During the Covid-19 pandemic, due to a range of demand-side factors, housing prices sky-rocketed across Canada. In various provinces, laws were enacted to protect tenants against rising rental costs. In Ontario, there was a rent freeze, which only ended December 21, 2021.
Whilst the freeze was helpful in protecting vulnerable tenants, it also created an unexpected downside—investment property owners were not able to raise rents to cover rising mortgage payments.
Although the ‘freeze’ has ended, landlords are only permitted to raise rents by a modest 1.2%. With rising interest rates and high inflation, this marginal increase may not be enough. This has led Ontario-based firm Royal York Property Management to make an unprecedented offer of financial help to struggling investment property owners.
Lifeline for Struggling Landlords
Nathan Levinson, founder and CEO, said, “It has been a very difficult time for most landlords. Property owners are concerned that the interest rates will significantly increase within the next 18 months. This will cause an inevitable drop in the real estate market, with many owners unable to make their mortgage payments. For a membership fee starting at $39 a month, Royal York Property Management will personally fund any rental income shortfall up to $500, for as long as we manage the property. The move is aimed at removing financial hardship and also concerns about whether or not landlords will break even on their investment properties.”
Interest Rates Set to Rise
Whilst most investors could possibly absorb a 0.25% increase in interest rates, which would cause a modest increase in the average mortgage payment, the market is predicting a quick succession of increases. Some analysts have pointed out that during the pandemic interest rates bottomed out at 2% lower than they are now. Increases are likely to return the rate to pre-pandemic levels at least, while some even anticipate new highs.
Canada’s Debt Problems
For those landlords who were already teetering on the brink, the sudden hike has created a ‘mortgage rate shock’. It has led to financial difficulties, as investors choose to either fund the difference from their own income or miss payments. Since over three quarters of a million Canadians deferred or skipped mortgage payments during the pandemic, the signs of financial stress are already showing. The question now arises, at what point will the increases have the desired effect on the economy?
By late 2021, Canadians had already amassed $51.6 billion of debt, with mortgages making up the majority of that figure. The debt-to-disposable income ratio stood at 177%—for every dollar of income available to spend, $1.7 was owed.
Previous Housing Crises
This is not the first time Canada has faced high interest rates and inflationary pressures. During the early 90s, rates reached the dizzying heights of 13%, causing a dip in house prices. Throughout the 2008 housing crisis, although Canada was largely sheltered from the worst of the fallout, home values dropped by up to 40%. Canada was only spared a complete crash due to tight banking regulations. Whilst the 2008 legislation helped avert an all out crash, recent laws—enacted to protect tenants against rising rental costs—threaten to precipitate a new disaster.
Economic Reform Is Needed
Mr. Levinson, who is an advocate for economic reform, explained, “The Ontario government should allow landlords to serve an N2 Form versus an N1 Form, permitting an increase in rent for properties built before 1991—like it was before the former premier of Ontario, Kathleen Wynne—made her announcement at Queen’s Park on April 20, 2017. If this isn’t adjusted, landlords will only be able to increase their rent by 1.2%, as per Ontario’s 2022 Rent Increase Guidelines. With what we are seeing, landlords will not be able to keep pace with inflation and rising interest rates and many will default on mortgages, leading to a depressed housing market.”
What Does the Future Hold?
When asked, “What’s next for Canada’s housing market?” Mr. Levinson commented, “All housing market downturns have shown that government policy can have a sharp and sudden impact on prices. That being said, we do not know what will come next for Canada’s housing market or whether there will be another crash in the future.”
When central banks acted as a lender of last resort during the last big crash, they helped to stabilize the market. Without their input, the market would have suffered and remained in a slump. Royal York Property Management company’s recent actions are reminiscent of central banks’ previous involvement in economic affairs. As Mr Levinson remarked, “Our actions are intended to shore up the market and ensure investors maintain confidence in property investment.”