Beware unintended consequences as governments meddle in real estate: Don Pittis

In a science fiction tale by the late Iain Banks, the only way a huge computercan make a trulyaccurate predictive model is to create a near-perfect simulation, including recreating the realisticlives of all the people involved.

Governments don't have the computer power to do that with the Canadian property market. That'sa good thing. They avoid the dilemma faced by the science fictioncomputers overwhether to kill offall those virtual people in the simulation.

The point is that, currently, even ourmost exacting models are ham-handedat predicting how sweeping changes in policy will affect the real world. No one knows for sure how the property market will react to government meddling, but here arejust afew of the many ways things could go wrong.

1. Popping the bubble

The current round of tools to cool the Ontario market is only the latest in a cumulative series of changes by federal and provincial governments. Like shifts in interest rates, alterations in rules can take a long time to work their way into the market especiallya market as disparateas housing. There is some danger that as foreign buyers, first-time buyers, owners ofvacant homes and domestic speculators find themselves nudged out, the housing market will cascade into a tailspin, revealing what so many critics have predicted:that the real estate market is a dangerous bubble in need of a serious correction of between 30 and 50 per cent.

• Ontario lays out sweeping measures to curb high rents, home prices

2. Market freeze-up

An alternative view is that rather than loosening up the market by encouraging people to sell, it is possible the uncertainty over the short-termfuture of real estatewill inspireowners to hunker down and stay put. If history is a guide, as population grows, the supply of prime urban and nearersuburban housing will remain at a premium. Instead of selling into a temporary falling market, those who have no urgent need to move may decide tosit on their homes, further plugging up the market. There is some evidence this is exactly what happened following new real estate restrictions in Vancouver.

3. Trapped tenants

Even though renters don't own their properties, rent controls give them a stake in future property markets in a way that could make them, too, unwilling to move. In Ontario,the new rules wisely allowrents to rise when a tenantleaves, unlike in some places where tenants can pass on their rent-controlled apartment to a relative effectively transferring the rising value of property from the owner to renter. But ifrents in prime areas continue to exceedinflation over time, as they have done historically in thriving cities,people in existing rent-controlledaccommodationwillfind it financially disadvantageousto move, leaving them trapped in a home that is the wrong size or in the wrong location.

• More Vancouver renters decry loophole used to sharply raise rents

4. Rental shortage

While some rental developers insist they have always done their planning based on rent increases at the rate of inflation, the traditional argument that rent controls discourage development has not been disproved. While the lifting of rent controls in buildings constructed after 1991did not create the promised surge of new rental units, economic changes are complex and not simple linear relationships. Property markets traditionally go through cycles where higher prices lead to overbuildingfollowed by oversupply that leads to lower prices. The interruption in the cycle before its completion may mean a shortage of future rentals despite other government incentives.

5. Spreading contagion

Whatever the cause, the wild speculative rise in housing prices began in the country's biggest cities. Already unaffordablehomes in the biggest urban centres haveled to sharp price rises in once sleepy communities within commutingdistance. Many analysts proposethat restrictions on speculation in Vancouver contributed to the latest run-up in Toronto-area prices. At current interest rates, property remains a good investmentexpected to hold its value. Pushing speculators out of the bigger urban centres may have the effect of making buyers look elsewhereto communitiessuch as Kingston,Ottawa and Montreal. That may mean future windfalls for current property owners, butcould eventually spell the same affordability problems for renters and new market entrants.

6. Political change

Although it is hard to prove, changes in property rules in both B.C. and Ontario have been widely describedaspolitical moves to bolster a government's fading popularity. But rewriting the rules creates losers as well as winners. While the winnersmay move to support the leaders who changed the policy to help them, voters are notoriously fickle. Those hurt by the shift in rules, whether because they went too far or did not go far enough, might be motivated to votefor change. Even as existing owners, renters and landlords begin toadjust to the new rules, they must realize that those rules could alteragain as soon as the next election.

Follow Don on Twitter @don_pittis

More analysis from Don Pittis