Controlling rent by ending rent control
Could the move result in more purposebuilt rentals easing market pressure?
During the last municipal election, the most discussed issue was affordable housing — what was the magic formula to deal with the city’s affordability crisis?
Cutting rent control was not one of the remedies that came up very often in public debate.
Nevertheless, on Nov. 15, Ontario Premier Doug Ford announced that he will remove rent controls in Ontario put in place in 2016 by former premier Kathleen Wynne.
Some experts suggest that removing rent control will help increase the limited stock of rental units in the GTA and, hopefully, address affordability that way, whereas others warn that it will leave tenants less protected.
The new rule (or lack thereof ) that was announced was for new buildings constructed after Nov. 16, 2018. Rental units in these buildings will not be subject to rent control, but units occupied before that date will keep the past mechanisms.
Rent control prevents rents from being raised over a certain percentage, which is set by the government every year.
This year it was set at 1.8 per cent. Without rent control, landlords can raise the rent however much they like.
“Ninety-nine-point-nine per cent of the market is still going to be rent controlled. It will be a small portion that isn’t,” said Shaun Hildebrand, president of Urbanation, a real estate market research website.
“On a good year, you’ll only see about 10,000 new units coming into the market [in Toronto], both condos and apartments,” he added.
“You have 500,000 rental units that will still be rent controlled.”
So what is the purpose of removing rent control?
Brad Lamb, president of Brad J. Lamb Realty Inc., said that, by removing rent control, you are able to increase the supply of purpose-built rental buildings, which Toronto is in very short supply of, but there is a lot of demand.
“Rent controls essentially froze out any willingness f rom any investor to put money into the Ontario market through purposebuilt buildings,” he said, due to the
inability for builders to make the profit needed to warrant the investment.
Without rent control, builders will typically raise rents by two to three per cent, in line with inflation, Lamb said.
“But sometimes [landlords] will raise the rent more to five per cent because of economic boosts,” he said. “That makes a difference. At the end of the day, it is a business of very tiny margins, and the extra ability to raise rent with tiny margins is very important.”
Benjamin Tal, the deputy chief economist at CIBC World Markets, said that builders typically have a plan of how much they would like to increase the rent over a long period of time so that they know the kind of returns they will get on their investment, which should take away anxiety from tenants worried about a very large increase in their rent.
Withdrawing rent control makes building rental units more profitable and attractive to developers.
The hope is that it will lead to an increase in supply, so landlords can’t go haywire demanding exorbitant amounts of money, but will set their price at the market standard because otherwise the tenant can just find a different place.
“The more supply you have, the less power developers will have to raise rent. That’s the point,” Tal said.
Tim Hudak, CEO of the Ontario Real Estate Association, said that ultimately no rent control will keep prices lower.
“What happens today is, if landlords know they’re going to be locked in, they jack up the price as high as they can because they’re going to be locked in,” he said.
“The price will be more affordable without rent control because they’ll be looking at the long-term return instead of trying to scoop it all up at once.”
Not everyone is in favour of removing rent control, though.
Geordie Dent, the executive director of the Federation of Metro Tenants’ Associations, said that rent control prevents what he calls “economic evictions.”
“This is when the landlord is cashing in on a hot market, or is pushing back on a tenant trying to enforce their rights by asking to get a fridge fixed, by then saying they [the landlord] will have to raise the rent $1,000,” he said.
“This happens when you don’t have rent control. It renders residency laws useless. My agency takes 10,000 calls on this. We’ve seen it repeatedly.”
Dent told a story of an entire building being evicted about a year and a half ago because the landlord raised the rent by $1,000 in every unit in the building, causing everyone to move out since no one could afford it.
However, Hildebrand said that incidents like these were “very isolated incidents in the condo segment” of the market.
“[These incidents] led to a lot of sensationalized stories. It was extrapolated as something that was occurring across the market and was widespread, and it wasn’t the case at all,” he said, noting that the incidents were used by the Wynne government to support rent control.
Tal also proposed that these incidents were not the common trend.
“These [rental building] companies are not in the business of taking advantage of tenants,” he said.
“They have reputations, they don’t want newspaper headlines that say they are taking advantage of poor tenants.”
Since development of apartment buildings has slowed down because it did not seem worth the investment, the condo market has supplemented apartments.
“That’s why I want to move the rental market f rom the condo market. I want purpose-built,” Tal said.
“We need to protect tenants by allowing more supply.”
Don’t expect to see the effects of no rent control take hold quickly, though.
“In Toronto, it takes six years to plan and develop an apartment building,” Lamb said.
“It is probably going to take some time, at least 10 years, for the markets to get in the position where we have a balance of supply and demand.”
“The more supply you have, the less power developers will have to raise rent.”
CIBC economist Benjamin Tal