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.

5 Responses to “On Rent Control”

  1. Matthew Says:

    I wonder if the lack of rent control also contributes to increases in purchase prices – the owner can justify a higher purchase price by charging a higher rent.

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  3. Potato Says:

    Maybe they can tell themselves that negative cashflow (if they run the numbers at all) is just temporary and the rents will go up, and justify paying higher prices… but I doubt it. The prices are so bad in so much of Toronto that I doubt many are justifying a higher purchase price on any grounds related to rent. Rather, it’s likely speculation that prices are going to the moon.

  4. Richard Says:

    I’ve been wondering why we don’t see more long-term rental contracts. It’s certainly not the most popular option in Canada. I have almost always rented and it doesn’t necessarily mean I want to stay in one place.

    But the two biggest complaints I hear about renting are that “you can’t paint the walls” (my least favorite activity in the world?) and “the landlord can kick you out any time” (not true if you have a lease, and not my experience since I don’t rent from anyone who owns less than 10 units).

    The thing is, landlords don’t exactly like annual turnover either. The costs of vacancy, fixing up the place, and possibly paying fees or commissions to get a new tenant can easily outweigh any increase in rent unless it’s a runaway market.

    So it seems like both sides could be served well if there were 5 or 10 year leases available. The longest I’ve seen offered in public is 18 months but I’m not sure what is negotiated privately since I do prefer the option to leave after a year (and again I typically rent from landlords large enough that they will offer me a renewal at the market rate regardless of what happens — in fact in the last 6 months I’ve gotten my rent dropped twice because of this).

  5. Potato Says:

    I’ve done 18-mo and 2-years before (and the landlords are also eager for that, forgoing even the inflation-level increases to get the longer term), and have toyed with the thought of asking our landlords for a 5-year here, but haven’t actually asked (though the landlord was like “we could even do longer than 2 years…” last time, so I’m pretty sure it would be possible!)

    I think it’s partly because so many rentals are seen as apartments for “a certain phase of your life” where people don’t want to be tied down, and a 1-year lease with month-to-month is fine (or even preferable to locking in for more than a year). But as having kids and raising families in rentals becomes more common (at least until prices correct), I think we may start seeing it more.