Is rent control a mistake?

Toronto has a big problem with its rental market – it's unaffordable and in short supply. With the real estate market cruising at an unsustainable speed and market rent skyrocketing, the Ontario government stepped in this spring, legislating new policy in April. The goal was to help those struggling with affordability by introducing the Fair Housing Plan – specifically for renters, The Rental Fairness Act, 2017.

The act introduced an element of rent control. Before the act, rent control existed to a degree – landlords could raise the rent as much as they wanted between tenants, but could only raise it annually and had to follow the provincially set maximum, which topped out at a maximum of 2.5 per cent, but has been much lower than that most years. However, the element of rent control in the act set out to close a loophole that excluded new units (essentially, any unit built post November 1991) from that provincially stipulated increase.

This is the element of rent control.

Is this element of rent control a mistake? The answer to that ultimately depends on who you're speaking to. Tenants who were being displaced by landlords raising their rent by 10 per cent, 20 per cent – even 50 per cent and more – just because there was no limit would say the government got it right. Developers and rental companies who desire to maximize their investments probably won't agree.

The struggle is that Toronto needs more rental property. The supply is critically low. The demand is extremely high - and rapidly continuing to increase as stats show that immigration to Toronto is more than double the national average.

While tenants have seen the intended benefits of The Rental Fairness Act, they're now starting to experience the consequences of the act, too. The concern is that the consequences may end up cancelling out any gains – and some are worried that it may, in fact, do additional damage. With vacancy rates hovering close to historic lows - 2.1 per cent for the province, but closer to one per cent in the GTA – Toronto is in desperately short supply of rental units.

The Rental Fairness Act was criticized from the start for including the element of rent control. The rental industry, including major players like Greenwin's Cary Green and Effort Trust's David Horwood, was vocal about the negative effects rent control legislation would have on the growth of the city's supply of purpose-built rental stock.

But is it rent control's fault?

Toronto sat for decades with nominal annual growth in purpose-built rental supply. Withe every year passing, the supply shortfall grew, while the population grew, until vacancy rates became so tight and demand so high that, suddenly, property owners were recognizing the profitability of building rental supply.

Rents were on the rise - and rising quite significantly. In 2014 The Canadian Mortgage and Housing Corporation (CMHC) listed the cost of a bachelor apartment in Toronto at $857. That unit increased over 8.5 per cent in two year to $957 in 2016.

Private investors quickly realized the profitability and capitalized on it, many people dabbling in landlording and accumulating investment properties. The incoming monthy rent was lucrative, and the appreciation of the condo investment was proving to be significant as Toronto's sizzling real estate market continued to see huge increases.

The condo boom caused an investor market to become the supplemental rental pool to fill the void, but even the condo rental stock couldn't improve the vacancy rate and create market stability. Interest in developing purpose-built rental stock was renewed. 2015 saw major condo developers like Urbancorp and Cityzen selling off properties that would become rental apartments instead of condominiums. Over 6500 rental units were being built in 2015, and that was a 25-year record high. 2016 saw nearly 5000 new rentals.

But with rent control, 2017 may see a different trajectory for the purpose-built rental industry. While thousands of units are in the planning stages, there are developers voicing their decision not to go ahead – some switching to condominiums instead. The most recent announcement by RioCan and Allied Property to convert 113 planned rental units to condominium units is being partly attributed to rent control – citing the uncertainty of profitability that rent control has created as a factor contributing to their decision.

This isn't the first casualty of rent control. Over 1000 units have been canceled, citing rent control as a contributing factor. But isn't the high cost of market rent profitable enough to warrant interest in developing rental units?

The Federation of Rental-Housing Providers of Ontario (FRPO) commissioned a study through Urbanation, to better understand the supply issues that the rental industry faces. Urbanation has reported that Toronto needs to see 6,250 new rental apartments built each year over the coming decade in order to improve the vacancy rates and keep supply up to demand to avoid a rental crises. FRPO President Jim Murphy says that “The only solution is for Ontario to build itself out of this situation. This begins with our provincial leaders working with industry to identify and implement policies that create more purpose-built rental units, not less.”

Will rent control really hold back a significant amount of new construction?

That remains to be seen. While landlords can no longer increase the rent on an existing tenant by more than the provincially mandated annual increase, they still have the ability to increase the rent without restriction when tenants change over, ensuring their units can be brought up to top dollar rents through attrition.

For decades, the lack of rent control on new builds had no effect on encouraging new construction, so the proponents of the new Rental Housing Fairness Act believe that this sudden change in the rules may cause a reactionary blip, but that with Toronto's high market rent value, the profitability will not be significantly impaired by the government protecting its citizens and creating stability for the millions of renters in Ontario.