How RENT CONTROL hurts tenants

25 Feb    Uncategorized
Feb 25

How RENT CONTROL hurts tenants

Lets talk economics, one of my favourite subjects for explaining how the world actually works.  Toronto and the greater golden horseshoe is becoming expensive in terms of property prices and rent prices. Some people forecast that it has a lot more room to catch up to more expensive cities like New York, London, or Hong Kong.  To help its citizens with affordable housing, one popular government intervention is rent control, a form of price control.  Over 90% of economists say that rent control is a terrible idea.  It’s no surprise that the most expensive cities in the world have rent control. In a free-market economy, supply and demand dictate price equilibrium.  That equilibrium is met when both buyers and sellers agree on a price. If a seller sets their price way above market value, then the buyers will flock to the other sellers who charge a more reasonable price. If a seller sets his price too low, he will have too many buyers and not enough inventory or not enough profit margin to sustain his business. The free market is a beautiful concept and figures things out by itself until governments step in.  Whenever and wherever governments have intervened, there have always been unintended consequences that end up backfiring and hurting the very people they are trying to “help”.

Rent control is when the government regulates how much rent can be increased by the landlord every year.  Of course if the tenant leaves and a new tenancy starts, the landlord can set a new rental amount based on what the market rent is.  In Ontario, the government limits the rent increase to the rate of inflation so that could vary from less than 1% to over 2.2%.  You can see why this might sound good on paper.  But does theory translate to real life?  Why have rents in Barrie increased by about 7% per year when the government sets a limit of about 2%? 

There are a few reasons that help explain the rent control paradox.

  1. Economics is all about incentives.  A business is worth running if after taking on a huge amount of risk and capital, there is a payday incentive at the end.  If you limit the reward or if the reward no longer exists, there is no incentive to do that business anymore.  Purpose-built apartment rentals were built all through the 20th century until the 1970’s when strict rent control laws were implemented.  Why?  Because the incentives were removed.  It no longer made financial sense to build apartment buildings.  As a result, there was less and less housing stock on the market and has since contributed to the severe housing crisis we have and the sky-high rent prices. 
  2. Also, a lot of these apartment buildings are many decades old (over 50 years old).  Often times, news articles try to portray the evil slumlord who leave their units dilapidated and in a poor state of repair.  The real reason behind this is the landlord cannot afford to upkeep their property and do the necessary repairs and maintenance.  If it was a viable business, they would renovate their units into a quality living space and tenants benefit by having a nice space to call home.  Instead, with many landlords going bankrupt, there are less and less quality units on the market to choose from.

    These purpose-built apartment buildings are no longer being built and/or are falling apart; thus, we have the “missing middle”.  An eye-opening statistic is the GTA is short about 10,000 houses per year based on the relationship between housing starts and population growth.  This gap grows and compounds every year as we are not “catching up” to last year’s shortages.
  3. Economics is the distribution of scare resource.  In the GTA where housing and living space is limited, rent control acts to further increase that scarcity.  Lets give a real-life example of how harmful rent control is to a city.  A family of 4 has lived in a 3-bedroom apartment for years.  Their 2 kids have become adults and are leaving the house.  Now the parents are occupying a 3-bedroom unit when it would make more sense for them to downsize to a 1-bedroom.  But after years of rent control, a 1-bedroom may cost much more than what they are currently renting it for and this disincentivizes the parents to move.  Now, multiply this across the board and you can see why this is not an efficient allocation of space.  That is one less 3-bedroom unit available on the market for a growing family that this mature family no longer requires.
  4. Not to mention the far-reaching implications this has beyond housing supply.  Lets say the husband has a unique opportunity to move to another city where that company has the highest and best use of his skills and talents.  He may decide not to move because where he is living ties him down.  It may not be worth moving because rent may cost a lot more where his new employment is.  You can see how rent control can kill mobility.  Now, we have people who don’t want to leave a city because of inhibitory costs when they could’ve had a better opportunity to provide more value to the world or better their family’s livelihoods.  Furthermore, if he had the mobility to move to another city, this frees up a unit in that city, helping with the housing supply shortage.
  5. Ontario has one of the most brutal pro-tenancy/anti-landlord laws in the world.  This can drive landlords insane and throw their hands-up altogether and take their unit off the market.  Investors and small-time landlords such as ourselves account for over 90% of the housing stock and the government’s purpose-built rental units account for the remainder.  The harsher the laws and the more adversities we face, the more profitable it is for us.  Because, fewer and fewer landlords can take the abuse from the government, there are fewer and fewer rental units on the market.  This further exacerbates the housing shortage and crisis.  This supply demand imbalance explains the huge increase in rent prices.  (In a future article, I will explain how government intervention is the result of unaffordable property prices as well). 

    In fact, one of my mentors has slowly transitioned from the long-term rental space to the short-term rental space AirBNB.  He had enough of the anti-landlord laws and the prejudiced Landlord Tenant Board.  He has 20 houses, many of them duplexes and triplexes.  That is almost 50 less units for 50 families.  I am also testing AirBNB out with one of my units and if it goes well, I will be slowly converting the remainder of my units over.  These government policies have unintended consequences and we, as rational actors, follow incentives that make the most sense for us.

In 2019, I was renting out an upper unit for $1,650 plus utilities.  I recently had a turnover for my lower unit and I can charge the same amount, $1,650 plus utilities FOR A BASEMENT UNIT IN BARRIE.  So you can actually see and feel the rents increasing.  Rent control plays a huge role in making housing less and less affordable for the people who vote for the same politicians who enact these policies which are intended to help them.

In short, rent control benefits the select few that have already rented a space but has large, widespread negative implications on the rest of society.  Rent control artificially inflate rent prices to levels higher than if a free market were allowed to dictate the price.  A nice analogy would be outlawing drugs like marijuana.  People still need their weed so when you restrict the supply, only the criminals on the black market get rich.  As the joke goes, the best way to kill a city without bombing it is to implement rent-control.

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