Through the roof.

An observer explained recently that "There is not enough rental being built to make rental rates more competitive. It is simple supply versus demand." Not only that, the writer claimed, but allowable rent increases in recent years have been "well below the inflation rate. Property operating expenses such as property taxes, insurance, etc. have and are increasing at a much higher rate. Property taxes alone have averaged six per cent, with Langford at 12 per cent."

Can you spot the contradiction?

On the one hand, rents are through the roof because "demand" so outstrips "supply" that real estate holders are literally forced to raise intertenancy rents by as much as 27% as they did from July, 2020 to July, 2021; and the inviolable Law of Supply and Demand (LSD) forced them to do this on the heels of increasing intertenancy rents 15% from July, 2019 to July, 2020, a compound rate of increase over those two years alone of 46%.

Mind you, raising rents in response to the inviolable LSD has absolutely nothing to do with costs. One is forced by circumstances entirely beyond one's control to raise the rents on one's properties as high as the traffic will bear. There is no decision-making involved in this. It is the Law.

But on the other hand, real estate holders are forced to raise their rents because property taxes, for example, are so onerous ($22,458 per year on a $5 million building, or $46.79 per month per apartment if that building contains 40 units) that they will lose money if they don't. One has to wonder how human landlords in the days preceding real estate holding corporations buying up apartments thousands of units at a time managed not to raise their rents for years at a time to keep good tenants.

Then there is the matter of inflation. "Shelter" in 2017 accounted for 26.8% of Canada's CPI (Consumer Price Index). CPI is the most widely used measure of inflation. So here is another contradiction: increasing rents increases inflation, so rents have to increase.

Finally, consider this graph.

The data are from the U.S., but the curve is the same everywhere speculators have repurposed housing from structures in which human beings dwell to financial assets whose function is to increase in price.

Note the dates on that curve.

From 1940 to 1970, a period of 30 years, median monthly rent increased $81, or $2.70 per year. From 1970 to 2000, median monthly rent increased $494, or $16.50 per year, 6 times as fast.

Beginning in the 1970s with the development of mortgage-backed securities and the secondary mortgage market, U.S. banks stopped holding mortgages they issue until maturity.

By the late 1970s and early 1980s this practice had transformed mortgage lending in the U.S. from a business where banks and credit unions originate and keep mortgages to maturity to one where they sell the mortgages they originate to mortgage aggregators, most notably Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation).

Mortgage aggregators pool mortgages into mortgage-backed securities (MBSs) which they sell to investors, which include pension funds, insurance companies, hedge funds, investment banks, the Federal Reserve, and foreign governments.

Selling the mortgages they issue freed the capital reserves that banks are required to hold to mitigate the risk of nonrepayment of their loans, thus allowing them to increase without limit the number of mortgages they are able to write.

To churn out a large number of mortgages, a way needed to be found to stimulate demand for mortgages on the retail side of the house.

Put another way, to satisfy prodigious demand for mortgages by the secondary mortgage market, it was necessary to incentivize turnover of (and home equity loans on) existing housing, both of which banks in general finance. (New housing construction is financed mostly by a variety of debt, equity, and other private investors.)

In the U.S., incentivizing turnover of existing housing was accomplished with the introduction in the 1970s of variable rate mortgages, whose interest rates are set, not in relation to the 5- or 10-year Treasury yield as those of fixed rate mortgages are, but relative to the Secured Overnight Financing Rate (SOFR), which varies with the effective federal funds rate (EFFR).

This, combined with a dramatic decrease in the Fed's overnight target rate, which EFFR closely follows, resulted in considerably reduced mortgage rates, stimulating investor demand for and increasing the prices of and rents on residential properties.