Rent control is not about affordability

Rent control is back in the spotlight. Toronto politicians are outdoing each other on promises to crack down on ‘greedy’ landlords. There is just one problem: rent control is not as simple as it sounds. As economist (and socialist) Assar Lindbeck once said, ‘rent control appears to be the most efficient technique presently known to destroy a city — except for bombing.’ Or is it?

Stories of Toronto tenants who received rent raises of over $1,000 — and some who saw their $1,800 apartments double overnight — have been in the news cycle for several weeks. Although some argue that average condo rents are actually falling across the city, these cases have drawn attention to rules that exempt residences built after 1991 from the rent increase limits that apply to older buildings in Toronto.

Rather than pay increases that would consume most people’s pay cheques, these tenants have had to vacate their apartments. But the search for another place to live is not easy. The current vacancy rate in Toronto is 0.6% and the average rent for a one bedroom apartment is $1,776. No one wants to find themselves without a roof over their heads in this market.

With an election year almost upon them, the NDP opposition party have proposed a law to end the 1991 exemption. Feeling the anger and frustration of voters over this issue, the reigning Liberal government raced to reassure us that they’re already on it.

At Apartmate, we agree that housing insecurity and unaffordable rents are both enormous problems. But we believe that the proposed rent control is the wrong solution. At best it’s a Band-Aid. At worst, it is a calculated distraction from bigger issues which are much harder to solve.

In this article we’ve tried to present a balanced breakdown of the pros and cons of the proposed changes to rent control in Toronto. Read this, share it with a friend, and then write a letter or call your city counselor to tell them what you think they should do!

What is rent control?

The term rent control is used to describe government regulation of the amount landlords can charge for rented housing. There are two types of rent control: rent ceilings, which place limits on the amount of money a landlord can charge for a rental unit; and rent stabilization, which sets limits on how much a landlord can raise the rent during a person’s tenancy.

Arguments in favour of rent control:

The argument in favour of rent control is a moral one. “The argument for rent control should be distinguished from the argument for affordability,” Joshua Mason, an economics professor at Roosevelt University, told Pacific Standard Magazine. “The real goal of rent control is protecting the moral rights of occupancy. Long-term tenants who contributed to this being a desirable place to live have a legitimate interest in staying in their apartments. If we think that income diverse, stable neighborhoods, where people are not forced to move every few years, [are worth preserving] then we collectively have an interest in stabilizing the neighborhood.”

Although renters are often criticized for not investing in their neighbourhoods, Mason told Pacific Standard “that rent regulations give tenants a greater stake in their community and incentivize them to put time, energy, and money into their homes. Without that kind of security in their occupancy, there is little return for contributing to the neighborhood and building relationships in the surrounding blocks.”

Arguments against rent control:

The argument against rent control is an economic one. A 1992 survey of economists found that 93% agreed that rent control reduces the quality and quantity of housing. More recently, economists like the CIBC’s Benjamin Tal have echoed the same warning.

As the Fraser Institute’s Ben Eisen explained in this article, “If a government requires that housing be rented or sold at a price below market level, then the production of that good becomes less attractive relative to other investment opportunities. Investors can put money anywhere they choose, so why would they choose one where they can’t realize market returns on their investment?” This leads to the main problem economists have with rent controls: it prevents developers from investing in new rental units, and incentivizes existing landlords to evict their tenants in order to sell their units and exit the rental business altogether.

The second predicted problem with rent control is that the existing stock of rental housing begins to deteriorate, as landlords lack incentives to upgrade their rental units, or in some cases to even maintain them adequately. This occurs not only because it doesn’t make sense for a landlord to pour money into a property that is not generating a return, but because landlords of rent-controlled properties don’t have to compete to attract tenants as renters have a strong incentive to stay put rather than take their chances in a market with a dwindling number of available units.

The third problem with rent control is that while some renters luck out and hold onto apartments at a great price, market newcomers (like young people with entry-level jobs) or people who need to move (like new parents) will have a much harder time finding an affordable place to live. Landlords will use every lease turn-over as an opportunity to hike the rent to cover past and future losses.

Who is right?

History shows that the reality of rent control is a little more complicated than either of these arguments suggests. A comprehensive review of literature by New York housing lawyer Timothy Collins found that New York’s two largest building booms took place during times of strict rent controls: the 1920s and the post-war period between 1947 and 1965. (Note that he’s not arguing the regulations provoked the building, just that they didn’t restrain it in the same way strict zoning codes did in the mid-1960s).

Similarly, Toronto’s experience shows us that an absence of rent control on new buildings has had no effect on new rental construction. As the graph below shows, since 1991 there as been almost no change in the number of new purpose-built rental apartments, but a huge boom in condominiums.

One thing the theorists are right about is that imposing rent control on some apartments causes rents of uncontrolled apartments to skyrocket because desperate renters have no where else to go. For those in controlled apartments, it leads to bitter landlord-tenant relations as landlords search for ever more inventive ways to evict their tenants in order to raise the rent with a new lease. It also makes it exceptionally hard to be approved for a stabilized apartment, as landlords know you’re likely to stay for a long time they are far more selective about who they rent to. Ironically, you’ll hear people refer to all of this as “free-market madness”, but they’re actually totally predictable, textbook side-effects of what happens when you try to regulate the rent market.

Solutions that would be better than rent control

The more effective housing policy would simply be to build more housing. Increased demand requires increased supply. Of the 300,000 new rental units that have been built over the past 24 years, 73% were condos. Even without the 1991 rent increase exemption, the rents on these units tend to be higher than older apartments because they are in prime downtown locations and come with huge monthly maintenance fees.

To create housing that is affordable, more apartment buildings, basement apartments, townhouses, laneway housing and other non-condo developments are needed.

City planners need to make zoning codes less restrictive and encourage creative development of underutilized land. To achieve this, politicians will have to take on home-owning NIMBYs who make up a huge proportion of their voter base and don’t like to see lower-income folks moving into their neighbourhoods (NIMBY stands for Not In My Back Yard).

Policy makers also need to offer tax incentives or subsidies to encourage development of rental units and apartment buildings. This could be funded by raising the city’s crazy-low property taxes, another decision likely to be unpopular with homeowners.

Rather than impose restrictions on rent, another idea is to regulate condo maintenance fees. But of course powerful development companies will fight this because it will mean they’ll have to cut back on the flashy amenities they use to pre-sell their condos (bowling alley and doggy daycare, anyone?).

Lastly — although we love using Airbnb — it has contributed to the dwindling supply of rental units in the city core. It also contributes to housing insecurity as landlords kick tenants out of their homes in order to turn a bigger profit as Airbnb rentals. A little regulation might be in order.

What do you think?

Is rent control a simple solution to a tricky problem or a cop-out for the government to avoid making bigger decisions? If the rising cost of rent is a cause that’s close to your heart, talk to your city planner and show up to city council meetings — it really does make a difference. Get involved!

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