Only 17 days until the election, and all parties are promising helicopter money for housing. The NDP plan, with rental subsidies, is probably the most well intended one. Rather than using tax dollars to help buy investments, they’re focusing on core needs. Unfortunately, every time you inject a large amount of cash into a market, it creates a ripple effect. The ripple effect flows through the whole market, not just a targeted segment. Even if they’re only looking to help low income renters, there’s broad implications for both non-subsidized renters and homebuyers.
As mentioned in the pieces covering the Liberals and CPC, we’re not picking on a party. Instead, we’re taking a non-partisan look at just the housing plan. We’re also exclusively looking at the risks, and unintended impact to the broad market. Politicians are more than willing to discuss the positives, so we’ll leave that to them.
That last part is in bold, because despite writing this yesterday – a number of CPC supporters still contacted us to say it was biased to not cover the positives. Once again, JUST THE RISK AND UNINTENDED CONSEQUENCES. If you pull up a pizza menu, you really shouldn’t be complaining if you can’t find sushi. On that note, let’s take a look at the NDP’s rental subsidies.
Immediate “Relief” From Rents
The most interesting key point in the NDP platform is rent relief via supplements. The full details of the plan have yet to be released, but so far they’ve said it would amount to $5,000 for 500,000 families. An extra $416 per month is quite the windfall, if you’re living on a tight budget. In theory, this income frees up more household cash to spend on necessities.
The Problem
First off, if you’re going to give taxpayer money to someone, it should go to those with low incomes. Money to low income households helps them live with dignity, and is immediately consumed. The money isn’t a handout to build up excess wealth to a private household. It’s spent on basic living expenses, and quickly flows back into the economy. In this case, the rent supplement would go right to their landlord. That’s where the problem is – it’s as much rental relief, as it is a gift to private landlords.
Renters of private property receiving supplements tend to see rents rise faster. Even though households were uncomfortable before supplements, they still made the payments. Injecting additional cash means they will more readily absorb increases to rents. In France, when subsidized rolled out, landlords adjusted their pricing strategy for potentially assisted tenants. Basically, the same units were now much more expensive. Landlords knew the government would make larger increases more palatable to those households.
This Plan Drives Rents Higher Across The Board
Knowing how market prices rent is important when it comes to understanding the impact. Rents are priced according to comps, not the cost a landlord pays to maintain the unit. For each additional perceived benefit a unit has, the more expensive it becomes. It’s fair to assume needing rental supplements, would seek the least expensive housing. If the least expensive housing gets a bump to absorb the cash injection, everything else gets a bump as well. In the short-term, this could push all rents higher. Wealthy renters, don’t worry about it. The higher the rental price, the smaller the impact of a rising market price floor.
Higher Rents Support Higher Real Estate Prices
If private subsidies raise rents, they improve the rate of return on housing. As the rate of return for housing rises, so does the premium for investors. That’s the white collared way of saying home prices move higher. If home prices are falling, this cushions them from falling as much as they should. If home prices are rising, this would accelerate them even faster. Higher rents can also create more buyers, since the gap between rent and buying narrows. Creating more demand, typically generates more upward pressure on prices.
In hot markets, some investors accept negative cash flow for fast appreciating houses. These speculative landlords are actually paying to have tenants in the unit. It’s a risky way of doing things, but it works if prices keep rising faster than the gap between rent collected.
Obviously, this isn’t sustainable long term. If it were, a one-bedroom condo that costs $500,000 would be worth $100,000,000 in just over 61 years. There’s typically a pull back towards a more sustainable return based on rent collected. In a bad recession, where rents fall as well, they both chase each other lower. However, as rents rise, they make falling prices more attractive to investors. Of course investors will take better yield.
A Shift To Suburban Markets?
Rent subsidies can prevent prices from falling, so what? Long-term, runaway prices threaten the economic viability of cities, driving investment away. Employers, already paying premium rents, also have to boost wages. Keeping talented staff just at the brink of poverty doesn’t typically end well. Being an urban employer becomes much more difficult.
Once the cost rises to a certain point, employers start looking at setting up shop look at other places. Manhattan has been seeing this some time, with many firms moving across the water. Silicon Valley, with a lower price-to-income ratio than Toronto, is seeing an outflow of new companies due to prices. The reason? The majority of investment in startups now goes to rent in these expensive cities. Ultimately, this leads to price stagnation, driving employers (and property investors) to smaller cities. This is part of the reason Canadian real estate investors have been flocking to the suburbs.
The NDP housing plan is the most noble of the plans, actually looking to help poor people. However, they’re estimating over 1.3% of the population needs an injection of cash. You can’t inject that much money into the private system, without causing a ripple effect. Further, this is a temporary measure, until the government builds more subsidized housing. So what happens to rental supply previous occupied by subsidized renters in 10 years? Investors holding those units won’t be super happy.
For the Liberal Party of Canada and CPC plans.
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Any time you introduce money into a market, you extend an inefficiency. The real estate industry loves to pretend they’re into capitalism, but really it’s just cronyism they’re after.
Absolutely !
Is this why I’ve real estate investment newsletters are targeting city investors for suburban projects? That makes sense, since people in Toronto generally make about the same as smaller cities (on the median). They have much room to extract rents from.
So I should buy now? Because post election, it seems like everyone is going to be trying to push prices higher.
Bruno, I’m not here to say whether you should or shouldn’t buy.
Just remember; what politicians say and what actually happens are two separate things.
Keep in mind that outside Canada, it’s being reported that a worldwide recession is on its way. If that happens, I don’t know how Canada remains unaffected. Is Canada really more special than every other country?
Fingers crossed for you whether you buy or don’t buy.
Governments have a bad track record of succeeding to keep bubbles going.
All this political degradation on display represents a good study in psychology because it is a good example of projection. It makes it clear that all of them operate from the basic premise that politicians are routinely bought by the highest bidder so they just try to buy voters in the same way (with taxpayers money of course). They just don’t know anything else.
A few words for those who are being fleeced by this nice political trio and other contenders who are not any better. You know why when you ask politicians to “improve housing affordability” they go talk to the RE industry then take the money out of your pocket to give it to the RE industry while looking in your eyes and telling you that they are solving your problem? Because politically speaking you are a cheap date and if you think that politicians will not take advantage of it… well, think again.
Despite the obvious negative effects of their agendas most of the politicians are not that dumb and know very well what they are doing and why. The only thing they really care about is being elected, so unless you make it abundantly clear to them that if some very specific measures are not enacted then they are not getting elected, they will keep whispering sweet nothings in your ears while working your pockets with their hands. Just don’t ask for some nebulous “housing affordability” because you can see for yourself how they go about it.
Why wouldn’t they just take the $2.5 billion dollars and use it to directly fund public and non-market housing? Why make a subsidy that goes to private landlords?
It’s a temporary measure, until subsidized housing is built. Basically, they want to turn Canada into Singapore, where even the middle class lives in subsidized homes.
And for those that think they’ll be rich because of the property they have, they’ll be squeezed out by rising property taxes, since you have to make up the subsidized property tax base.
Exactly what happened in Singapore. You can’t disconnect wages from values for long. A million home with a person earning $80,000 is a recipe for disaster when everything is done.
Basically, they want to turn Canada into Singapore, where even the middle class lives in subsidized homes.
That’s basically what I want, too. But why don’t they just take $2.5 billion and straight up buy existing buildings?
Government money AND private money both competing to buy the same real estate would make costs rise even faster.
I would love to unload my real estate for a higher than market price, then the government can take over and ensure non-white immigrants are prioritized over the existing population. Then everyone is happy…except those lower class Canadians we wanted to help in the first place.
Come on now, it’s not kid ourselves here. To solve the housing crisis we simply implement a predatory real estate tax. Where all none primary residential real estate are taxed at 5% annually. No foreign ownership, no corporate ownership without license. If you are concerned about a sudden correction implement these measures over a 4 year period.
We need to force the government to act, we know what we should do. These politicians won’t do it unless we protest.
If housing don’t be come more affordable we are going to riot like HongKong soon. According to UBS Toronto housing is less affordable than new York or Hong Kong compare to local wages. This is worse than a dictatorship.
taxed at 5% annually
Why stop at 5%?
How fair is subsidizing the poor to all of those just above the poverty level as measured by income? Someone making few thousands more than the cut off is automatically in the same financial position as the person who qualifies for subsidies despite working more, harder, in a higher responsibility job, having to invest in more education or other job qualifiers etc.. We have taxes progressive, any subsidies should also be progressive as well, if have them at all.
Stephen,
Thanks for these three articles discussing the risks from each plan! It’s sad that no party aims to solve the housing crisis by letting prices come down. Of course, it also makes sense considering the impact that will have on the economy. Will you guys be discussing some solutions that may also work to make housing more affordable? Solutions we can rally around and potentially have parties adopt. I would really like to learn what can be done.
For example, I’d imagine imposing some minimum down payment requirement (let’s say 20%) and incrementally increasing it every year would certainly help. Alternatively, reducing the maximum amortization period would do something similar. Basically, whatever gets purchase prices back to being connected to incomes/savings and less on credit should work.
Higher rates are the best solution, and stop using the Bank of Canada for rate suppression. These ultra cheap mortgages aren’t a function of the market, it’s by design from the country’s central bank.
Will you tell us about the Green Party plan and the People’s Party (theirs looks to be to reduce demand by reducing immigration)?
Housing is a supply and demand problem, these parties all try to solve the issue on the supply side, they need to look at the supply and the demand. 350k new immigrants every year, mostly into Toronto that creates a housing shortage unless they are building a lot of new units per year. And when you are talking about an already dense urban center it’s impossible to find the space to build those units.
-Limit immigration to reasonable levels. This also would help raise wages
-Control where immigrants are settling.
-Build new units faster.
-New solutions for large urban centers like tiny units for singles who’d rather eat out all meals than cook etc.
It seems very strange not to mention the largest part of the NDP housing platform – the construction of half a million affordable housing units.
In a bad way?
There’s already a housing labour shortage. Massive premiums to get people to do basic things. If construction wages are rising 20% y/y, and you increase national construction by 20%, that demand increase will also be passed on.
The increase would also push material and machinery costs up, and leave a really big overhang for people that will be unemployed at the end of the 10 years.
Without third world immigrants you would have no affordability crisis.
I’m a landlord in Windsor and I basically have families begging me to help them because they can’t find a place because there are so many people in these places they want to rent. And where do they come from? Elsewhere…
To many people and not enough houses.