Rent Controls: An Efficient Way to Destroy a City

[Only The Lonely..]

Efficient way to destroy a city

By: Avrom Charach | Winnipeg Free Press - 'The View from the West'

12/09/2009 1:00 AM

The time has come to change or abolish rent controls in Manitoba. Manitoba remains the only province or territory which has and enforces strict rent controls. It also remains the jurisdiction that consistently has the least investment in new multi-family buildings.
This has led to record low vacancy rates of 0.1 per cent in Brandon, 0.9 per cent in Winnipeg and a decline to 1.2 per cent from 3.5 per cent in Portage La Prairie.

The province has just announced a one per cent allowable increase in rent for 2010 presumably due to low consumer price index. For almost a decade the Residential Tenancies Branch has received record numbers of applications for rent increase above the guideline because it ignores rising costs faced by landlords. This one per cent guideline will be a further disincentive to investment and construction at a time when Winnipeg and the province need new housing for a growing population.

Ontario abandoned strict rent controls 10 years ago, allowing rents to increase to market levels whenever a unit is vacated and allowing tenants and landlords to mutually set rents higher than guideline. Quebec has similar rules.

All other Canadian jurisdictions have no rent controls. Manitoba's only significant change in 30 years is an improvement but not good enough.

A landlord can now raise rents on single suites when voluntarily vacated if they first pay a $150 application fee, invest no less than $3,500 in specified types of repairs and have two (or more) site inspections of the suite.

This is allowed for 10 per cent or less of suites in any given building per year, or one third of average turnover.

Ontario saw an increase of more than 300 per cent in spending on suite maintenance by simply changing its legislation. Manitoba, meanwhile, added staff, overhead costs and bureaucracy to achieve relatively little.

Before it abandoned strict rent controls in the late 1990s, Ontario had vacancy rates below one per cent. Since then, significantly more rental units have been built and the vacancy rate regularly is in excess of three per cent. A balanced rental market is achieved when vacancies are in the two- to-three per cent range.

Saskatchewan, which removed rent controls at the same time as Ontario, sees more new development than Manitoba and had a balanced market until their recent oil boom.

CMHC statistics show that Winnipeg had a net loss of more than 1,500 rental units in the last ten years. More concerning, Winnipeg's rental market has lost more than 4,800 units since 1992 -- an 8.5 per cent decline in rental units.

Why has this happened?

Disrepair due to low rent guidelines has caused many buildings to be boarded up while other owners convert units to condominiums as a way to leave the rental market.

Where will the 7,850 new immigrants predicted to arrive by 2010 live when rental units keep disappearing? In many provinces, 30 per cent or more of all condominiums are bought as investment property and rented out. This does not happen in Manitoba because of rent controls.

In the five years between 2004 and 2008, Manitoba's allowable guideline rent increase totaled 10 per cent while CMHC reported a 17.9 per cent total increase in rents charged. This happens because a large number of landlords apply for increases above the guideline. The application is cumbersome and the fee is $150 for single family dwellings up to triplexs and $500 for larger properties.

The fee and expertise required for this process discourages most small owners, who watch their properties decline or sell them to condominium developers.

Ontario, facing a much lower CPI than Manitoba, is allowing two per cent as its 2010 guideline for occupied units. In British Columbia, the rent guideline is set by taking the Consumer Price Index, adjusting for the basket of goods faced by landlords, and adding two per cent. With a lower reported CPI than Manitoba, B.C. has set a 3.2 per cent guideline for occupied units in 2010.

That is much closer to the average actual rent increases in Manitoba reported by CMHC.

The Professional Property Managers Association has suggested that if rent controls are not removed that we adopt a transparent CPI based system, instead of one where the calculations and reasons are locked up and not accessible, even with a FIPA request.

It would be purely economic, allows for repairs, and has no appearance of political interference.

Statistics show Winnipeg regularly experiences higher percentage rent increases than much of Canada. We also see regular reports of low investment and declining numbers in rental stock where other jurisdictions see more, higher quality, rental stock and lower rents.

What we have here is proof of what every student of economics learns, price controls do not work.

Nobel Prize winning economist Gunnar Myrdal has written, "Rent control has, in certain western countries constituted maybe the worst example of poor planning by governments lacking courage and vision."

Unless Manitoba's government comes to realize what every other province has realized we will be doomed to more decline in housing quality.

Swedish Economist Assar Lindbeck sums it up best, "In many cases rent control seems to be the most efficient technique presently known to destroy a city, except for bombing."


Avrom Charach, a Winnipeg property manger, is chairman of the Canadian Federation of Apartment Associations.

Republished from the Winnipeg Free Press print edition September 12, 2009 A18

[grumpy old man]

Originally Posted by Only The Lonely..

Nobel Prize winning economist Gunnar Myrdal has written, "Rent control has, in certain western countries constituted maybe the worst example of poor planning by governments lacking courage and vision."

That sums it up so well.

Rent control is much like university tuition freezes. It does not truly help those that most need help. It merely penalizes AND rewards those that don't need help.

Allow investors to earn a fair return and quality goes up (and availability). If we want to help the disadvantaged then allow market forces to drive development and subsidize the needy using means tests.

Same with tuition. Allow universities to charge fees that allow the university to grow, create new curriculum, attract the best and brightest teachers, improve the campus... To avail this to everyone subsidize the most needy through those same means tests.

[DowntownWpg]

Think there still needs to be protections for those in the low-income apartments, but overall I agree that the extreme rent controls is probably the biggest reason why we have something like a 1% apartment vacancy in the city. Makes it very unappealing to build and own/manage apartments.

Would like to think that there wouldn't be outrageous rent increases every year without such rent controls that we have. If more new apartments go up with much more limited rent controls, and we get a 5-10% vacancy lets say, the apartment owners wouldn't want to drive tenants/customers away as there would be an element of competition.

[ILYR]

Removing rent controls all together would not be a good idea. Some level of rent control can be good. In Alberta the rule is you can only raise rent once per year, but any amount (which makes this rule pointless). A couple years back during the peak of the boom in Alberta I had numerous friends that had rental increases of 50-100% in one go, with no upgrades to the buildings. Granted they got 3 months notice, but when your rent doubles its likely you will have to move. That being said having strict rental control makes upgrades unlikely and new development scarce. We have to build a system that works for both the developers and the tenants.

[Andy6]

When rent controls were relaxed in Ontario, it unleashed a frenzy of renovations and upgrades to apartments, at least in my neighbourhood. I can't say that rents seem to have gone up more than usual as a result, either, although we still have rent control as long as you stay in the unit.

[newflyer]

I have been a long time advocate for eliminating rent control ... it really does little to help those in need. At its worse it only provides incentive to take rental units off the market and turn them into condo units.

The market must be aloud to set the price if we are to have an efficient balance between supply and demand. If the government really has interest in supporting low income people it would provide tax incentives and grants to building owners who would build and or accomodate lower income people in well kept buildings. By forcing the whole residential rental market to below market rates as a means to meet these artifical government limitations it only discourages better units from being created or maintained.

Capital investment chooses where it can be best be utilized .. and the sooner government realizes that the best it will be for everyone. Create incentives to alter market conditions and capital will be drawn in that direction.

[grumpy old man]

There was a Manitoba government initiative that funded low cost housing as an integrated function within standard new apartment construction. By that I mean the government would fund a number of suites (X%) in a development that will be leased to low income tenants.

This is a perfect strategy afaic. It avoids ghetto housing and introduces peer pressure. Peer pressure will drive how people take care of property that is not their own.

I understand that initiative has run out of money.

[drew]

Well with any luck there should be around 60 new apartments entering the marketplace sometime next year... preliminary work is starting on plans to renovate the Penthouse block into upscale apartments.

Here is a question for this thread, how can rent control be such a hindrance to apartment construction, when after a new apartment is built, the owner is allowed to set the rental rates? It's only in subsequent years that the rent increases are controlled.

From what I have heard the major reason rentals are unpopular isn't so much the rental controls here, its the longer term return on investment.

People put up condos instead because they get their profit immediately.

[newflyer]

Originally Posted by drew

Well with any luck there should be around 60 new apartments entering the marketplace sometime next year... preliminary work is starting on plans to renovate the Penthouse block into upscale apartments.

Here is a question for this thread, how can rent control be such a hindrance to apartment construction, when after a new apartment is built, the owner is allowed to set the rental rates? It's only in subsequent years that the rent increases are controlled.

From what I have heard the major reason rentals are unpopular isn't so much the rental controls here, its the longer term return on investment.

People put up condos instead because they get their profit immediately.

Long term rate of return is effected by the level of rent control. The first year of rent is not the only year factored into the calculation. You need to factor in the discounted rate of return in future years, thus if the rate of return in future years is limited, it impacts the viability of any capital investment.

[grumpy old man]

Originally Posted by drew

Well with any luck there should be around 60 new apartments entering the marketplace sometime next year... preliminary work is starting on plans to renovate the Penthouse block into upscale apartments.

Here is a question for this thread, how can rent control be such a hindrance to apartment construction, when after a new apartment is built, the owner is allowed to set the rental rates? It's only in subsequent years that the rent increases are controlled.

From what I have heard the major reason rentals are unpopular isn't so much the rental controls here, its the longer term return on investment.

People put up condos instead because they get their profit immediately.

But not again otherwise (unless his rents are above a certain value $1105?). More to the point an owner must ask some bureaucrat if he can raise his rent to cover his costs and earn the return he feels he should earn.

The rentalsman approved a 1% increase this year. One percent!

Perspective: How would you like it if your boss offered you a measly 1% pay raise. And you could not change jobs in order to raise your income.

Why should an investor/owner have the same restrictions.

[newflyer]

Originally Posted by grumpy old man

But not again otherwise (unless his rents are above a certain value $1105?). More to the point an owner must ask some bureaucrat if he can raise his rent to cover his costs and earn the return he feels he should earn.

The rentalsman approved a 1% increase this year. One percent!

Perspective: How would you like it if your boss offered you a measly 1% pay raise. And you could not change jobs in order to raise your income.

Why should an investor/owner have the same restrictions.

Not to mention the property taxes and other expenses increase in price by over 1% a year ... its really a poor long term investment.

The bottom line is the discounted rate of return does not meet the required rate of return.

[vid]

Speaking from the experience of my own city, you don't need rent control when you have a slum.