The Potential Implications of Rent Control in Canada

Working in the Canadian multifamily industry can be challenging. Outside of tracking demand across the country, and dealing with tenants and the media, we also have to navigate the varied rules and regulations governing the rental industry. Without a single national framework in place, provinces were left to create their own tenancy laws which resulted in a patchwork of regulations. 

The closest we've gotten to a single set of tenancy laws is Ontario's Residential Tenancies Act (RTA) which outlines the legal protections offered to tenants. There, in its name and purpose, is a clear bias regarding which group gets protection and which groups need to have their rights and responsibilities balanced. All in all, there are 9 provinces and territories that have passed the Residential Tenancies Act, which all manage the relationships between property owners/managers and tenants, as well as how to meditate and resolve disputes between these groups.

Besides the implementation of RTA's, every province has implemented some level of rent control, which seeks to protect and ultimately benefit tenants over rental housing providers. All provinces and territories have implemented "frequency limits.” which restrict rent increases to 12-month intervals. However, the use of rental increase limits (maximum rent increases) and vacancy control (rent increases applied to the unit)  vary by province. These two rent control measures are much more extreme and can have serious effects on: 

• The price of rental rates
• How properties are managed
• The trajectory of the rental industry within a province, and, 
• The economic outlook of a tenant well into the future.

When we look at the state of housing regulations, and the implementation of rent controls, the worst places to manage rentals in Canada are: Manitoba, PEI, Ontario, and lastly, with an honourable mention British Columbia.

Whether due to existing market controls, or a trend of tightening rent controls, these provinces have implemented various strategies to either control the growth of rental rates or ensure the availability of product. While these methods may have been enacted out of the goodwill of local politicians, they may, unfortunately, have much more dire consequences well into the future.

Here we'll uncover the main concerns with being a rental housing provider in these provinces:

Manitoba

Manitoba much like PEI includes vacancy controls within its suite of rent controls. This means that rental rates and rent increases are tied directly to units and not to a tenancy. In this case, when a unit is turned over the rents are not reset, but instead, carry over to the next tenant ultimately ensuring that a unit never reaches the true market rent. The most extreme form of rent control, and effectively allows the province to dictate how much profit a housing provider can generate on their property, regardless of any outlying factors. Unless an owner goes through the process of substantially renovating their property and jumping through various legal requirements, their properties may only charge what is prescribed by the city.

Manitoba also prescribed a maximum allowable rental increase of 0% in 2022. Typically, based on the annual increase to the consumer price index, they have instead proactively decided that there will be no price increases until the end of 2023. Truly done in a vacuum, this decision forgoes record high inflation or that the cost of goods has soared in recent years, and instead aims to please tenants. The province has also said that rent increases should not be used to cover the cost increases incurred by property owners, and are instead meant to represent the inflationary cost of housing. 

PEI

In PEI the province has indicated that the rents landlords are allowed to charge are not just based on market conditions, but are also based on the financial status of the property and individual landlord. This means that the province has the right to determine what they believe to be an appropriate rent based on likely expenses and what they believe to be a reasonable profit a landlord should make off of their property. Effectively turning the multi-family rental industry into a command economy albeit without the ability to control the production or supply of housing.

Ontario

Ontario seems to straddle the line between being pro-business and micro-managing every aspect of the rental process. Although they've done away with rent controls on new units unoccupied before November 15th, 2018, they have also instituted new housing reform by approving inclusionary zoning policies. Although this policy tool does directly address the problems of availability instead of applying a bandaid, it also works against developers by creating additional steps for developers to work through. This only further disincentivizes developers from building new product which in the long run may hurt supply, and even drive up the cost of market rate units.

British Columbia

British Columbia seems to be moving away from a single set of provincial housing regulations by allowing cities to impose municipal-level rent control measures. Done in a bid to promote affordability and ensure the existing supply of old stock properties are not allowed to reach market rents. Local legislators are more concerned with ensuring affordability to attract service workers into their communities; while ignoring existing market controls and prevailing market conditions.

Both British Columbia and Ontario straddle the line between being in favour of either tenants or landlords. On the one hand, they want to reduce red tape by offering greater density to developments in urban areas in urban areas, or removing rent controls. While on the other they try to legislate away problems without addressing the direct impacts policies are likely to have on the development community responsible for delivering this housing. 

Creating confusion amongst developers regarding the direction a province intends to go is not ideal for the provinces containing Canada's least affordable housing markets.

While rent control is often touted by housing critics as an integral part of improving household affordability, it also carries with it the potential for long-term harm not only to the supply of housing but to future renters.

The implications of rent control

You want to treat the problem and not the symptoms; rent control simply treats the symptoms without addressing the core problem.

Yes, the initial response from rent control is that rents become cheaper, and affordability is improved for tenants. Tenants are no longer displaced when neighbourhoods gentrify and are able to live with better security knowing that they can afford the homes they live in. However, with every action comes an equal and opposite reaction. 

In this case, the long-term reaction is that when property owners are the ones required to subsidize the cost of living for tenants; they either cut costs elsewhere or simply shift their housing stock to what might be considered a less problematic housing type.

A study completed in 2019 by a team of Economists at Stanford University titled The Effects of Rent Control Expansion on Tenants, Landlords, and Inequality looked at the effects on housing supply, rental rates, and future outlook for tenants within the San Francisco Bay area. 

The study found that rent control policies had multiple negative long-term implications on the supply of quality housing. 

Rental housing providers do not passively accept the burdens imposed by laws. To counteract these mandatory subsidies they in many cases converted properties to condos, converted them for private use, or in some cases allowed properties to fall into disrepair as a means of recouping the subsidy they were required to pay. Associated with this was a 15% reduction in the rental supply of small multifamily properties which in the long term led to rent increases and reduced affordability.

This shift in housing types attracted higher-income households which only further accelerated gentrification and worsened income inequality in the city. Vacant units in rent-controlled buildings attracted new residents who on average had a household income that was 18% higher than those in non-rent-controlled buildings. This further suggests that rent control promotes gentrification and worsens affordability in the long run.

Rent control ultimately led to a housing stock which caters to higher-income individuals - Diamond, et al.

Another interesting result of rent control was the reduced mobility associated with those living in rent-controlled units. The study found that there was a 20% increase in the likelihood of households remaining in their units or within the same city in the long term. While this may offer some benefits by ensuring that households aren't displaced it also has negative implications. The households remaining within their units or communities are forgoing potential opportunities and limiting their future options by remaining in place. 

In the long run, any initial benefit is undone as the supply and quality of housing decline dramatically, effectively trading today's benefits for higher prices tomorrow. 

Rent controls end up being a better political tool to win an election by giving benefits to tenants; than an economic mechanism to improve housing within a market. Ultimately it doesn't address the root cause of affordability or supply and instead applies a temporary solution to a long-standing problem. Those who got in sooner benefit the most, while those entering the housing market later have to contend with a smaller supply of lower quality housing, at an accelerating price.