The closest analogy I have to our housing situation in North America is that of the Titanic. Perhaps that sounds exaggerated. Yet a decades-long trend alongside the last year of spiking interest rates suggest that perhaps this analogy isn’t alarmist enough.
I regularly see rentals in my suburban hometown of Langley, British Columbia, some 40 km east of Vancouver, being advertised on social media with some passionate responses of disgust from the public. Most landlords choose to post anonymously in hopes of reducing harassment from a frustrated populace accusing them of outrageous greed.
A 1 bedroom in Willoughby, one of our newer redeveloped neighbourhoods, was advertised recently at $2,300 per month by an anonymous landlord. One response simply said, “For a one bedroom, that is outrageous”. A week before this, a 2 bedroom in the same neighbourhood was asking $2,900. This elicited a similar response: “With all due respect, that price is obscene” followed by someone else saying “no respect is due at all” and “I agree, I’m struggling to find a reasonably priced rental…”.
These, of course, are the more tempered comments. It isn’t uncommon to see comments such as,
“We need to stop renting at such high prices. People don’t seem to mind gouging. Sure, it’s turned into bug [sic] business but really, food banks are becoming used more regularly by working people!!!…”
“Sorry…. WHAT?!!!? How much??!?”
“…Now landlords all think it’s a business to make profit off and are mad they made bad financial decisions and trying to **** everyone else over like they ****ed themselves.”
“I hope you foreclose and lose ur [sic] rental and ur [sic] credit gets trashed 🥰”
The frustration is tangible, real, and warranted. The target of the rhetoric, however, is misplaced, caused by a fundamental misunderstanding of the market reality. It’s important for the general public to understand this reality so that they can not only demand real solutions from all levels of government, but also understand that we all collectively bear some responsibility in the problem and solutions.
Let’s first of all grapple with the economics of rent and take those two examples above as case studies.
The $2,300 newer 1 bedroom unit currently sells for around $550,000. In order to purchase this as an investment, a buyer would need to have 20% down payment, plus property transfer tax and closing costs. So far the total is around $121,000 upfront. This purchase would likely have a $440,000 mortgage at 6.29% for a monthly payment of $2,891. This unit has strata fees of $214 and taxes of around $2,300 and likely to increase, so let’s say another $200 monthly. The landlord would therefore need to come up with $121,000 at completion and pay $3,305 monthly for a rental that is ridiculed for asking $2,300. Would you want to pay $121,000 for the privilege of losing over $1,000 a month?
A slightly older 2 bedroom unit that was on Facebook asking $2,900 for rent sells for over $600,000 in today’s market. If they got that same GOOD interest rate now at 6.29%, their monthly mortgage payment would be $3,154.30. Strata fees on this one are $351 and property taxes at $227 monthly. This doesn’t include any maintenance they will have to do, including while tenants are inside or between tenants. To purchase that unit now would require you to have $132,000 at completion, plus $3,732.30 monthly plus their factors of liability and risk. That would be a negative cash flow of $832.30 per month. That isn’t even including property insurance, any special condo levies, or property damages.
Of course, you might think it is ridiculous that anyone would make such an “investment”. And it is. So they don’t. The people renting out these properties likely didn’t purchase in this environment, which is why they are able to offer the $2,300-2,900 rents without losing money. This is why advocating for simple rent control, without a larger housing strategy, doesn’t work. Rent control, without enough units for rent, only exasperates the problem and leads to increased homelessness.
Let’s take the 2 bedroom, built in 2014. By 2015, those units would have sold resale for $350,000. The mortgage rate at the time would be inconsequential, since they probably would have renewed at least by 2020, especially when the the variables were a cheap 2.15%, or more likely, perhaps they sold when the market jumped. At the time, they probably could have got maybe $500,000, depending on their unit size. Let’s do the same math now. 20% downpayment is $100,000, plus taxes and closing for $110,000 upfront. A $400,000 mortgage at a 2.15% variable gives a $1,723 rent, plus then $288.88 strata fees and $219.92 monthly property tax, for a total of $2,231.80. Remember, this is the one asking $2,900 currently. They certainly weren’t getting $2,900 in 2020, but I recall seeing them for around $2,200-2,300. So back in 2020 they may have been close to breaking even. However, if they HAD selected a variable mortgage, which would have been likely, their monthly payment is no longer $1,723. At the current 6.1%, their monthly mortgage payment of $2,583, or total expenditure of $3,091.80 on a home now worth $610,000.
So what do you do as a landlord? You can only raise rent on an established renter by a selected % each year, set by the province’s rent control program – for this scenario above, the maximum rent increase between 2020 and 2023 with the same renter would be $2,414. When your tenant decides to leave, you’re at the mercy of the market limits. For renters, the market is way too high, but for landlords, it’s not even enough to come close to covering the bills. As a landlord, do you opt to lose almost $300 per month every month, plus any upcoming levies or months without a renter, or do you sell it, pay your Realtor, capital gains, etc and move on with maybe an extra $50-60,000 in your pocket for your 3 year investment?
Here is the crux of the issue. If the landlord is not even breaking even, and there is little to no appreciation on the property, there is no incentive to keep the property. There is even less incentive for the property then, due to the discrepancy between expenditures and even at today’s rental prices, for that unit to be purchased by a new investor. This means that the new buyer is very likely to be a homeowner, thus taking the unit out of the rental pool. As more landlords are “forced” out of the market as their mortgage renewals come up and/or incentives to sell become too high, the rental pool will continue to diminish, only to be maintained by those diminishing select few, those with no or very little mortgage left in a property, who can “afford” to keep their expenditures lower than market rent. Rent may be high now, but as these economic forces make their way through the economy, rent is about to get exponentially higher unless we flood the market with public housing. It takes time for these market forces to make their way through the housing market. What renters are experiencing today are based on the home values and interest rates of the past few years – not today. Today’s values and rates will take time to truly take effect, but the situation is accumulating, so it will only continue to get worse before it really hits.
Homeowners taking over previously tenanted properties is not necessarily a problem unless it happens en masse, which is exactly what is happening and the current interest rates will only increase its frequency. If we had built enough apartments, or other types of units for that matter, over the last few decades, what would happen is that market forces would push homeowners into the newer apartments, while investors would focus on more affordable older units that would (hopefully) maintain a positive cash flow or at least break even. However, rather than build more homes for an increasing population during the 1990s and 2000s, we actually built less homes than we did for a smaller population in the 1970s.
Since the 1990s, rental housing became almost completely dependent on the private market and dependent on the whims of supply and demand. There is no mechanism to force builders to build “over supply”, so the development industry cannot be counted on to build the number of housing to increase housing affordability. If housing prices are falling, builders hold back and reduce permits. If housing prices are rising, they increase them, but only to the point that they can optimize profits and mitigate risk.
Prime Minister Justin Trudeau’s admission of defeat in the housing sector is telling. After multiple campaigns promising significant action on housing affordability, he recently stated that housing isn’t a primary federal responsibility. So while he and the Liberal Party will ride the wave of housing promises to get elected multiple times, they’ve now admitted that the problem is a lot bigger than they can handle while ducking responsibility for the underlying economic factors facing housing in North America.
The problem with the vast majority of the rental market being completely market dependent is that when interest rates are low, housing prices climb, raising rents. When interest rates are high, housing prices may stagnate or even fall, but costs still rise. This is not a new phenomenon. In the 1980s, inflation caused interest rates to skyrocket to 18-21% and people were expressing the same concerns 40 years ago as they are now:
Rising housing costs is not the result of landlord greed. It isn’t the result of incoming immigrants. It isn’t even due to the lack of rent controls (we actually do have rent control). We have systemic issues built into the private capital market with priorities in governance and failures on multiple levels that go back to monetary policy made in the 1970s and housing policy in the 1990s that are far too nuanced and complex to cover in this explanation. The issue with the general public not understanding the seismic shift in the housing market is that we endanger ourselves to electing populist politicians that provide soundbites and “solutions” that have done and will do more harm than good. It is human nature to want to have our cake and eat it too when we reach the ballot box, but this approach has led to long term consequences that are coming home to roost.