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November 23, 2018 | Under Control

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

If governments don’t control the price of houses, why should they control rents?

The question leaves cons nodding and lefties horrified. It seems to separate the wrinklies form the moisters. And it’s at the heart of a brewing, giant, never-ending political slugfest that just got a tad more vicious.

For example, Vancouverites have elected a dude as mayor who ‘s decidedly pro-renter and anti-landlord. The city will soon have a renters’ advocate, at the same time it’s double-taxing people with two residential properties (that they bought with their own after-tax money). Meanwhile in Ontario, the pro-builder premier has ended rent controls on new buildings which was introduced just a year ago. Soon amateur landlords can charge ‘market’ prices – which is basically whatever the market will bear.

At the heart of the debate is whether or not shelter is a human right. But does that right (if it exists) means everyone must get ‘affordable’ shelter? Does it mean people have a right to live in the centre of big cities, where land is most expensive, just because they want to walk to work? And are tenants to be protected from the same economic forces that whack property owners – like rising mortgage rates, property taxes, insurance or maintenance costs?

If the people investing in properties are not allowed to get a decent return because of government controls, why would they continue? So, do rent controls mean fewer units, squeezing out people who can’t afford to buy, and must be tenants?

Ontario just bucked a trend towards governments heavily favouring renters over owners. Any leases signed in new units that were completed/occupied after November 15th will have no price protection. That doesn’t mean a LL can toss out a renter just because s/he wants a higher payment, since existing legislation gives every tenant a huge swath of rights, whether they live in a rent-controlled space or not. Evictions can only happen for limited reasons, such as major reno or a family member of the landlord moving in.

But these buildings will go forward without controls, meaning the unit owner is able to set whatever price someone will pay when a vacancy occurs. Since 13,282 new condos were pre-sold in Toronto last year alone, you can see the future impact of this change. Before long tens of thousands of rental units will be priced by Mr. Market.

The logic is simple. Fewer controls will mean more supply. More supply ultimately keeps prices reasonable, while rent restrictions distort markets. Otherwise, developers abandon putting up apartment buildings, for example, and focus on condos – where projects can be pre-sold, making them easier to finance and giving a far quicker return on investment.

The pro-tenant groups, who’ve been successful in bending public policy, say this is hokum. Right wing Con crap in a world already badly skewed in favour of the rentier class composed of greedy leeches. Tenants are being pushed from urban centres altogether, they say. More often than not, these are highly-educated young people with urban jobs and meagre incomes. Is pricing these people out of their homes not a social crime?

But if we’re going to control some people’s rents, and not others, does this not create two classes of tenants, one with protection and security and the other with none? Equally, there are two sets of landlords. One with strict curbs on investment returns, the other unlimited – while both face equal costs and risks.

So, yes, we all should have shelter. But there‘s no right to shelter you can afford exactly where you want to live. Get over it.

If controls end, there’ll be more apartments built. Fewer condos. More long-term spaces without the fear of eviction when some amateur landlord decides to sell. Renting will still be cheaper than owning, and a viable, rational alternative for those who eschew being a mortgage slave and wish to pursue glorious liquid wealth.

It’s such a good thing I don’t live in BC. My head would be on a stick.

                  

Oil crashed almost 8% Friday and a barrel of the good stuff is back down close to fifty bucks. Canadian oil is ridiculous at about $14. (In comparison a barrel of milk – about 160 litres – would cost more than $440.) The decline pulled down the poor TSX once again, making you wonder how something that was $80 not long ago (and $140 a few years back) can have fallen so much. Aren’t we using more oil than ever? Are investors just idiots? Is this one of those buy-low-sell-high-later moments?

I asked my fancy portfolio manager buddy Ryan for a few words on this, between gassing up his guzzly Porsches:

“A number of recent bearish factors have caused the price to decline with speculators/hedge funds then piling on with short bets. This steep decline is frankly stupid and not justified by the underlying fundamentals nor is it suggesting a major downturn in the economy, in my opinion. Demand remains strong with 100 million barrels per day being consumed in July, Aug and Sept (Oct it dipped to 99.9). Yes the global economy slowed a bit and we could see global GDP at or slightly below this year’s 3.7% to 3.8% in 2019, but there will be no major drop off in oil demand, absent a global recession.

“The issue is supply and there have been a few factors that have caused a short-term oversupply of oil relative to demand. They include Saudi/OPEC rising production, US production surging from 10 million barrels at the start of the year to almost 12 million today, the US agreeing to waivers of Iranian oil sales to 8 countries, concerns that global growth is slowing and investors significantly adding to their short futures contracts. In the chart below you can see that total futures (combines commercial hedgers and speculators) are hitting short levels not seen since 2011. Basically, the oil market is short-term out of whack and speculators piled into shorting the market through futures contracts.

“Where do we go from here? Higher! This is a complete overreaction with hedge funds and investors greatly contributing to this. Demand remains strong, and supply will naturally correct lower to these low prices. As they say, the solution to low oil prices is low oil prices (ie producers cut when prices fall this much). OPEC is very likely going to cut production in upcoming meetings which will likely be the catalyst to turn this around. I see prices returning to $60-$65/bl. The low oil prices will continue to weigh on the Canadian economy especially as we have little plans to address and build much needed pipelines. But a pick-up in WTI will help ease the current crunch on our energy sector.”

Now you know what to do.

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November 23rd, 2018

Posted In: The Greater Fool

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