Gutting the market
Pressure is developing in Ontario to change rent controls yet again in response to media stories about rent increases for buildings built after 1991. The lack of rent controls on post-91 buildings is being called a “loophole” when it is anything but: It was a deliberate policy designed to stimulate rental construction after a tumultuous history of mistreatment of rental housing investors. Ontario appears destined to repeat a miserable history that will destroy new rental housing investment.
In 1975, in response to media stories similar to those today, the PC Bill Davis government brought in strict rent controls. An exemption from rent controls was provided for any building built after 1975 in an attempt to maintain investor interest in new construction. The results were devastating. Rental housing supply screeched to a halt, vacancy rates quickly began to drop, rents began to rise and tenants couldn’t find apartments. Pension funds and other institutional investors all pulled out of Ontario rentals; they could not operate under a system that incented owners to cut back on investment and let the buildings deteriorate.
In 1985, the newly elected Liberal David Peterson government tightened rent controls, taking away the post-75 rent control exemption, pulling the rug out from rental investors yet again and crushing the investment climate in Ontario. By the late 1980s, Ontario’s rental market had reached crisis proportions. Vacancy rates dropped below 0.2 per cent in Toronto. Low-income and vulnerable households could not get access to housing, as landlords could pick and chose better risks from long queues for apartments. Rents rose much faster than inflation, driven by a government-manufactured housing shortage.
In 1990, the NDP tightened rent controls yet again, and retroactively removed approved rent increases for capital expenditures already incurred. A five- year exemption from rent controls was provided for new construction. The results were predictable. Investment in new private rental construction vanished. Vacancy rates remained incredibly low, and low- income and vulnerable households remained without access to housing.
With the subsequent election of the Mike Harris PCs, legislation was introduced that for the first time in Ontario’s history favoured rental housing investors. The 1998 rent control legislation allowed rental owners to charge a market rent when a tenant left, before lifetime rent controls kicked in again. In addition, the PC’s changed the NDP’s 1991 five-year exemption into a permanent exemption to revive non-existent private rental construction.
Positive results came relatively quickly. Investment in new rental construction increased, institutional investors returned, as did badly needed investment in Ontario’s aging rental stock. Best of all for Ontario’s tenants, vacancy rates rose as the market began to function normally, especially vacancy rates at the low end of the rental market. Access to housing for poor and vulnerable households improved along with affordability indicators and customer service as landlords competed for tenants.
One noticeable change that began at this time was a massive upsurge in new rental investment through condominiums, which provided a new vehicle that allowed smaller investors to get into rental housing.
The McGuinty Liberals brought in new rent control legislation in 2006. By this time, there was further evidence that the 1990s reforms had been successful. Investment capital continued to pour into existing buildings and new rental construction levels continued to improve. With huge supply now coming from condo rentals, vacancy rates were rising, a first for Ontario. As a result, the key elements that had been successful in promoting investor confidence were left in place: vacancy decontrol and the post-91 exemption.
One particularly amazing outcome for tenants during this period was how rents began declining. Beginning in 2002, average inflation-adjusted rents in Toronto began dropping. CMHC data shows real average rents in Toronto are still $20 below where there were in 2002. So even though Toronto’s real estate market has been on fire, the rental market in Ontario has been a source of stability for renters.
While rents have been flat in traditional rental buildings, rents for higher-end Toronto condominiums have risen significantly recently in response to a huge spike in demand as home ownership becomes less and less affordable in Toronto. In response to this spike in demand, the housing industry is responding as expected. Over the past four years, the Toronto market has added over 13,000 new condo rental units a year.
About 44,000 condominium apartments are under construction, more than half of which will be added to the rental market. In addition, the market price signals have brought forward about 28,000 units of purpose-built rental in the planning process in the GTA. Surprisingly, the government seems unaware of this good-news rental-construction story.
It would be unfortunate if Ontario takes hasty action that negatively impacts all the new rental investment coming forward in response to increasing rental demand. The post-91 exemption is working as it should. Strong price signals are being sent to attract new investment. Before the government revises rent control, it needs to sit down with investors to ensure any changes do not set Ontario’s tenants up for another crisis.
ABOUT 44,000 CONDOMINIUM APARTMENTS ARE UNDER CONSTRUCTION, HALF FOR THE RENTAL MARKET.