateur real estate “investors” end up having to fork over 10 grand to fix a leaky roof, or their condo fees increase, they can’t pass it on to you.
Until interest rates rise, no one will know for sure whether these the new 16-point plan will cool this insane housing market. BUT if you’re a renter, you can now rest easy, knowing that your rent won’t double even as your landlord’s mortgage, property taxes, and maintenance costs go up.
And as a long time renter, I gotta admit, it feels great. For now, the pendulum is swinging away from the landlords and back towards the renters. So if you’re a renter, now’s your time to take advantage!
And while you’re at it, make sure you gloat a little bit at your landlord. God knows they’ve gloated at you for too damned long.