Locked out in Lotusland

Excerpted from the “Goodman Report” December newsletter, published Dece. 7 by Vancouver-based HQ Commercial Real Estate.

We’ve come up with a number of mythbusters to help the industry, the media, the community and Vancouver City Council over the learning curve on the hard truths of supplying rental housing.

Let’s be clear: we completely empathize with Vancouver tenants in their pursuit of affordable rentals. Since 1983, we have advocated for a healthy rental market that benefits renters and landlords alike. We understand the significant impact that displacement can have on mental and physical health, especially for seniors, people with disabilities, low-income households and families with young children. The problem is how to enable a flow of building supply that serves the diversity of tenants who need places to live. Whatever the issue, it’s important to consider the different sides involved in solving it.

❚ MYTH 1: Net operating income is all profit in your pocket

❚ Not true! It’s erroneous to think of a stabilized net operating income as what landlords pocket each year. Net operating income doesn’t take into account mortgage payments, which are subtracted each month. Also, many expenses are “normalized” and don’t reflect actual expenses. Additionally, net operating income doesn’t account for capital expenditures. As an example: in a typical lowrise, an elevator replacement can cost $200,000 and a new roof $100,000, taking away many years of profit from a typical building. Reality: it’s incorrect to use this figure as profit. Just ask around.

❚ MYTH 2: Rent control is good

❚ Not true! The City of Vancouver has suggested that research is mixed on the impact of rent control on construction and that economists have differing opinions. Most economists agree that results are not mixed: rent control is bad for tenants, existing rental housing stock and the case for building new rental. Some industry stakeholders commented, “When demand for rental exceeds supply … those with the fewest resources will have the most trouble securing good housing. Those with money find housing. Rent controls result in an even greater demand–supply imbalance, which makes (rental) housing more expensive.” Another landlord stated, “If you advocate for the poor and working class and those with lower incomes, then you should be the harshest critic of rent control, which has been shown to be a devastating scourge for the very groups whose lives and housing you want to improve. Rent control is their worst enemy, not a panacea.”

Rent control may have the effect of moving investors into markets where price controls are absent, such as short-term rentals including Airbnb. While the City has tried to clamp down on Airbnb to help alleviate the rental crisis, we believe that the attraction toward short-term rental is partly a function of draconian rent controls and regulations. It’s possible that this has been a factor explaining why 1,081 rental condos have left the rental market, as of the latest CMHC report.

Joshua Gottlieb, associate professor at the Vancouver School of Economics, UBC, has tweeted that “rent control does absolutely nothing for people who don’t already have a secure rental, or who suffer long commutes, or need to move for other reasons.” He’s also tweeted, “The only effective way to protect renters is create competition among landlords. That means allowing rental housing construction.” He predicts that the Province’s new limitation of allowable rent increases to the cost of inflation “will do the opposite: discourage construction, which reduces competition. Renters will suffer — via low quality instead of prices.”