by | February 12, 2013 · 10:17 pm

‘Brace Yourself…It’s here.’ Mary’s Managment Musings

Feb 2013

Mary A Moore

Brace yourself for the correction in the housing market. While it certainly has started in the west coast, the heartland of Canada has been moving along especially in the periphery.  The writing is on the wall now with the downgrading of several major Canadian banks, the closure of several major tech outlets, and most of us just struggling to pay off the mountain of debt Canadians have racked up, with Christmas bills just the icing on the cake. This should be the time for property owners to look to optimize their situation whether it is lock in interest rates at record low levels, quickly sell off poor performers, add incentives for tenants to stay at optimized rents, or reduce costs through inefficiency reduction. Builders have sensed an increased risk approaching and have backed off on the numbers being built in 2013.

housing starts

From the C.M.H.C.

Some of us who talk regularly about such matters are watching for triggers such as the slowing of foreign money from places such as China, who are having difficulties currently, and whose investment in Canadian real estate is a factor along with other foreign money. Whether it is unpaid workers advertising their plight on YouTube, or Chinese hackers scouring the internet for some advantage, the transition of leadership may have complicated a delicately balanced situation by forcing the disclosure of assets held by officials and their families, at a time when money is becoming tighter internally. Other major issues to consider are increasing volatility in the stock markets, external shocks such as an attack by North Korea, the effects of a currency war as countries come to grips with their stagnating economies, looming inflation and interest rate effects, and the shifting of asset location to sectors considered more of a potential for growth than real estate.

The debate has not been on whether a correction is coming, but rather whether it will be gentle, harsh, or precipitous. Significant for property rental owners is the following excerpt from a study written about in the Economist:

‘The first gauge is a price-to-rents ratio. This is analogous to the price-earnings ratio used for equities, with the rents going to property investors (or saved by homeowners) equivalent to corporate profits. The measure displays a massive range, from a whopping 78% overvaluation in Canada’

This is like hearing the stock you own is overpriced by 78%, and the correction is in the picture for the asset class. A comparison from the Economist for various countries is below.

20130112_FNC117HousingPrices-thumb-615x413-111574

On the issue of Chinese money and pending changes the BBC did a story on issues affecting the rich in China.

…’China’s rigid and opaque political system is perhaps one reason for the wealth-drain, particularly in a year in which there is due to be a changing of the guard at the very top of the Communist Party’…

…’But he admits that for many of his wealthy friends it is a sense of insecurity which is leading them to ponder a life outside China. “Most of them think I’ve got so much money here but one day maybe the government will change the policies and take it all back,” he says. Entrepreneurial, well-connected or just plain corrupt, it does not matter how they made their fortunes, there is mounting evidence to show that China’s super-rich are heading for the exit’…

Large realty markets for the Chinese include Canada, Hong Kong, Singapore, and Australia which are some of the most overvalued markets. The stability of this money in Canada would be a major driver between a soft landing, and a precipitous one. But whatever the case it is time to brace yourself for the coming correction, in motion.

Plot of S&P Composite Real Price-Earnings Rati...

Plot of S&P Composite Real Price-Earnings Ratio and Interest Rates using data from irrationalexuberance.com/shiller_downloads/ie_data.xls (Photo credit: Wikipedia)

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by | December 8, 2012 · 3:34 pm

‘Condo King Kong’ by Tim the tenant

Tim the Tenant

Tim Fuller

Nov/Dec 2012

When last we met, the topic was condos, and the narrative going on all around was: City of Toronto – North America’s Condo King. The ongoing issue is when the Condo King Kong is going to fall off the building. A few months later, the story is much the same, but less so. Toronto is still constructing more condominiums than any city in North America, but we are starting to see the effects of a managed leak in the real estate bubble that gave Toronto that distinction.

The synopsis at the end of 2012:

Home sales are falling; the Feds are behind it; Toronto has not got the word (and continues to sprout big, beautiful icicles pointing skyward); there’re too many people here now. It’s easy to find headlines that suggest that the Toronto condo boom is showing no signs of waning; real estate prices are increasing (albeit at a slower rate) and new developments are still being, uh, developed. The following headlines unfold the drama of North America’s condo king:

Unruffled builders see a continuing Toronto condo boom (Jun 20, 2012)

 

Bidding war for St. James Town semi results in $295,000 over asking offer (Oct 18, 2012)

A Toronto semi draws several quick bids and goes over-asking (Oct 18, 2012)

But many more headlines spelling the long-desired “cooling off” of the Toronto condo/real-estate market have recently appeared:

 Housing market weakens, more softening seen (Sept 14, 2012)

Toronto real estate Sales down but prices up from last year (Oct 03, 2012)

Market News Don’t feel low about sales dip (Oct 05, 2012)

Housing starts fall less than expected in September  (Oct 09, 2012)

Home sales drop 15% in September as prices edge higher (Oct 15, 2012)

 A recent CMHC report details the encroaching instability of the housing market in the GTA:

According to the CHMC’s “Housing Now” report for the Greater Toronto Area, building has not slowed down, but both new home sales – which were only half that of new housing starts – and resales, which dipped by 12% compared to September of 2011 –  have. And when we’re talking about new housing starts in the City of Toronto, 95% of the time, we’re talking condos.

So, assuming that this is the reality of the current market, what brought it on?

Among many other factors, I blame the Government.

THE FEDS ARE BEHIND IT!

Canadian Finance Minister Jim Flaherty has, since the dawn of the real-estate collapse in the U.S. and the subsequent worldwide recession, been making incremental efforts to slow down the apparently overly hot Canadian real-estate market, which has seen major flare ups in first Vancouver and, for the last few years, Toronto. Each of the last three years has seen major structural changes to the home mortgage guidelines, designed to inhibit first-time buyers who really can’t afford a mortgage, banks that have engaged in rate wars designed to rope in these first-time buyers, and current homeowners using their equity to pay for things they can’t really afford:

Feb 2010  

  • Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term.
  • Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes.
  • Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

Jan 2011 

  • Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent.
  • Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85 per cent from 90 per cent of the value of their homes.
  • Withdraw government insurance backing on lines of credit secured by homes, such as home equity lines of credit, or HELOCs. 

Jun 2012

  • Reduce the maximum amortization period to 25 years from 30 years.
  • Lower the maximum amount Canadians can borrow when refinancing to 80 per cent from 85 per cent of the value of their homes.
  • Fix the maximum gross debt service ratio at 39 per cent and the maximum total debt service ratio at 44 per cent.
  • Limit the availability of government-backed insured mortgages to homes with a purchase price of less than $1 million. 

Flaherty has suggested throughout that the changes affecting CHMC backed mortgages have been in response to fears of household debts becoming unsustainable if – or more likely, when – historically low interest rates start to rise again. Almost five years after the first of these changes, Flaherty continues to express his fears that Canada might follow the U.S. into the home equity abyss, as his views from August 31 of this year indicate

“I remain concerned about people taking on larger obligations than they would be able to afford were interest rates to go up, as they inevitably will…(b)ut other things are going on too. I think Canadians are increasingly getting the message that at some point interest rates are likely to rise.”

SOMEONE FORGOT TO TELL HOGTOWN

Regardless of what might be seen as nanny state economics at the federal level, Toronto will continue to build condos. The boom that’s been going on for the last few years has actually been part of a growth pattern stretching back more than ten years. An amazing article on the CBC website provides dramatic visual (and interactive) proof as to how Toronto’s skyline has been affected by the city’s increasing population density.

Where once the city’s lakefront featured office buildings of ever-increasing heights, it is now a magnet for condo developers who bring with them ambitions on a fantastic scale. Despite the shift from business to residential (many of Toronto’s condos are being created within the city’s outmoded office space), the race to the top has continued. At 277 metres, the tallest condominium building in Toronto will be The Trump International Hotel & Tower, scheduled to open at the end of the year (the hotel part opened in January). Regardless of the building’s infamous brand name, its creation points to some sort of proof that Toronto’s condo boom has attracted some very big players. Predictably, with big money comes a desire to be at the centre of the scene, and thus you see the tallest buildings going up in the busiest and highest rent areas in the city Aura at College Park (264 metres) will be just south of Yonge & College; 1 Bloor (237 metres) is being built at the corner of Yonge & Bloor – probably the epicentre of Canada’s biggest city.

The umpteen high-profile condo projects fighting for space in the city core represent a seismic shift of scale for Toronto. Having surpassed Montreal for Canadian urban supremacy sometime in the early ‘70s, the city has for awhile imagined itself competing on a global scale – with the added attraction of being the business engine of an economy that has not fallen off the rails. Toronto has many to thank for its current reputation as a safe investment haven historically cautious fiscal management at the federal level; the fruits of an ambitious municipal plan to increase both the population density and the “world class” image of the city; and a 2006 provincial government growth plan designed to curb suburban sprawl and consolidate more of southern Ontario’s population (and its tax base) in the “Greater Golden Horseshoe” area – the centre of which is Toronto.

TOO MANY PEOPLE! (a.k.a. more sushi restaurants than hospitals?)

The sort of headlines that are popping up these days focus on the inevitable fallout from the decade long development party, and they all question how it is that the city can handle its supercharged and highly concentrated urban growth.

Examine the following headlines:

Can your neighbourhood survive Toronto’s condo boom? (Globe and Mail, Oct 12, 2012)

Density, infrastructure and the high cost of building a vertical Toronto (Globe and Mail, Oct 13 2012)

 

Toronto condo market seen stabilizing in 2013: CMHC  (Globe and Mail, Nov 14 2012)

So, perhaps it’s now not so much “when will the sky fall” as much as when will the Kong fall off? How can the center of the “fourth fastest growing area in North America” handle an explosion of its urban population, without responding in kind to the level of infrastructure services?It remains to be seen how Toronto – which in the 1960s was praised for its progressive urban planning – can safely expand into the-city-it-always-wanted-to-be. What started years ago as a plan to increase urban density and tax dollars into the city’s core has become something much larger, involving forces on a scale that even Jane Jacobs would find hard to corral.

Trends to watch include other urban areas competing for foreign dollars such as Seattle’s luxury market which is picking up speed, the approaching fiscal cliff in the US, and whether China will continue it’s foreign purchases post leadership transition.

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by | October 1, 2012 · 3:42 am

Considerations of a Giant Panda Bear on Wheels…Mary’s Management Musings

Sept 2012

Mary’s Management Musings

Mary A Moore

An understanding of what is happening in China politically at this crucial time helps greatly in predicting potential consequences for the Canadian property market with a segment of the western market being influenced by money invested from Asian Sources, and the automotive market mainly located in Ontario as China begins to massively produce cheap vehicles that become exported to our marketplace. It obviously also has larger ramifications worldwide as China’s economy slows from a fallen Eurozone  and struggling American economy. How the current leadership is able to manage the transition to the next generation becomes a critical juncture in the endpoint outcome for the Chinese economy. Not only does the next generation of leadership have to continue the economic focus while dealing with various internal failure points, it will have to deal with a politically disenfranchised military that has grown increasingly large over the past few years, an over- engorged infrastructure development that has been both internal and external in its consumption of funds, the graft and corruption that comes out of a centralized system flush with money and unafraid to spend it, and the demands a society on the brink of a social restructuring will require. Consider the automotive market, property market, banking system, robots versus slave workers, an internationally exchanged renminbi, and everything for China has gone according to plan. Or consider a civil war and things have gone very badly for China with an attempted coup, factories and infrastructure destroyed, and the future direction is uncertain. Or consider a regional resource war with China and various countries trying to stay afloat after a marked economic decline, demographic shifts, and climate change causing social instability in the region. It is not clear whether a wheel could come off the Panda Wagon, or which one. What is clear is that a period of relative instability and marked change is approaching.

China is often mistaken for a somewhat slumbering Panda Bear, but as leadership changes approach for the Chinese Central Committee, a rather angry bear has emerged.  Chinese crowds have trashed anything Japanese in their vicinity, cars were destroyed, factories closed and stores demolished. The animosity towards the Japanese being driven by the not so distant memories of harsh Japanese treatment during the occupation with the Second Sino-Japanese war, which included Japanese efforts to try and control vital resources in the region. The battle for control of the disputed islands in the East China Sea, called the Diaoyu by the Chinese and the Senkaku by the Japanese, symbolizes the re-enactment of history for many. The triggering of this outpouring of emotion  represents a triggering point for a change process that has begun formally. This process is now being felt informally and dynamically as other political forces are played out.

Most of us have read about the now disgraced Bo Xilai, and the scandal involving his wife and the murder of British businessman Neil Heywood, but few realize the evolution of the power struggle that the events overlie. Neil was involved with the sale of Volvo to the Chinese Zhejiang Geely Holding Group Co., Ltd. (“Geely Holding Group”) with Chinese State Banks financing a deal that was David swallowing Goliath. Eventually financing became a major issue, as Geely reworked details to refinance its loan structure. Bo Xilai had contacts with Geely going back to 2006. The involvement of Chinese state banks could have been a liability for Bo and his group, and may have established a motive for his drive for attempting to grasp a firmer base of power within the Chinese leadership structure. With the pending change of leadership within the Central Committee from the Fourth generation to the Fifth generation, the evolution of China from a focus on militaristic power to economic power would remain, continuing in its current trajectory. The Fourth Generation in their final phase of leadership has gone on an unprecedented buying spree and has purchased the infrastructure they consider essential to continue China on its path towards growth. But this has not been without internal power shifts and attempts to regain control by the disenfranchised military elite. The exclusion of the military from the leadership succession of the current leadership had opened a rift between the military hard liners who were disgruntled both personally and politically. The overly ambitious Bo Xilai had cultivated this dynamic, and this alliance is alleged to have been plotting a coup during the 18th Conference which is only now scheduled for November 8th. What has been clear is that a major purge has gone through the military with numerous retirements, reshuffling of responsibilities, and demotions. Bo now has been expelled from the Communist Party is to face criminal charges while his wife Gu Kailai and henchman former Chongqing police chief Wang Lijun have already been sentenced. Along with a change in the army guarding the 18th Conference to ensure it’s loyalty, the official date has been set, and a gentle calming of the hostilities between China and Japan has begun internally, while the transition towards a reforming communist society has been set in motion. Whether any further attempts are made in the near future to destabilize the leadership’s goals, remain to be seen.

Aug17, 2006, the Awarding Ceremony of the National Auto and Spare Parts Exporting Base was held in Beijing, at which the former Premier Wu Yi and Minister of Commerce, Mr. Bo Xilai were present. And Geely, represented by Chairman Li attended the ceremony and received the Award.

Dec 2 2009 China .org.cn reports that Geely, the Chinese car manufacturer picked as the preferred bidder for Ford Motor’s Volvo unit, is seeking at least $1 billion in loans from Chinese banks to finance its $1.8 billion bid, the banks, including Bank of China, China Construction Bank and Export-Import Bank of China had agreed to extend loans to Zhejiang Geely Holding Group, said the banking sources briefed on the plan. “Money is not a problem for Geely,” said a source. “They definitely have strong support from Chinese banks and there are a number of private equity funds queuing up to invest in Geely.”

2nd August 2010 – Hangzhou, China  Geely Holding Group Co., Ltd. (“Geely Holding Group”), one of the fastest-growing car manufacturers in China, today announced it has completed the acquisition of 100 per cent of Volvo Car Corporation (“Volvo Cars”) from Ford Motor Company. Stefan Jacoby becomes chief executive at Volvo August 2010

Mr. Heywood  played a role in several business ventures with foreign companies, including Zhejiang Geely Holding Group Co.’s takeover of Volvo.

November 2011  Geely finally began sales operations after much delay with government requirements.

14 November 2011 Neil Heywood dies

15 November 2011 WantChinaTimes reports: Geely, China’s biggest car maker, needed to borrow funds to complete last year’s purchase of Volvo. As it tries to repay them, funding sources are becoming harder to find. Overseas high-interest loans are strangling the operation of Zhejiang-based Geely, a major Chinese automaker, after its acquisition of Swedish carmaker Volvo and the company is having difficulty accessing funding sources, according to a report from a Chinese magazine. Geely Group is a model for private enterprises in China and founder Li Shufu is a shining star among Chinese entrepreneurs, building his auto empire from scratch over 10 years. His career hit its peak with Geely’s acquisition of Volvo.

February 6 2012: Wang visits U.S. consulate in Chengdu, reportedly to seek asylum.

March 2: Xinhua says Wang is under investigation.

March 9: Bo defends himself and his wife, Gu Kailai, at a press conference at the National People’s Congress.

March 15: Bo dismissed as Chongqing party chief.

March 26: Britain asks China to investigate November death of Briton Neil Heywood in Chongqing.

April 10: Bo suspended from Communist Party posts. China says his wife is being investigated for Heywood’s death.

April 17: New York Times reports U.S. officials held Wang so he could be handed to Beijing authorities instead of local police.

July 26: Gu charged with Heywood’s murder.

August 20: Gu given suspended death sentence after confessing to Heywood’s murder.

September 18: Two day trial of Wang for defection and abuse of power ends without him contesting the charges.

September 24th  Stefan Jacoby, 54, after having a mild stroke, is handing the reins over to Jan Gurander the chief financial officer, who will serve as the acting chief executive for Volvo.

Sept 26 2012 Fu Qiang is appointed as the new sales head for China

 

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by | June 16, 2012 · 11:40 pm

And Boom it went…But will it Bust? ‘The Canadian Housing Market’ by Tim the Tenant

June 16th 2012

Tim Fuller

Looking for a House?…

In an ongoing effort to write a piece about housing prices in Toronto, I’ve become caught up in some actuarial equivalent of a soap opera, or rollercoaster ride, or whirlwind of fuss and bother. As I am still a renter, I had not been keeping such a close eye on the events of the last few months…better make that the last year…OK, to be safe, the last couple of years… And therein lies, for me anyhow, part of the problem (or, should I say, challenge).

The story is big. It involves billions of dollars shifting between mysterious “foreign investors” and property developers – who themselves have apparently been buying up truckloads of rose-coloured glasses. It crosses the continent. It begins, more or less, with the start of the Great Recession, in late 2008, and continues to this very day. It features the lowest mortgage rates and the highest home sale prices in Canadian history. It’s really an ongoing tale of speculation, and everyone is involved. Buyers want to know if mortgage rates will go up (and if so, when and how much?) Developers would like to know if they should keep buying up property in Toronto and building even more condominiums, despite some time last year making the city North America’s #1 Condo Market (surpassing Vancouver – itself a major player in this drama). The federal and provincial governments are scrambling (have been; will continue) to keep up with the events and try to corral the bull market. But even the efforts of any number of finance ministers have not, so far, kept away the gaze of The International Organizations that, you would think, have bigger things to tend to. With an anemic American “recovery” and a crumbling eurozone, what would the likes of the IMF and the FSB need to fuss with our little 11th-place GDP for?

I thought this was a good question. But, as I kept stepping back to take in the full scope of the story, I began to try and connect the dots. So, far, my paint-by-numbers report looks something like this:

Vancouver, a couple of years ago, was experiencing a similar situation to Toronto. Condos were being bought up at a furious rate by foreign investors, with most of them becoming “non-owner occupied properties.” Prices for good-ol-fashioned single-dwelling homes were rising faster than anyone had seen and higher than anyone could understand. Despite a “cooling” process, which helped to reduce, if not completely deflate, the size of its housing bubble, Vancouver retains the honour of the having the second least affordable houses on the planet (http://www.demographia.com/dhi.pdf). On average, Toronto housing prices are a mere 2/3 that of Vancouver’s, though some events (like an apparently unremarkable North York home that sold, in March of this year, for 55% above its list price) are pointing to the same future. With high sales and higher prices, Toronto has become – for housing anyhow – the “it” city. This is helped by a number of factors – none of which we’ll be describing in detail in this particular offering, but all of which are providing cat nip for business columnists and market analysts. The headlines tell some of the story, which I’ve categorized for your convenience:

THINGS ARE GREAT!

Condos drive Canada’s housing start surge

Housing starts shoot higher on back of condo boom

Caviar condos set to flood Toronto market

Busy builders unfazed by talk of Toronto condo bubble

DON’T BE SO SURE…

Canadian house prices overvalued by 10 per cent, IMF warns (2011)

Toronto, Vancouver house prices to sink 15% over 2-3 years

Canadian economy ‘vulnerable’ to overheated housing market, IMF warns

How deeper euro crisis would whack Canada

Bank of Canada flags ‘spillover’ of Europe’s deepening troubles

Banks Not Immune To Housing-Related Failures: Corporate Canada

…WE’RE NOT SO SURE OURSELVES

Is Canada in a bubble? Housing experts face off

What will make the housing boom go bust?

IT’S THE FOREIGNERS!

Are foreign investors driving up Canada’s housing prices?

Flight to safety fuels Toronto’s condo market

Offshore bids price Canadians out of housing market

To tame Toronto’s housing ‘bubble’, ban foreign buying

OUR ELECTED OFFICIALS ARE DEALING WITH THE PROBLEM

Government fixes mortgage market, but will it work?

Ontario government will review condo legislation

Ottawa to toughen CMHC oversight

Canada’s banking watchdog to oversee housing agency 

WE’VE SEEN THIS MOVIE BEFORE

Vancouver Real Estate Cools – Could Toronto Be Next?

Canada’s housing bubble: This time is not different

And perhaps the three most telling of them all:

IT’S GONNA HAPPEN…REALLY…

Toronto housing market expected to cool next year: CMHC (2010)

Toronto house prices expected to cool through autumn (2011)

Housing market to cool: CMHC (2012) 

So far, two of these three headlines have proved less-than-accurate. When seen together, I get a sense that we’re dealing with Mayan prophecies. And speaking of doom foretold, let’s let the following headline segue us into why this all might be going on:  Be very afraid of the Canadian housing bubble. At the moment, that seems like a very safe strategy. Be afraid; you know how this will end up.

A recent Bloomsberg News survey (http://www.bloomberg.com/news/2012-05-02/canadians-dominate-world-s-10-strongest-banks.html) listed four Canadian banks among the top six “strongest” banks in the world. Following the universally painful “readjustment” of the U.S. economy starting in September of 2008, Canada was left relatively unscathed as our neighbours down below and cousins across the pond fell into hard times that, like aftershocks, continue to threaten the Global Economy. Not everyone in the world lost their savings, though, and quite a few people who still have money – and need a good safe place to store it – have been looking to Canada. The International Monetary Fund and the Financial Stability Board (currently run by Bank of Canada governor Mark Carney) have both recently chimed in on Canada’s hot housing issues, and our Feds have been listening (and responding). It might be a case of fiscal ’post-traumatic stress disorder’, but these days, when you see the words “housing” and “bubble” side by side, in 40-pt. type, every day, you might wish to see a safer landing than the last time.

In 2008, very few people were talking about the U.S. housing bubble, and even fewer could anticipate the disastrous effects once it burst. In 2012 (or maybe ’13?), everyone wants to be able to say, “I told you so…” No one, yet, knows how the story will end. Ideally, in a uniquely Canadian way, it will not so much burst or implode as much as it will likely slow down, maybe after having a few government-directed “time outs,” leading safely to a sustainable anticlimax. But we shall see.

In following columns, I’ll delve deeper into the whole state of affairs and even – having not forgotten the name of this blog – discuss the effect that Toronto condo sales are having on rentals.

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by | May 23, 2012 · 3:21 am

PropertyRentalsBlog.Net ‘Rent Controls…Every Landlords Nightmare’

Mary’s Management Musings

‘Rent Controls…Every Small Landlord’s Nightmare’

MaryAnn Moore May 2012

If you have been around long enough in this business, you have done business in a time of rent controls. The issue of rent control is a political hot button, hit in hard times, and as my father always said to me…’There are more tenant voters, than landlord voters.’ I’ve had the pleasure of trying to turn around a declining building in the climate of  strict rent controls, (read much less than real inflation) and work hard to create enough cash flow to slowly upgrade a building to bring in ‘better tenants‘. It’s a bit like trying to raise a sinking boat really. The price of heating fuel, electricity, and insurance, go up quickly in times of inflation, along with property taxes.  Even city services such as water/sewer services can escalate. Your rents go up slower than your costs, and eventually you hit the sweet spot of no profits. Many landlords just stop doing the repairs they should, to keep some profitability, but it doesn’t take long before this becomes a terminal state of decline, with the associated difficulty of getting the best tenant.When most landlords hit this spot, they often start looking at a sale to escape out of this bind. Builders at this time usually stop building rental buildings, as a climate is created where there is limited return on investment. This often creates a situation whereby rental supply tightens, tenants demand even more protection, and owners end up facing even more rental controls or reductions on rental increases. The end result is the value of your property declines in this situation.

When property values are going through the roof, then no one cares about a negative cash flow and owners simply ride the property appreciation train for as long as they can afford to do so, before they cash out. But when property values have stalled or declined, and rent controls gear up, its time to think hard about your choices. Avoid getting into a building with low rents, as in a time of increasing rent controls  your window of profitability is very small. If your rents are average or above, you can have time to plan your strategy of survival.

The only thing that can save some landlords are the legal ways of increasing rent, more than just the allowable standard increase. In some regions this may be to amortize the cost of renovations, although often this is just until the costs are recouped and then the rent goes back.  Some regions allow the rent to increase between tenants after someone moves out, which is a better situation. While some regions have other legal loopholes for amortizing costs, often that fixes the rent higher than what is was. Landlords should realize however the general trend for rent control ‘increases’ has been decreasing. In Ontario for example, rental increases went from around 8% in the late 80′s, reflecting the higher interests rates of the time, to between 2 and 3 % recently.

If you get caught in that hard place of little or no profitability, think of alternative ways of increasing rent income, such as subdividing large apartments into two smaller ones if possible, or charging for additional services that you arrange to supply, whether internet, phone, or other utility, or other service. But the easiest thing is to not get caught in the first place. Always crunch out your numbers before you buy a property, to know if your venture is sustainable over changes in your operating environment of rent controls and costs.

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by | March 21, 2012 · 3:57 am

PropertyRentalsBlog.Net ‘The Ontario Experiment….Rent Controls’

‘The Ontario Experiment… Rent Controls ‘

Tim the Tenant

Tim Fuller  March 2012

 

“…there is nothing inherently good nor bad about rent regulations. I know of no researchers who support rent controls in principle. If conditions in particular rental markets require them, fine. If not, fine…. The objective public policy question, however, is whether a particular set of circumstances requires a particular set of regulations.”                                                               J. David Hulchanski, University of Toronto

 

Canada is a very large country with a small population. There are only twelve countries in the world with a smaller population density than Canada, but much of what is seen on a map is frozen tundra and largely uninhabitable.

 

The warmer, softer lands lie to the south. 75% of Canada’s population live within 100 kilometres (60 miles) of its border with the U.S. Canada as a whole has only 3.1 persons per square kilometre (5 per square mile), but its biggest city, Toronto, has 7% of its entire population and a density of nearly 4,000 persons per square kilometre (6700 per square mile).

 

It’s also estimated that, though the General Toronto Area is enjoying steady population growth, the city of Toronto is shrinking, and most of those that remain are getting poorer. According to the 2006 Census on Income and Shelter Costs, “Toronto continues to have a higher incidence of low income (almost double) than the rest of Canada, Ontario and the RGTA.” 46.6% of renters in the city are paying more than 30% of their income – the generally accepted maximum — for shelter. Only about 23% of homeowners were paying at that level.

 

http://www.toronto.ca/demographics/pdf/2006_income_and_shelter_costs_briefingnote.pdf

 

Condominium building in the city continues to boom. An average of 15,000 to 20,000 new units have been built each year since 2000. Meanwhile, the stock of rental properties has started to drop, falling by 1,000 units during the same period, with most of those units close to 40 years old.

 

And while the median income for the city fell between 2000 and 2005, the cost of renting a place in the city rose in that same period by more than 11%. Not surprisingly, there were 4,000 more people receiving eviction notices in 2005 than in 2000. Granted, these stats are a bit dated; we may have to wait until next year for results from the 2011 census. But the growth in condo starts and the dearth of rental units has continued in the meanwhile. In addition, the city’s middle class is evaporating:

 

“Between 1970 and 2005, the number of middle-income earners – those making between 20 per cent above and 20 per cent below the average individual income – collapsed from 66 per cent to 29 per cent of the city’s population. It could fall to 20 per cent by 2025. Meanwhile, those making 40 per cent above the average more than doubled to 15 per cent, from 7 per cent. And the very low-income earners, making 40 per cent below the average, jumped from 1 per cent in 1970 to now about 15 per cent.”

 

http://www.thestar.com/specialsections/vitalsigns/article/703740–toronto-a-city-of-disparities

 

The basics of supply and demand dictate that a decrease in rental units leads inevitably to an increase in costs. But what do you do if you’re responsible for all those folks who may get squeezed out of housing altogether?

 

If you’re the Government of Ontario, you revisit for the umpteenth time the rent control policies that have been in place for almost forty years.

 

The modern era of rent control in the province began in 1975, as Ontario was experiencing a housing crisis brought on by “stagflation”, a term that combined economic malaise and rampant inflation. Between 1971 and 1974, vacancy rates in Toronto fell from about 3.5% to close to 1%. Private rental starts fell from a peak of about 40,000 per year in 1972 to a few thousand in 1975. Ontario’s consumer price index climbed dramatically throughout the 1970s, with peaks of 14% in 1973 and 13% in 1979.

 

http://www.urbancenter.utoronto.ca/pdfs/researchassociates/Hulchanski_Ont-Leg_Economic.pdf

 

By the time of his 1975 re-election, Ontario Provincial Premier Bill Davis had been forced to change his strong stance against rent controls. Pressured by the rising popularity of the left-leaning National Democratic Party (NDP), which strongly favoured controls, Davis attempted to bridge the gap between his Conservative party’s free-market values and an urban population that had been buckling under rent hikes that had jumped an average 13.3% in Toronto the previous year.

 

In November of 1975, housing minister John Rhodes introduced the Residential Premises Rent Review Act, legislation that set a limit of 8% on rental rate hikes, in addition to establishing a rent review board that would review appeals from landlords wishing higher increases.

 

With guidelines that were set to rise or fall based on the the yearly consumer price index, the ceiling on rent hikes fluctuated between 6% in 1976 and 3% in 1998.

 

In 1998, the highly contentious Conservative government of Premier Mike Harris, in the midst of what it called its Common Sense Revolution, imposed Ontario’s first ever system of “vacancy decontrol” as a part of its new Tenant Protection Act. The legislation attempted to loosen price restrictions on developers and landlords:

 

“Intertenancy rent de-control provides for the temporary de-control upon vacancy of the controlled rent on a unit and the re-control again at a new negotiated rent upon occupancy by a new tenant. Existing tenants in this system are protected from eviction and rent increases on their unit are controlled.”

 

http://www.frpo.org/documents/Smith-IntertenancyRentDecontrolInOntario.pdf

 

This meant the landlord could raise the rent as much as he wanted in-between tenants, but had to stick to the province’s yearly guidelines for any future rent hikes with new and previously existing tenants.

 

Five years later in 2003, Liberal party leader Dalton McGuinty won a majority government by taking advantage of a backlash against a Conservative party that had slashed spending for social programs, especially in housing. Part of his party’s platform was to repeal the so-called Tenant Protection Act. Prior to the election, McGuinty stated:

 

“I want to be clear about our plan for rent control. We will repeal the Harris- Eves government’s Tenant Protection Act and bring back real rent control that protects tenants from excessive rent increases. We will get rid of vacancy de-control which allows unlimited rent increases on a unit when a tenant leaves.”

 

http://www.torontotenants.org/sites/torontotenants.org/files/publications/tenant.nov2003.pdf

 

Though it took four years to write and pass the legislation, McGuinty’s Liberal party passed the Residential Tenancies Act (RTA) in early 2007. In addition to making it harder for a tenant to be evicted, the bill had two provisions specific to rent pricing:

 

Guideline increase

120.  (1)  No landlord may increase the rent charged to a tenant, or to an assignee under section 95, during the term of their tenancy by more than the guideline, except in accordance with section 126 or 127 or an agreement under section 121 or 123. 2006, c. 17, s. 120 (1).

 

Guideline

(2)  The guideline for a calendar year is the percentage change from year to year in the Consumer Price Index for Ontario for prices of goods and services as reported monthly by Statistics Canada, averaged over the 12-month period that ends at the end of May of the previous calendar year, rounded to the first decimal point. 2006, c. 17, s. 120 (2).

 

Maximum increase

(3)  A landlord shall not increase rent charged under this section by more than the guideline plus 3 per cent of the previous lawful rent charged. 2006, c. 17, s. 121 (3).

 

http://www.e-laws.gov.on.ca/html/statutes/english/elaws_statutes_06r17_e.htm#BK129

 

In addition, the act laid out the specifics that allowed a landlord to increase rent above the stated yearly guideline:

 

Agreement

121.  (1)  A landlord and a tenant may agree to increase the rent charged to the tenant for a rental unit above the guideline if,

(a) the landlord has carried out or undertakes to carry out a specified capital expenditure in exchange for the rent increase; or

(b) the landlord has provided or undertakes to provide a new or additional service in exchange for the rent increase. 2006, c. 17, s. 121 (1).

 

A landlord could also apply for an increase above the legal rent if:

 

“…their costs for the municipal taxes or utilities have increased by more than the guideline plus 50 per cent. “

 

http://www.ltb.gov.on.ca/stdprodconsume/groups/csc/@ltb/@keyinfo/documents/resourcelist/stdprod_088485.pdf

 

Despite McGuinty’s promises, the RTA did not do away with the Tenant Protection Act’s intertenancy rent decontrol. As was the case in 1998, a landlord would still be able to raise the rent as much as he chose once the rental unit became vacant.

 

Under the RTA, the last two years has seen both the lowest allowable rent increase – 0.7% in 2011, and the highest – 3.1% for 2012. This last number, predictably, has brought condemnation from both housing advocates — who claim it’s too big a hike, and from landlords and property owners — who claim its not high enough to compensate for rising energy costs.

 

Currently, the McGuinty government is trying to pass an amendment to the 2006 RTA that, though still tied to the Consumer Price Index, would see a ceiling on rent increases of 2.5% and a floor of 1%. (The amendment states, again, that the guidelines do not apply to vacant residential units.)

 

http://news.ontario.ca/mah/en/2011/12/stabilizing-the-rent-increase-guideline.html

 

Regardless of legislative initiatives or amendments, the city of Toronto – the fifth largest in North America – will have to continue to work with its provincial counterparts to combat the ever-shrinking supply of rental units and aging buildings.

 

Alongside New York City, Toronto has a long and predictably controversial history with rent control. Despite having a relatively huge amount of breathing space compared to Manhattan, the city of Toronto continues to deal with the challenges of keeping its lower-income citizens in affordable housing while at the same time maintaining a vibrant market for rental housing.

 

Expect the debate to rage on.

 

 

Sources:

 

http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf

 

http://www40.statcan.ca/l01/cst01/demo05a-eng.htm

 

http://www.toronto.ca/housing/pdf/rental-housing-facts-figures-2006.pdf

 

http://www.urbanation.ca/Members/PDF/2011CondoForecast.pdf

 

http://www.ontariotenants.ca/rent-controls.phtml

 

http://www.ontariotenants.ca/articles/1975/ts-75k06.phtml

 

http://www.ontla.on.ca/committee-proceedings/transcripts/files_html/1996-08-19_g030.htm

 

http://www.bankofcanada.ca/monetary-policy-introduction/why-monetary-policy-matters/2-inflation/

 

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by | February 9, 2012 · 5:29 pm

PropertyRentalsBlog.Net ‘Rent Control………The Apartment of my Desires’

‘Rent Control…The Apartment of my Desires’  Tim the Tenant

Tim Fuller  Feb 2012

“I began to realize that being beautiful is like having a rent-controlled apartment overlooking the park: completely unfair and usually bestowed upon those who deserve it least.”                                

                                                                                            Carrie Bradshaw

Rent control is a non-topic for 47 of the 50 American states that don’t have it. There shouldn’t be much to discuss.

But these three states happen to be among the most populous and influential in the country: New York, (19.5 million residents), New Jersey (8.8 million), and California (37.1 million), may be the only remaining jurisdictions that still contend with rental price controls, but the sheer volume of the population affected (66 million), and the inherent socio-economic conflicts of such policies ensure that the issue will remain a contentious for some time to come.

To keep things focused, we will discuss only the case of rent control law in New York State, which has the longest history of rent regulations

Rent control has a history that began midway through World War II in anticipation of the end of the conflict, when more than 15 million U.S. (11 % of the population) and 2.7 million Canadians (41% of the population) would be returning home; those who couldn’t return to a warm hearth needed housing. The logistics threatened to throw the supply and demand cycles of rental properties into turmoil and leave many would-be tenants at the mercy of landlords who could raise rates through the roof based on the overwhelming demand for space.

In addition, the massive government investment and subsequent employment opportunities created by the Second World War lead to consumer demands that couldn’t be met in a wartime economy, leading to inflation.

The first formal rent controls in the U.S. began under such conditions, as a part of the federal Emergency Price Control Act (EPCA) of 1942, which was, “…the government’s response to inflationary pressures resulting from a fully employed wartime economy that channeled resources exclusively to the war effort. Price controls for rental apartments in residential areas were included in the EPCA. Rents in most counties in the State were placed under Federal regulation. On November 1,1943 the Federal Office of Price Administration issued regulations freezing New York City rents at the March 1, 1943 levels.”

http://www.tenant.net/Oversight/50yrRentReg/history.html

 

Roosevelt’s address on the EPCA compared the war effort overseas to that of the homeland battle:

“The Emergency Price Control Act of 1942 is an important Weapon in our armory against the onslaught of the Axis powers. Nothing could better serve the purposes of our enemies than that we should become the victims of inflation. The total effort needed for victory means, of course, increasing sacrifices from each of us, as an ever larger portion of our goods and our labor is devoted to the production of ships, tanks, planes, and guns. Effective price control will insure that these sacrifices are equitably distributed.”

 

http://www.presidency.ucsb.edu/ws/index.php?pid=16192#axzz1jbPyynL1

Following the end of WWII and a normalization of America’s economy, The EPCA was allowed to expire on June 30, 1947, replaced the following day by passage of the Federal Housing and Rent Act. The new legislation exempted from price controls any buildings constructed after February 1st, 1947.

http://nysdhcr.gov/Rent/faqs.htm#rsrc1

Back in 1947, the only form of rent control was a rent ceiling, which – simply enough – meant that the price for a rental unit was capped and could not be raised. This form is the most outdated, though as many as 40,000 rental units in New York City are still regulated under a provision that dates from 1947:

“The rent control program generally applies to residential buildings constructed before February 1947 in municipalities that have not declared an end to the postwar rental housing emergency…”

http://www.housingnyc.com/html/resources/faq/rentstab.html

The most common form of rent control, and one that is still in use today, is tenancy rent control, which allows for a rent hike after a tenant has moved out, but is subject to strict levels of increases once the new rent has been established. This is also known as second-generation rent control or rent stabilization:

“New York City has a system of rent regulation known as “rent stabilization.” The system was enacted in 1969 when rents were rising sharply in many post-war buildings. The system has been extended and amended frequently, and now about one million apartments in the City are covered by rent stabilization. Rent stabilized tenants are protected from sharp increases in rent and have the right to renew their leases…”

http://www.housingnyc.com/html/resources/dhcr/dhcr1.html

A third form of rent control is called vacancy decontrol. With this, once a tenant has moved out, a landlord can increase the rent to whatever the market will pay. It is essentially a method to deregulate units that were previously under price stabilization protection.

The issue of rent control of any sort has long symbolized the socio-economic divide in the U.S. Those who support controls argue that housing is a right, that tenants should not be subjected to arbitrary hikes in rent that might render them homeless, and that a healthy city must include all levels of the social strata. Without rent control, a place like New York City would provide a home only for the richest of tenants.

The other side of this argument states that price controls of any kind are contrary to the fiercely American tenets of capitalism and amount to little more than subsidized housing, with the landlord footing the bill. Such a scenario creates decreased profits for landowners and a disincentive to build, thus exacerbating any housing shortage.

The conflict can be seen in the varying degrees of regulation enacted by the New York State legislature. For example, units covered by a rent ceiling apply only if the tenants have been living in them prior to July 1, 1971, when vacancy decontrol provisions were established as a result of the Urstadt law, named by Governor Rockefeller after the state housing commissioner, Charles Urstadt. With this, authority over rent regulation shifted from the municipal to the state level, creating resentment towards lawmakers in Albany from those in favour of “home rule.”

More importantly, the Urstadt law deregulated controls on nearly 400,000 rental units in and around New York City.

The law lasted only three years. Due to a “serious public emergency”, the 1974 Emergency Tenant Protection Act (ETPA) was enacted because “…a substantial number of persons residing in housing not presently subject to the provisions of the emergency housing rent control law or the local emergency housing rent control act are being charged excessive and unwarranted rents and rent increases…”

This situation, stated the ETPA, lead to a resolve that“ that preventive action by the legislature continues to be imperative in order to prevent exaction of unjust, unreasonable and oppressive rents and rental agreements and to forestall profiteering, speculation and other disruptive practices tending to produce threats to the public health, safety and general welfare…”

http://public.leginfo.state.ny.us/LAWSSEAF.cgi?QUERYDATA=**ETP

 

The ETPA also expanded the amount of stabilized rental units by including buildings constructed prior to January 1, 1974.

With this followed a slew of both deregulation and subsequent emergency protection, as bureaucrats attempted to set a balance between spiraling rent costs and access to affordable housing in the biggest city in the country.

Currently, there are a number of exceptions to the rent control and rent stabilization regulations. The Rent Act of 2011 details the most recent developments in New York City’s ongoing attempts to balance the affairs of landlords and tenants, by allowing a “High-Rent Vacancy Deregulation”, which states that. “If an apartment is vacated with a legal regulated rent (Rent Stabilization) or maximum rent (Rent Control) of $2,500 or more per month, such apartment qualifies for permanent deregulation, and therefore for removal from all rent regulation.”

In an effort to curb the abuse of rent controlled apartments by wealthier tenants, a “High Rent/High-Income Deregulation” provision was also added, which states that apartments, “… which are occupied by persons whose total annual federal adjusted gross incomes, as reported on their New York State Income Tax returns, have been in excess of $200,000 for each of the two preceding calendar years, may be permanently deregulated under the procedures set forth below. “

http://www.housingnyc.com/html/resources/dhcr/dhcr36.html

Through the years, rent control regulation in New York City has been overseen by federal, municipal and state control. It has ranged from absolute control (no increases) to negotiable increases to no regulation at all. It has at any given time incensed either the liberal or conservative members of the public and punditry and has been subject to ever-swaying shifts in public policy and economic health of both the city and the country itself. It continues to be a topic of concern for policy wonks, bean counters and housing activists alike.

We’ll continue the look at the history and impact of rent controls in North America next month, with a look at the history of regulation in California and Canada.

Further Reading:

http://www.forbes.com/2009/11/02/rent-stabilization-tishman-speyer-peter-cooper-stuyvesant-opinions-columnists-richard-a-epstein.html

http://www.nytimes.com/2011/08/03/nyregion/faye-dunaway-subject-of-suit-by-manhattan-landlord.html

http://www.economist.com/node/1826620

http://www.nytimes.com/2011/06/28/nyregion/rent-board-in-city-raises-limits-on-increases.html?_r=1&ref=rentguidelinesboard

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