RENT CONTROL
Swiss have solved the problem
Nova Scotia is facing a rental housing crisis. The vacancy rate in Halifax is 1.7 per cent, lower than either Toronto or Vancouver.
The temporary cap on rent increases will expire on Feb. 1, 2022, or as soon as the state of emergency is lifted, whichever comes first. Once that happens, every tenant in Nova Scotia could legally have their rent doubled, or tripled, or increased by any other amount their landlord chooses — and if they can’t pay, they can be evicted.
Premier Tim Houston and his government don’t support rent control. They don’t think it will solve the housing crisis. They want to increase the supply of rental housing instead.
They’re right that low supply is the ultimate cause of the crisis. Low supply means a low vacancy rate, which means more tenants competing to rent fewer homes.
Landlords can take advantage of this scarcity to jack up rents, charging as much as the wealthiest — or the most desperate — tenant can pay.
There’s a name for this practice. It’s called profiteering: “the act of making an unreasonable profit on the sale of essential goods especially during times of emergency.”
Housing is an essential good. Without housing, life is reduced to a daily struggle to find shelter. And so people will pay whatever they can to get housing — they will pay everything they have — because the alternative is so dire.
It would be unconscionable for the government to stand by and allow Nova Scotians to be extorted by unscrupulous profiteers. Something must be done. The question is what?
Premier Houston wants to increase supply. But that’s a long-term solution: supply takes years to build. What Nova Scotia needs right now is a short-term solution to protect tenants from profiteering until new supply is built.
Maintaining the current rent cap is a possible short-term solution. It protects tenants from profiteering as long as they stay in the same unit. But it does nothing to protect tenants who move: they are subject to profiteering as they search for a new home. That is why British Columbia and Ontario, which have rent caps, have seen average rents increase by 96 per cent and 62 per cent respectively over the past 20 years.
As Premier Houston has noted, maintaining the rent cap could also hamper efforts to increase supply. The government is relying on privatesector investment to build new supply — but a rent cap introduces a level of uncertainty which makes rental housing a less attractive investment. A landlord whose annual costs increase by four per cent (due to increases in inflation, the mortgage rate, and maintenance) cannot maintain the same level of profit under a system that caps rent increases at two per cent.
And so the government faces a Catch-22: if it allows the rent cap to expire, tenants will be forced out of their homes by rent increases they can’t afford — but new supply might be built faster. If it maintains the rent cap, tenants will be safe from profiteering as long as they remain in the same unit — but the construction of new rentals may slow.
What shall it be? Should the government sacrifice some tenants immediately, for the possible greater good of all tenants in the long term? Or should they protect all tenants now, but jeopardize the longterm affordability of rental housing?
If only there were a third way.
There is. It was developed in Switzerland, a country best known for its secret banks and chocolate, but also known for having the highest income per capita in the world, prepandemic.
Sixty per cent of the Swiss are tenants, and for over 30 years, their rent-control system has kept rents affordable while sustaining a booming private-sector rental construction industry.
The rental vacancy rate in many parts of Switzerland is very low — a mere 0.7 per cent in Geneva — yet average rents have increased by only 28 per cent in the past 20 years (in Nova Scotia, average rents are up 75 per cent). Market rents in Switzerland actually fell by 5.8 per cent between 2015 and 2019. Yet the rental construction industry is so robust that Credit Suisse remarked in 2020 that “supply has exceeded demand in the Swiss rental apartment market for many years” and “rental buildings are still springing up in excessive numbers.”
How does Switzerland’s system work? Instead of capping annual rent increases, Switzerland caps the landlord’s net return on his investment in the rental property. The cap is set at the current mortgage rate, plus a premium. The premium is currently two per cent, meaning that when mortgage rates are two per cent, a landlord can earn a net return of four per cent.
For landlords, Switzerland’s system protects their ability to charge a rent that covers all of their costs and generates a predictable, commerciallyrelevant profit. This makes rental housing an extremely attractive investment, and explains the high levels of private-sector rental housing construction in Switzerland.
But the Swiss system is good for tenants too, because it protects them from profiteering:
if a landlord charges a rent that generates an excessive net return, the tenant can challenge it and have it reduced. And if the landlord’s costs ever go down — for example, if the rental property is mortgaged and mortgage rates fall — the tenant can apply for a rent reduction.
Adopting the Swiss system would give Nova Scotian tenants the short-term protection against profiteering they desperately need, while allowing the government to achieve its long-term goal of increasing supply.
Switzerland applies its rentcontrol system to commercial tenancies as well. Imagine how Nova Scotia small businesses would prosper if their rent suddenly dropped by hundreds of dollars each month — and if tenants suddenly had money to spend at those businesses after paying rent?
The best part? Adopting the Swiss system wouldn’t cost the Nova Scotian government a dime.
It’s been tried and tested by the most successful capitalist country on Earth. What is the government waiting for?
Adopting the Swiss system would give Nova Scotian tenants the short-term protection against profiteering they desperately need, while allowing the government to achieve its longterm goal of increasing supply.