On Rent Control

April 6th, 2017 by Potato

An important principle in our society when it comes to rentals is striking a balance between a landlord’s ability to make money and a tenant’s security of tenancy. A tenant will call whatever place they are renting home, and deserves to have some reasonable modicum of security that they will get to continue to call that place home.

They should not be kicked out because they got a non-destructive pet, because of their skin colour or religion, or that of their significant other (or the very fact that they may have started dating since the place was first rented). A tenant shouldn’t get kicked out because it would just be more convenient for the landlord to flip the place if it was vacant, or because the tenant didn’t welcome the landlord’s sexual advances – we as a society have said that the laws are going to protect against that.

And none of them mean a damn thing without rent control, because all the landlord has to do is jack the rent to a level no one can afford, and the tenant gets forced out (“economic eviction”). They don’t even have to show that that’s actually the new market rent or find a new tenant at the new price. They could jack the rent from $1000/mo to $100,000/mo, evict the tenant they don’t like (for any reason whatsoever), then rent it to the next tenant they do like at the original $1000/mo and nobody in power blinks an eye.

So in Ontario it’s a big deal that we don’t have rent control on properties built after October 1991. All those new condos built in the boom, many of which are serving as rental stock, are uncontrolled and there are essentially no protections for tenants. This is especially important in the midst of a housing bubble, as people feel there’s no option but to buy (no matter the price) if they don’t have the security to raise kids as tenants. We’ve been seeing that in the news recently in Toronto, with the Premiere picking it up this week when the rent doubled on a few people for an economic eviction.

Now, I think the existing pre-1991 rent control is a very good compromise between security and economics: the landlord can charge whatever the market will bear when the tenant leaves, and they get to put through increases in line with inflation (set by the government) while the tenant stays there. So the tenant gets protection, but not the unit. And to a large extent, the government rate is actually about what rent inflation is. I spent a decade in London, Ontario, and watching the rental market* there, market rent inflation if anything lagged the allowed increases. I know the approximate rent a few people were paying in downtown Toronto near UofT, and running those through the increases to today gets to within 5% of the current asking rent in those areas. Other than the last few years, rent inflation has been really low. And when costs legitimately spike (like when our apartment replaced the boiler or property taxes increased), the landlord can apply for an above-guideline increase, which goes before a third-party arbiter.

But, it doesn’t have to be that exact system: we could add enough rent control to prevent economic eviction, but allow double the rent increases for places built after 1991, or have regional inflation rates, or permit any increase to market rent, with the burden of proof on the landlord to apply to a board or ombudsman that that’s actually the new market rent and not a ploy for economic eviction.

Some people on Twitter and elsewhere have railed against rent control for buildings after 1991 – including Ben Rabidoux, who I usually agree with – as it would dis-incentivize building rentals. But I simply do not see it here.

First, there was hardly any building of rentals after the exemption was put in, and we’ve had almost three decades for that to do something. So evidence suggests it was not effective as an incentive, and taking it away isn’t going to change that.

Second, deciding whether to build a rental building depends on a number of factors: how much it costs to build and operate versus how much you can bring in in rent. The current market conditions and base case projections on inflation and financing costs are massively more important to that decision than rent control rules. Having free reign to increase rents only helps you in the scenario where rent inflation increases rapidly and where tenants do not turn over very often and where the government doesn’t recognize the inflation in the guideline increases. For more normal scenarios, the lack of rent control is a nice option (mostly to skirt eviction rules) but otherwise doesn’t really affect the economics of your building — doesn’t sound like the make-or-break incentive to me. Indeed, for most cities over most of the last few decades, the provincial guidelines (and occasional above-guideline requests and vacancy de-controls) have been plenty to keep your units at market levels. So yes, putting in rent control will be a dis-incentive, but a relatively minor one compared to the other costs of building and operating, and is nowhere near something that should out-weigh the social need for some measure of rent control (without which all other tenant protections are toothless).

And the fact is, cap rates are garbage right now. Rent control or not, we’re going to get hardly any serious purpose-built rentals in the GTA simply because people are willing to pay far more for a condo for consumption than a rational investor would for a rental (driving up land and construction costs). There are many other incentives to condo building (including that you get to crowd-source your funding and punt the risk to individual saps), and disincentives to purpose-built rentals (including the property tax regime). Despite the fact that at the moment there is no rent control on the books for future rental units, I’m amazed that there are any being planned in this environment, and I’m sure that there is a story about back-room dealing with the city to have made that happen anyway.

So I say bring on rent control for buildings after 1991: as it is for others, or a weaker compromise form if necessary, but something to provide more security of tenancy than the current economic eviction free-for-all.

* – note, there are no good data sources on market rents that I know of. Everyone complains about CMHC’s because it only tracks large apartment buildings, which tend to be older. Many rentals don’t show up on MLS so the realtors don’t have a good picture, either.

Never Weight – 1st Quarter Update

March 30th, 2017 by Potato

Back at new year’s I decided (resolved, even) to focus on taking better care of myself. I had finally cleared some major things off my plate: the investing course was finished, the major grants for the season were done, and Wayfare was out of the hospital and on the long road to recovery. Plus I had hit my “never weight“, a line in the sand I had set long ago. I knew the things I needed to do were fairly simple: sleep better, eat better, exercise more — the challenge was just in implementation.

I’ve been better about my sleep, but not as good as I should have been given that a) things are really quiet right now on the work front and b) it was my top priority to start on. Part of this issue is I had a minor cold/sore throat for several weeks which meant that I was getting poor quality sleep even when I went to bed earlier. Still working on that one. However, I did finally get off my butt to have a sleep study done, which looks like will lead to a dental appliance in the next few weeks to see if it helps my sleep apnea.

For exercise, I have recruited Blueberry as my personal trainer. Let me tell you, four-year-old girls do not fuck around when there is a chart and checkmarks (or stickers!!!) involved. She helped me come up with a simple routine of basic exercises that can be done in ~10 minutes, including things like push-ups, sit-ups, and ballerina twirls. She’s been fantastic at checking in on me everyday to make sure that I’m doing them, and if I have to do it after she’s in bed, she will even critique the quality of my checkmarks the next morning. One day when I really pushed myself, I got two stickers for each exercise. I’m thinking of writing a paper for a change management journal.

The exercise regimen Blueberry helped create; the following week, I got stickers as well as checkmarks.

When spring finally comes (vs. the spring-tease we’re currently getting where we’ll get one or two decent days followed by a deep freeze and maniacal laughter from mother nature), Blueberry wants to start working on biking further and further each day until we can make it all the way to Grammy’s house (about 6 very hilly kilometers one-way — a pretty intense distance for a bike with training wheels). And I know she’ll get me out to the park and running around, so my personal training regimen should only get better.

I have not made as much progress on implementing a process for improved dieting: I’m eating a bit better, snacking a bit less, but haven’t yet gone into meal planning or tracking or anything that’s a substantial change beyond some low-hanging fruit (like eating more fruit). I started tracking what I was eating in January, but stopped in March (which is quite likely related to the backsliding from February’s weigh-in).

As for my weight, I was down 5 lbs by the end of February, but have plateaued in March and am still only down 5 now. So I’m sitting just under that “never weight” threshold still. Other than “doing better” (ideally in a life-long sustainable way), I haven’t quantified my goals yet. Am I aiming for my new-daddy weight of 5 years ago, or my pre-MSc-crisis weight of 12 years ago? And how fast should I try to get there? A pound a week seems to be a reasonable goal according to many sources, and I’ve only lost 4 in 13 weeks — just one third of that textbook rate. But even rolling back the clock by 12 years, which seems like such an unrealistic goal now — going all the way from obese to just a tad overweight in BMI — would be just over a year at that accelerated rate. Yet getting to that level would require some more serious dieting and exercise interventions — drastic lifestyle change, as Joe put it in the comments to the last post — whereas this more leisurely rate has been achieved with minimal actual sacrifices. And losing 16-20 lbs/yr with a lifestyle that has “minimal sacrifices” would make me pretty happy in the end, if I can keep it up.

For now, I’m going to continue to make better sleep and exercise my primary focus, and will get back to tracking what I eat to raise awareness without setting explicit weight goals (just “lower!”) or getting into meal plans for the next quarter.

Public Transit Tax Credit Axed

March 23rd, 2017 by Potato

In yesterday’s federal budget, one of the changes was eliminating the public transit tax credit, which looks like will be effective July 1.

For many people in Toronto living the car-free life, a metropass is a no-brainer, tax credit or no. If they live downtown they’re on and off streetcars and buses pretty much any time they leave the house shoebox.

For commuters, it’s not so clear-cut: metropasses are expensive. By signing up ‎with a discount through your payroll (if your employer offers it), they’re $129/mo, and $134 if you sign up for the yearly discount plan on your own (and over $146 a la carte).

With the tax credit, these are effectively 20% cheaper, so best case, a metropass only costs ‎$103.20, or $1238.40/year, and maybe as much as $1401/yr. With tokens (or a presto fare) now $3, you’d have to take at least 413 trips to make it worthwhile to choose a pass instead, maybe as many as 467 in the year if you pay full price each month. How many days will you commute to work? There are two trips each day you go to work and 365 days in a year, but with weekends, vacations, holidays, and likely a few sick/work-from-home days, you’ll likely have about 450-460 one-way trips for work.

‎So with the tax credit, a metropass is financially worthwhile — though not by very much, considering you do have to commit to it to get a discount, and not lose your cards/receipts to claim the tax credit. But it is more convenient than tokens, and opens up the option to take the TTC for non-work-related trips.

Without the tax credit, even the cheapest metropass option needs nearly 500 trips to break even. That’s not totally out of the realm of possibility — just a few extra non-commuting trips per month to do it. But I know in my case I probably only use the TTC 10 or 12 times a year outside of work purposes, plus another dozen or two trips on it for convenience when downtown (e.g., to take the bus or streetcar all of three stops to grab lunch at work) — walking-distance trips that I would not bother with transit if it weren’t free anyway (and often don’t if there isn’t a streetcar or bus in view).

So without a tax credit, unless the TTC changes its pricing scheme in response (which I doubt will happen), I’ll be unsubscribing from the automatic metropass purchases.

Aside from deciding how to respond to it in my own life, I’m not sure what to think of the move: it does make more sense to simplify things and just directly fund transit, especially given how many people have had to dig up receipts to prove their claim. However, in practice I highly doubt that the TTC will adjust metropass pricing (or soon presto monthly pricing) to compensate‎ for the loss of the tax credit, even if they get more direct funding, which means more people like me will make the decision to abandon the stable funding of metropass subscription programs and move to paying by the trip. That, in turn means taking transit becomes a visible, painful cost. And as for simplifying the tax system, there are a other tax credits out there that could have been targeted over (or with) this one.

HCG TL;DR

March 17th, 2017 by Potato

Home Capital Group (HCG) is a company with some troubles that is being shorted by some colourful and entertaining (and IMHO likely correct) characters. But the implications of the story go beyond just a stock market tale.

Brief Recap:

Home Capital issues mortgages to borrowers, primarily in Ontario, with a focus on “homeowners who typically do not meet all the lending criteria of traditional financial institutions” (pick your euphemism as long as it’s not “subprime”), as well as traditional business that gets insured by CMHC. Around Sept. 2014 a whistleblower lets them know that several brokers were allegedly sending them fraudulent mortgages (independently, reports come out about people in the industry who help people forge documents). HCG’s CFO announced a retirement in November 2014.

In documents released yesterday, (H/T @TaureauResearch) Home Trust appears to notify CMHC about the issue at the end of October, 2014. CMHC seems amazingly chill about the fraud – no mention publicly or in the documents about cancelling the insurance, adjusting guidelines, or even reviewing anything. Hell, they say this: “CMHC thanked Home Trust for coming forward with the information and for being proactive in working together with CMHC to prevent fraud.” [page 90] The most that seems to happen is to schedule a review for over a year in the future (Jan 2016).

In May 2015, HCG releases its first quarter results, with no mention of the potential fraud issue, despite noticeably lower originations. The release just has a vague phrase about reviews. “The first quarter was characterized by a traditionally slow real estate market, exacerbated by very harsh winter conditions. The Company has remained cautious in light of continued macroeconomic conditions and continues to perform ongoing reviews of its business partners ensuring that quality is within the Company’s risk appetite.”

On July 10, 2015, they state that originations were down in the second quarter, and that they had terminated their relationships with certain mortgage brokers.

On July 29, 2015, they clarified – at the request of the OSC, they note – that in 2014 they were notified about “possible discrepancies in income verification information submitted by certain mortgage brokers. […] The investigation determined that falsification of income information had occurred but that there was no evidence of falsification of credit scores or property values.”

It’s not until after this that CMHC seems to get activated about the possible fraud (that they’re insuring!) On August 4th they ask if they’ve done any analysis about the exposure to the fraud, and on July 30 someone sends around the total exposure to Home Trust (again, redacted so hard to say for sure, but without an analysis of that issue), and that they’ll have a closer look then. On July 31, someone at CMHC appears to say that they can’t transmit information (on the brokers) from one lender to another (page 36, French, partially redacted), in response to an email asking if they have the list of 45 brokers from CMHC (page 37). Not until December 2015 does someone ask if anyone checked whether the brokers in question originated loans through other lenders.

Why Does This Matter?

The matter with HCG itself is just a symptom. It’s important for investors (and short sellers) of that company to understand those events are going on, and to consider what your opinion is of management that waits that long (with a poke from the OSC) to disclose an issue like that. But HCG is just a small player. Beyond that, it’s a sign of what’s happening in the housing market.

Yes, fraud exists in the market (and I’m not talking about HCG here: more generally). But more importantly, moral hazard exists, and there is a huge outcome bias at play. CMHC at first seems to care little about the issue: there are few arrears, so no biggie. But there are few arrears in a housing bubble anyway – no one defaults when their house appreciates 10-20%/yr. Everything seems great until the music stops. Similarly, many voices (including MPs) argue against tightening regulations and that Canada’s financial system is strong because arrears are low.

The message heard by players in the industry then is that there are no consequences for bad behaviour. If arrears pile up 5 years later, well then people may care but it will be too late. In the meantime, fraud is happening in the market (and I’m not alleging at HCG specifically), and there is no sense from the government or the banks that there’s anything wrong. They even call it “soft fraud” or fraud-for-shelter – bending the rules to get a house, which can’t be that bad as long as they pay the mortgage, right? (The one that they can’t technically afford if rates rise.)

There are things that could have been done. Instead of being reactionary, there could have been more proactive actions at CMHC (which to be fair may have happened but not been captured in the FoI release, or been redacted). They could have flagged the brokers in question and checked for any past or future loans with other lenders – and sources suggest that the brokers that HCG stopped doing business with are still in the business, sending loans to other lenders. They could have put the loans back on the lender and cancelled the insurance without waiting to see if there was a claim. And nowhere did I see any mention of whether Genworth was in the loop on the goings-on.

Insured mortgages require the least amount of capital on the balance sheet. Simply putting them back proactively (perhaps with an investigation and some work on improving underwriting processes), even without a fine, would have an impact as the company would have to use capital to hold on to those mortgages, potentially slowing their growth or forcing them to go to the market to raise money. That would have been a small step, but one that would have sent a message that fraud is not cool.

But the bigger issue is that it was reactionary: there’s no evidence in the released documents of CMHC doing anything to prevent these brokers from continuing to write taxpayer-insured mortgages, or even quantifying the exposure until July 2015. It’s not until the matter becomes public and there’s the risk of backlash and people like Ben Rabidoux asking questions that anyone seems to bother to even quantify the potential risk, let alone do anything.

People like to state – with very little supporting evidence – that Canada’s financial system is safe, stable, conservative, etc., etc. But this example seems to show that nothing is actually checked in depth, and rules are only lightly enforced until something breaks into the media and public consciousness.

Yes, today arrears are low and the banks aren’t failing. The point of making a good system with oversight and strong regulations that are actually enforced is to keep it that way.

Advice and The New Model

February 25th, 2017 by Potato

There are many elements to a successful financial life. You’ve got to live within (below) your means, which means developing an ability to budget and deal with cash flow. Create some savings and disaster-proof your life. Then come up with a long-term plan, and get some investments going to make it happen. So a successful financial life looks something like this:

Elements of a successful financial life: saving/budgeting, planning, long-term savings. Picture of text in boxes spread across a life trajectory.

These are all important. How they get done though is different for everyone. Some people find that things comes more-or-less automatically. Other people need help to sort out some or all of this. For example, budgeting and matching up cashflows is really intuitive for me, I barely needed to read anything before I was off handling it on my own, whereas some people need help from a money coach to sort out their budgeting, cash flow, and basic relationship with money.

And at various points, you may need help with something. There’s no shame in that, we’re not all personal finance bloggers obsessing over this stuff, or people with the time to read books and take courses to try to build up the skills to DIY.

But when you go to look for help, a successful financial life may look more like this:

Elements of a successful financial life: saving/budgeting, planning, long-term savings. Picture of text in boxes spread across a life trajectory, with investment products and insurance over-sized.

Traditionally, many advisors only made money if they sold you a product of some sort, especially investments (mutual funds, etc.). So their view of your situation was focused in on that part of the problem they could solve. Planning became less about clarity, goals, and trade-offs than about coming up with a bare framework to support investment purchases.

And that’s not to mention the conflicts-of-interest, such as that some advisors might not even ask you about your debt or budget, and look to invest any cash you have, even if paying off your debt may be a better use for the money. Or that so much of the focus is on investment selection (i.e., active management), which is where you will get little to no value for your money.

Advice — good advice — can be extremely valuable. Lousy advice — distressingly common — can be extremely expensive. If you’re paying your advisor through commissions on mutual funds that you buy, and you’re getting good service and value for those fees, then that’s totally fine. But I don’t see that being the case all that often, and those high fees really eat away at your long-term worth.

Instead, a new model is emerging that I like a lot better: paying for advice in a transparent way, for any part of your life that needs it, then figuring out the products to fit that advice separately, whether through DIY investing in low-cost index funds or using a robo-advisor to handle the investment management part.

In addition to getting value for your money and having transparency, this model lets you put the focus where you need it. If you need a money coach to help you sort out your cashflow and budgeting, you can now find one fairly easily — it’s not a side discussion you cram in while shopping for insurance or mutual funds. If you need to talk more about planning and clarity to figure out what direction your life is going in and how you meet your goals, you can do that.

Do you have confidence in your plan? Wait, that’s backwards: does your plan help inspire confidence in you and where you’re going? It doesn’t have to be a 30-page printed report: a good sketch on a napkin can be really illuminating. But if your plan is really just a few “know your client” bullet points to support some sales goals, you may want to work to figure it out yourself, or find a planner to help get that clarity.

So roughly speaking, here’s how I see the industry in the near future:

Elements of a successful financial life: saving/budgeting, planning, long-term savings. Picture of text in boxes spread across a life trajectory, with money coaches, planners, and robo-advisors to help at each stage.

Each part that makes your financial life tick, you can find some support to help. From a full-service coach/planner/advisor, to semi-automated solutions and support for DIY methods. And for each of those, you’ll pay a transparent fee so you’ll know if you’re getting value for your money.

And this is already happening. Nest Wealth, Wealthsimple, and ModernAdvisor each offer planner dashboards, to allow collaboration with unlicensed (which here means not-salespeople) planners. The planner does the planning and coaching, the robo-advisor does the investment planning, and each can charge for their component of it independently.

For people with larger portfolios, this new model is likely going to lead to better advice at a lower cost. For people with smaller portfolios who are just starting out, paying an hourly rate may cost more than they’d pay even with super-high 3% MERs… however, many people aren’t getting the planning support they want or need anyway, and this way they can get help with the elements that may be more important to them at that life stage, like figuring out their budgeting, or coming to an understanding of what their money is for.

Resources to do this:

Directory of Fee-Only [Fee-for-Service] Planners

Money Coaches Canada

Our robo-advisor comparison tool to find a robo-advisor that fits your needs and situation

My course on DIY investing to learn how to do the investment management part yourself

A reading list to help you get started

Plus loads of other resources out there for financial literacy. Chris at Rags to Reasonable has a free email course on getting a handle on your money (left side of the figure). Cait Flanders has her budgeting system. Bridget Casey has her build a budget course. And all the blogs.