Minimum Wage Kills Affordable Housing - Creates Real Estate Opportunity

The title of today's blog doesn't sound possible if you are of the mind set that we need to help everybody because they aren't smart enough to help themselves. It couldn't possibly be true because we are told time and time again by the bleeding hearts that the minimum wage is the only thing separating the working poor from living in the streets. But alas, some simple number crunching and comparisons to actual published government documents reveal that indeed, the minimum wage and other government regulations aimed at making life better for the working poor actually go a long way to making many of them worse off.

Let's take a look at a minimum wage example where the minimum wage is $10/hour. It is higher in Ontario ($10.25) and lower in other places but the roundness makes the example slightly easier to demonstrate. In this example we have a slumlord who operates dozens of low rental units that he purchased at relatively high prices despite the shabby condition of many of them. In each of these units, he charges $160 per week or $694/month ($160 x 52 weeks / 12 months). He arrives at this figure rather simply - he gets it from his banker. The banker tells him that all people can afford to spend 40% of their income on housing. The banker tells him that the minimum wage is $10/hour and the normal person works 40 hours a week making $400/week. With 40% for housing, his tenants should be making payments of $160/week.

This may sound simplistic, but how does it compare to reality? As I said, the Ontario minimum wage is slightly higher and according to Stats Canada, the average monthly rent for a 1 bedroom apartment in Ontario in 2010 was $736.  That extra 25 cents an hour in Ontario's minimum wage raises the expected rate in my calculation to $711/month.  So, the actual rate charged is just $25 above my simple calculation.

What does this tell us? 

It tells us that minimum wages are propping up rent prices, which in turn are propping up the property values of affordable housing. As an investor, if you know this happens, then the time to purchase rental properties geared towards affordable housing is right after the government announces that the minimum wages are going up. Here's an example demonstrating the proof of this:

John owns a property and is collecting the expected rental rate of $711/month in Ontario based on his bankers recommended rate charge, which is based on the current minimum wage of $10.25/hour.

The government announces that it is going to raise the minimum wage to $11/hour beginning in 3 months.
Bill, an astute investor,recognizing the potential in real estate gains, does the simple calculation and determines that the property values should go up by the same percentage as the rent increase. The rate of increase in the wage is 7.3%. Bill offers John 5% below the market rate for the property knowing that he will make 7.3% when the wage actually rises. John accepts the offer, taking his money out of the market and Bill will now make 12.3% (5%+7.3%) in the first year. He knows that even if the economy turns bad, as long as he can rent the apartment, the value of the property will not fall.

Is the Minimum Wage Recipient Better Off?
The expected rental rate per unit will jump to $762/month, gobbling up 40% of the increase in the minimum wage and defeating the government's 'will' to make the person better off. Many other government intrusions, particularly those involving spending tax dollars, continue to drive up the cost of government debt creating an inflationary effect on the cost of basic goods including food and fuel. These items make up nearly 100% of the non-housing spending of low wage earners, so the remaining increase in the minimum wage is negated by inflation.

I've kept this as simple as possible because I've never seen this issue addressed anywhere. Hopefully it will create some discussion.