rent control

Assessing the impact of rent control

New research suggests RFA doing more harm than good
Tuesday, October 9, 2018
by Erin Ruddy

Since receiving Royal Assent in May of 2017, the Liberal government’s Rental Fairness Act (RFA) has been an ongoing concern for Ontario’s rental housing sector. Now, more than a year later, a shift in government has put rent control back in the spotlight with new research suggesting the hastily-formed restrictions applied by the previous government did little to ease the province’s affordability crisis.

In fact, the prevailing opinion among market researchers, developers and landlords alike is that the RFA is having quite the opposite effect.

In September, REALPAC released its latest policy backgrounder, “Assessing the Impact of Ontario’s Rent Control Regime”, in which it points to the fundamental flaws of the Act, concluding that the feasibility of new purpose-built construction has been reduced. It also points to the increased cost of rents for new tenants, imposed development risks for investors, and eroded property rights for landowners.

“Ontario’s rent control policy needs to be seriously reconsidered,” commented Michael Brooks, CEO of REALPAC. “It was brought in with limited consultation and was meant to address a problem that was misrepresented and misunderstood. Not only has the expanded rent control failed to slow down continuously increasing rents, but it also acts as a disincentive for the construction of new rental units—a key goal for the Government of Ontario—despite high levels of institutional capital ready to invest in it. It has become clear that in order to provide the rental accommodation Ontarians desperately need, the Government of Ontario should shift the focus from heavy-handed policies to market-based tools to enhance housing supply.”

As explained in the report, rent control regulations are based on the expectation that the government should intervene in the rental housing market to ensure rents are not increased at a pace existing tenants cannot afford. These restrictions either create a price ceiling that prevent rents from exceeding a certain level, or establish a percentage rate cap up to which rents can increase over a specific period. The goal of these policies is to shelter lower income current tenants from the ebbs and flows of the real estate market, without decreasing the amount of rental housing currently available within the market.

REALPAC’s research ultimately suggests that despite protecting existing tenants staying in place, rent controls will make long-term affordability worse by dis-incenting new supply available to future renters.

Trish MacPherson, Executive Vice President, Operations at CAPREIT, couldn’t agree more. “The passing of the Rental Fairness Act has put pressure on landlords to re-evaluate the potential for new purpose-built rentals and to charge higher rents for new developments from the inception of leasing activity,” she said.  “This has a large impact on renters in terms of affordability and can also reduce the supply of new rental housing.”

Meanwhile, Toronto-based Urbanation, a leading consulting and analytics firm that tracks big picture issues and local market trends affecting rental and condominium development, has been conducting its own research since the RFA was introduced. A big takeaway according to the firm’s president, Shaun Hildebrand, is that even though the province’s rental supply is increasing, new development simply isn’t able to keep up with growing demand.

“Immediately following the introduction of rent control for new development, a number of planned rental projects were cancelled and converted to condominium in the GTA,” he observed. “There was also a slowdown in the number of new proposals for rental projects. Nonetheless, the supply pipeline of new rentals is still growing as developers foresee the long-term demand potential and realize the extent by which rents have escalated in recent years. The fact remains that the condominium sector is unable to supply enough secondary rental units to accommodate the demand.”

Furthermore, Hildebrand pointed out that under rent control, tenant turnover has declined, putting further downward pressure on vacancies. “In the end, because of the strength in market fundamentals for rental, we will see more supply developed, but not nearly as much as it would have without rent control. So supply will still be a big issue for many years to come.”

Working toward a reasonable solution: encouraging, rather than thwarting new construction

To rectify a rental housing supply crisis now gripping Ontario, REALPAC asserts that the Ontario government needs to begin by treating developers as partners in city-building initiatives rather than opponents. “Any intervention by government needs to ensure the long-term sustainability of existing stock and encourage the construction of new purpose-built rental housing.”

Among other initiatives, REALPAC recommends the following policy options to incentivize further development of purpose-built rental housing in Ontario:

  • A complete rent control exemption for newly constructed rental units;
  • Allowing more liberal annual rent increases for existing units to better cover cost inflation and maintenance;
  • Allowing decoupling of utilities and maintenance costs from gross rent;
  • Elimination of HST taxes on purpose built rental.

To read REALPAC’s full report, visit: realpac.ca

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