An Interesting Question For Your Next Board Meeting

What is the cause of the cause?

Suppose we want to deal with something like the high price of renting an apartment?

Most of us are able to deal with cause and effect, but most of the analysis stops too soon. The result is a policy that addresses symptoms rather than root issues.

Analysis #1 Cause and effect

Fact: Rents are high because vacancy rates are near zero and people bid up the price or landlords raise them.

Analysis of cause: Landlords are the problem. They are taking advantage of the situation.

Action: Probable policy change includes rent controls and government built low rental housing.

From a cause and effect standpoint, this is a salable policy change.

Analysis #2 Find the cause of the cause

Fact: Vacancy rate is near zero

Analysis: Landlords are profit seeking and will price their product at the highest level commensurate with avoiding vacancies. An apartment rented for a little less is better than an empty one at a higher price. The market, by supply and demand, decides the price, not the landlord. Why a shortage? 

Cause of the cause: Municipality has rules and conditions on developing new rental housing supply that make it unattractive for a landlord to build.

Possible policy response: Make it less costly and faster to develop. Eliminate trivial rules.

Analysis #3 Find the cause of the cause of the cause.

Facts as in 2) but the municipality cannot act because the province has created rules that prohibit their action. Maybe insufficient funding for infrastructure or land use conditions that cannot be met.

You could go deeper

Sometimes cause and effect is not enough to drive reasonable policy. If the cause of the cause is feeding the problem instead of the solution, the problem will increase.

Usually the best incentive is the removal of disincentives. 

Rent controls nearly always feed scarcity.

Why would anyone invest their capital when they cannot control the investment once done?

Rent controls, and tenant-centric, landlord-tenant laws aggravate the problem while trying to help. Before imposing any such law, it is crucial to know two things:

  1. Does it make a supply side solution to the problem more or less likely?
  2. How do you turn the laws off without creating new problems like quickly escalating rents or arbitrary treatment of tenants

There is no easy answer

The system created the problem. No systemically created problem has an easy answer. Perhaps we should think about the deeper case as a guideline for deciding. Maybe short term pain is worth the price. In India there is a thought that describes the reason to avoid counter-productive legislation

“It is easier to ride a tiger than to get off”

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

This entry was posted in Decision Making, Insight to Business, Planning and tagged , , , , , , . Bookmark the permalink.

One Response to An Interesting Question For Your Next Board Meeting

  1. Brian says:

    You are right. Remember Pierre Trudeau’s gas shortages in the 70’s. That story doesn’t show up in today’s history books. I wonder why this generation would want to repeat it….

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