Have Homeowners Become Too Cocky?

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Over 4 years ago I read a quote that was said by the then Governor of the Bank of Canada Mark Carney. Even to this day it still resonates with me

Real wealth is built through innovation, and it’s gained through hard work. It’s not through some magical asset inflation.

Well Mr. Carney, you couldn’t have been more wrong. Or at least Canadians don’t really believe in those words that you spoke. Ever since Mr. Carney and now Mr. Poloz have run the Bank of Canada, interest rates have been kept low to spur the economy and get people back into jobs.

Instead of the intended purpose to spur on the creation of more jobs and increase productivity, quite the opposite happened.

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So why would you want to work hard at anything if you can have a single magical asset propel you to millionaire status? It seems that owning any kind of property is better off than having a real job.

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Yes, somehow just owning a home is better than a vice president salary. How absurd does that sound? But yet in Toronto the housing boom is not abating. A recent report coming out of Rider Levett Bucknall shows that Toronto remains the crane capital of the world. Meaning Toronto has the most high-rise construction cranes out of any city. This includes big time American cities like Boston, Los Angeles, Chicago, New York, San Francisco, etc… Of the total crane count in Toronto, 80 percent of them are being used for residential development. The report goes on to state that more than 400 high-rise construction projects have been proposed in Toronto. So guess what people are buying in Toronto?

The Right To Make Money

All the rhetoric of owning a home as an investment has completely skewed what it means to own real estate. Since homes have become money making engines, it is now presumed risk-less and a guaranteed way to riches. New rules introduced by the Ontario government requiring landlords to pay tenants to leave unjustly have left a sour mouth on landlords and investors:

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These are real comments left by individuals who probably own property they rent and they are incensed at the rule changes being brought on by the government. The most recent rule was to require payment by the landlord if he declares the property for personal use and kicks a tenant out. This rule was frequently being used by landlords in a hot Toronto market to remove tenants so rents could be raised. With universal rent control now in place across the province, this practice would grow more rampant.

Of course landlords don’t sit well with this because it crimps their ability to make a profit and pay their mortgages. Real estate was supposed to carry no risk, but now it’s carrying a lot. Maintenance fees are rising, so is property tax. Let’s not forget the rising interest rates that will force higher mortgage payments on the next renewal. All of these factors were not thought of when these amateur landlords took to business. Now that government regulations have come into play, many are calling foul.

Where’s The Renter Empathy?

show_me_the_moneyAs a landlord, the goal is to make money on the investment.  Just like a corporation, the goal is to turn the largest possible profit. What’s the point of owning a home when you can’t make money on the investment. Unfortunately this doesn’t coincide with renters. Renters consider the property to be their home. It’s a place where they take care of their kids, house their senior parents or a place for peace and solace.

As real estate has become such a coveted investment, they’ve essentially become commodities that are traded like stocks. How common is it to hear from a renter that their landlord is selling and kicking them out? How often have we heard stories of exorbitant rent increases? Have landlords lost their compassion?

This analogy is no different between the big corporation and the consumer. Consumers want the best possible product for the lowest possible cost. Corporations want to make a big profit to appease their shareholders. Landlords now behave no different than the big fat corporations that want to line their pockets. With growing prices and big demand for real estate, landlords and real estate investors no longer feel the need to appease renters when they can simply be replaced.

Can This Continue?

The run up in real estate in Canada has been unprecedented in recent years. It’s rare that a bull run in any asset class can continue running for over 20 years. Will the party end soon? Who knows. Prices continue to climb year over year. Condos continue to be the popular investment and keep climbing at double digit percentages.

The result of the latest interest rate increases have yet to take affect. Even with the two increases that amounted to a 0.5% increase in mortgage rates, costs of ownership are still near historic lows and few if any home owners are defaulting on their mortgages.

Of course, with such brash behaviour being exhibited by real estate investors and landlords it would be nice to see some regulation put in place to put these individuals back in their place. Until then, continue to see line ups at new build sales offices and line ups to buy or rent condos in popular cities like Vancouver and Toronto.

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