The vicious and not so virtuous cycle of rent controls
Rent control is out of control. Now it’s making a comeback.
Which may leave us right back where we started.
The debate over rent control is a perennial in Ontario politics, as predictable as the election cycle. In today’s tight housing market, with a close political contest looming, history is about to repeat itself. For better or for worse. Overheated housing markets reduce the turnover from families that would typically move up to starter homes, freezing out future tenants.
That’s when the news cycle, the political cycle, and economic cycles come into play.
Reclaiming the moral high ground, the NDP has proposed a law to level the rental playing field: It wants to close a so-called loophole that exempts any post-1991 apartments from controls, arguing that tenants in newer rental stock are vulnerable to extortion from rapacious landlords.
Defending their political turf, the governing Liberals insist they get it — and claim they’re on it. They are hinting at expanded rent controls that remove the 1991 exemption, and other reforms.
We have seen this movie before. Here’s the storyline:
In the mid-1970s, NDP firebrand Stephen Lewis seized on media accounts of landlords gouging tenants. He goaded the government of then-premier Bill Davis into promising rent controls lest his Tories lose power.
It seemed like a good idea at the time. But history is littered with good political intentions — and contortions — that create economic distortions.
When New Democrats won power in 1990 under Bob Rae, the rent control panacea had petered out. A low vacancy rate dropped even lower as developers abandoned the controlled rental market for the freedom of condominiums.
In government, the NDP responded with two controversial concessions to reality: First, they abandoned their campaign promise to ban any rent increases above the annual guideline (they allowed up to nine per cent initially, including repairs). Second, they tried to encourage new apartments by granting a five-year exemption to rentals coming onto the market after 1991 — a recognition that controls were a disincentive.
It didn’t work. And in any case, it didn’t last long.
When the MikeHarris Tories took power, they made the NDP’s 1991 exemption permanent. And when the Liberals won government, they retained it.
Another controversial exemption: If a tenant moves out, a landlord can decouple the unit from rent control to charge a steeper rent (hopefully renovating in the process), on the grounds that there is no longer a captive tenant, but a newcomer signing the lease with his or her eyes open (renter beware).
These are not “loopholes,” as critics suggest, but defensible public policy decisions to shield new investment (including renovations) from disincentives. The concern, of course, is that it makes some of our housing stock less affordable in the two-tier rental market that results.
At root, rent hikes are a result of reduced supply and increased demand, which is what puts pressure on politicians for rent controls, which then depresses supply even further. It’s a vicious circle, and less virtuous than one assumes.
Extending rent controls to newer (costlier) units would benefit the middle and upper class more than the working class (who tend to be stuck in older units anyway). A more equitable way to shield people from onerous shelter costs would be with a government “voucher” — once the redoubt of right wingers, but now embraced by progressives as a “portable housing subsidy.”
But giving people cash to defray their monthly rent would cost the treasury dearly and prove controversial. It’s much cheaper and politically popular for governments to make landlords swallow foregone rent increases by imposing or extending price controls.
I’m not shedding any tears for landlords (no one roots for the “lord”). But why target rentals while exempting the rest of the real estate market, notably the housing speculation that is driving much of the current crisis?
No government would dare constrain homeowners from cashing in on rising property values. Landlords are an easier target, but by breaking the promise of 1991 we will drive yet more developers into condos and suburban sprawl.
Rent controls can be a cop-out, making it too easy for governments to avoid bigger decisions: Federal tax incentives stimulated investment in apartments, but all that dried up decades ago. Municipalities routinely banned basement apartments until the province intervened. Airbnb will cannibalize more housing stock unless it is properly regulated.
Rent controls were intended as emergency relief, not a forever fiat — a one-time-use flotation device to give governments breathing space. Now, four decades later, we need serious solutions to increase supply, not merely panaceas to decrease it.