Despite the presence of various rent control regulations and policies across Canada, doubts persist about their effectiveness in curbing inflation in the housing market.
Rent control measures vary across Canadian provinces. Quebec publishes annual rent guidelines, while British Columbia had a 2% cap in 2023, rising to 3.5% in 2024. In Ontario, rent hikes are capped at 2.5%, but this cap applies only to buildings occupied before 2018. Alberta lacks rent control altogether. Overall, around 85% of Canadian tenants are covered by some degree of rent control.
This raises the question: If this much of the market is covered by rent controls, why is the rent component of inflation so disproportionately high? If we assume that existing tenants see increases in line with the growth for new tenancies, the average for 2023 should be slightly over 3%. Yet, it surged by 8% year-over-year in December.
What’s missing is the rise in rents for units vacated by tenants and filled by new ones. If a unit was under rent control for a prolonged period and becomes available, the new rental rate will substantially increase to match current market rates.
CMHC reported an average rent increase of 18% for new tenants in 2022, compared to just 3% for existing tenants. With a turnover rate of approximately 14%, these figures align with an overall rate of 4.7% in 2022. Considering CPI rent inflation in 2023, it suggests that rent hikes for turnover units may have reached up to 25%, or alternatively, that there was an increase in the turnover rate. While the impact of students being off campus and returning is a factor, data on this market segment to quantify the impact is currently unavailable.
Even though we expect rent inflation to moderate this year and next, there will be ongoing pressure across the country to either tighten up or impose new rent controls, either directly or indirectly, such as Hamilton, Ontario’s recent bylaw on renovictions (when landlords claim renovations as a reason for removing existing tenants, allowing them to then rent the unit to new tenants at a higher rate.)
Richard Arnott, an expert in urban economics, noted that economists widely agree that rent controls discourage new construction, cause abandonment, slow maintenance, reduce mobility, create mismatches between housing units and tenants, exacerbate discrimination in rental housing, create black markets, encourage the conversion of rental to owner-occupied housing, and “generally short-circuit the market mechanism for housing.”
This perspective is generally accepted when looking at “first-generation” controls, which typically apply to the entire rental market and may result in price freezes. “Second-generation” controls, on the other hand, tend to be more nuanced and may target specific segments of the rental market to allow more price flexibility for new leases.
While the benefits to tenants are evident – regulations ensure that landlords cannot excessively raise rents, ensuring a pool of more affordable housing and protecting tenants from displacement – there are downsides as well. Rent control can diminish the return on investment for property owners and does little to incentivize investors to increase the supply or quality of housing.
A February 2023 report highlighted a significant disparity in rental unit construction over the years. Between 1960 and 1979, nearly 224,000 rental units were constructed in Ontario, compared with fewer than 24,000 units between 2000 and 2023. While changes in income and property tax levels played a role, rent control appears to have been a major deterrent for developers in constructing purpose-built rental buildings. Similarly, metro Vancouver experienced a 40-year period with no new rental buildings, only condo developments.
However, there has been a resurgence in rental building construction in Vancouver due to the introduction of incentives aimed at encouraging more rentals. These incentives include allowing rental buildings to be taller than condos and reducing development charges for rentals. As a result, rental buildings accounted for more than half of the homes approved for construction in 2021.
Although there has been progress in building more rentals in an environment of rent controls, there is always the risk of political motivations frustrating good policy. In British Columbia, for example, prior to 2019, the allowable annual rent increase was inflation plus 2%. However, the BC NDP altered this policy in 2019 to inflation plus zero, allowing landlords to apply for rent increases based on capital spending. When the COVID-19 pandemic hit, the province froze rents for 2021. Subsequent years saw minimal increases, with a 1.5% allowance in 2022 and a 2% increase in 2023, both well below inflation rates.
This kind of explicit political decision-making is a no-win policy. Holding rent increases below inflation deters construction and maintenance, and makes it politically challenging to allow rents to rise in the future to catch up with inflation.
While there is scope for well-designed rent controls, the best rent control is housing abundance. When housing is in abundance, landlords want tenants to stay.
Independent Opinion
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