Speculative Housing

The place we are living was bought in 2004 for $445,000. After 17 years of rent covering the mortgage, the owner wanted to sell it for a million dollars. Outrageous: yes. Despite the hefty price tag, a house like this is a good deal in a housing market that has gone crazy.

Buyers are making unconditional offers and outbidding each other to land property. After they get the keys, they discover what they bought. Horror stories are emerging of unprofessional renovations done without permits or inspections. Buyers don’t care: there’s no time to care.

The expensive homes are turning into expensive rental properties. Homes are going for well above $3000 per month in Greater Victoria and the prices are rising. The rent someone can bear is classically in the 25% range of gross income. As the dollars go up, renters get more gunshy: they expect more. They will limit rentals to “professional couples.” They don’t need to accept kids or pets.

At $3000/mo., the math looks like this:

• $3000 / 25% is $12,000 gross income per month
• Two breadwinners, working full time could earn $12k if they earn an average of $40 per hour.

It’s unsustainable. There are few positions that pay $40/hour. Everyone in retail and the food industry isn’t earning anything close to $40 per hour. If the housing prices continue to spiral, 2021’s $40/hr. won’t be enough for 2022 or 2023.

There are some important questions coming from this:

• What caused it?
• What’s going to happen if nothing is done?
• What can be done?

What caused it is a cocktail of arbitrage, affluence and boredom.

Tourism sucks down about 10% of the global economy. When 2020 hit, no one went on annual vacations. Their money was burning a hole in their wallet. They bought cars by the droves. They got pets to mitigate the boredom. They did renovations until supplies ran out. And, they bought property. All of this money was available for those considering changing towns, moving to better digs or just changing things up.

There’s a lot of money out there. Only 46% of Victoria need to hold down a job. The remainder are very young, very old or they can live off of their trust funds. With nothing to spend their money, the affluent people turned their eyes to property.

While Victoria isn’t affordable, it’s still cheaper than places like Vancouver and Toronto. In 2020, everyone learned how to work remotely. Silicon Valley and San Francisco are seeing a mass exodus. People are looking at inexpensive properties in little towns. They are selling their properties in overheated markets and relocating to where the pace is slower, the housing is less expensive and the bandwidth is good.

In 2016, we sold our home. The buyer didn’t have to worry about financing. He was cashing out from Vancouver, so he just cut a cheque for half a million dollars — likely money gained from selling an overheated property there. The effect of arbitrage isn’t new. People have moved from expensive locations to cheaper locales. It’s been going on for years and it’s getting worse as the price points climb higher and faster.

What can we do about the dynamic? The problem isn’t housing. We are not short on housing. The Gold Rush mentality is pressing more developers to build more residential space. With so many offices going virtual, that commercial space is eventually going to get turned into residential space. If that commercial space converts, it could make millions of square feet available in as little as a year. Developers would like to keep demand high, but they may also be driven by individual gain to flush lots of housing inventory into the market.

The problem isn’t a lack of space. It’s a lack of affordable space. Speculators are riding the feeding frenzy for all it’s worth. The place we’re leaving: doubling in value in 17 years is akin to a 5% return on investment. If you factor in that renters have paid the mortgage, it’s more like a 12% annual return as most of the money profited was put in by the renters not the owner/investor. Five percent is pretty good in an era where low risk investments (savings and bonds) skim the 1% mark.

What’s to be done? Convert property from an investment vehicle to a means of satisfying shelter. Get rid of the profit opportunities and the speculators will leave the scene. Here are some thoughts for how to calm things down:

Time delays will shake off speculators. Speculators want to be fluid. They want to hop out of a property as soon as possible. If there are roadblocks posted, they could be diminished over time to not impede legitimate sellers.

Change mortgages. Make mortgage interest tax deductible. At the outset, most of a mortgage payment goes to interest. Give owners a break. As time goes on, their interest share diminishes and with it, so would the tax benefit. This puts those who need financing in a better place that those who can parachute in and pay for a whole house with cash. While many homeowners need mortgages, they are critical to speculators who use financing to execute fast flips. Put a time delay on when the mortgage interest tax benefit is available. If the mortgage interest tax benefits kicks after a full year in a mortgage term, it would be of little benefit to speculators. Likewise, it could be only of benefit to Canadian taxpayers holding a mortgage in a Canadian bank, so foreign owners would be at a disadvantage.

Change building standards. The tiny house movement combined with the move towards carless living is huge to developers. They are making homes smaller and cramming more suites onto a plot of land. The woke crowds don’t catch on that they’re being played. We need to change the standards to only qualify larger liveable spaces. 2020 taught us that we may need to be okay being indoors. Remote work; climate change; and the next COVID-styled surprise could put us back in our homes. Let’s make them decent spaces. Developers aren’t going to do it out of the goodness of their hearts. We have to force a minimum standard. Space isn’t the final piece of the standards: homes have to be more durable in the face of climate change. They have to consume less energy — bonus points if the homes create more energy than they use.

Keep and use a history of rents charged. Make rents subject to regulatory approval. Landlords living through 2020 were stuck. In BC, the province mandated that there could be no rent increases. Even without that rent freeze, the rents are climbing at a glacial rate, especially compared to property prices. How can landlords get the market rent? When a suite is vacated, the landlord can reset the rent to whatever the market will bear. This is encouraging landlords to carry out renovictions and bad faith re-occupations. If they were forced to hold rents at a sensible rate there would be no incentive to ejecting tenants. First: force them to register the rent paid. When the suite is vacated, they can raise the rent by a sensible amount, but not the 25–50% gougings that are common. Anyone can request the rental history and they can make a complaint if the landlord has spiked the rent, then a body like BC’s residential tenancy branch can force the landlord to set the rent at a reasonable amount.

Use cost of living and median income as factors in tax policies. When it comes to rents, tax the landlord based on the local economy. If the average income is, say, $50,000/year and a home has two earners, then the bearable rent is ($50k + $50k x 25%) $25,000 per year. Use a carrot-and-a-stick approach. Rents below the local averages are tax free income for landlords. Rents above the local average get a hefty tax — maybe a tax percentage that climbs in comparison to how much a rent strays from the realm of affordability.

Expand landlord insurance. Landlords complain about the high costs associated with renting. That expense is a combination of renters who skip out on rent; and damage to property. It adds up and they have a point. Renters can be lousy. In this market, renters are essential: the landlords cannot occupy all the places they own; and the market has been driven to such heights that renters could never buy. While property coverage for landlords is common, there’s no fund to protect landlords from renters who skip out on rent. If that were available, it would factor out some of the impacts of bad renters. An insurance system could also hold a registry of skip-prone renters and they could seek to recover money from those renters. The government could step in to offer a layer of insurance protection for landlords who have been stiffed on rent.

Lots of housing inventory is coming online. Developers think the party will never end and they’re building like mad. If the housing continues to be unaffordable it could drive lots of people out of the region. It could financially break them. If there is too much inventory in the housing market, it could give prospective renters lots of options — even if they need to pay a real premium — there could be suites left vacant. If landlords eat a few months of lost rent while waiting for a renter, they may reconsider the rent and drop it to make their property stand out. That could dismantle this problem or make it all much much worse. Outcome A: lower potential for rents means rental properties could sell for less and cool the market. Outcome B: lower potential for rents could make landlords more cautious; they could take a page from commercial realtors and sit on a vacant property for months, holding out for the ideal rent.

We need to use the tax structure to shape policy: make expensive property less attractive and less profitable. We need to make developers build livable homes. We need to protect landlords to encourage them to keep renting. We need to make housing affordable again for renters and viable for landlords.