Proposed rent control rules already discouraging rental development in Ontario

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Appeared in the Toronto Sun, October 4, 2017
Proposed rent control rules already discouraging rental development in Ontario

Amidst concerns over housing affordability in the Greater Toronto Area, the Wynne government is pressing ahead with tighter rent control laws.

When the government first proposed an expansion to the province’s rent control laws, economists and policy analysts warned that this move would create a disincentive for companies to build more rental housing and maintain the quality of existing stock, developments which would only make matters worse for prospective renters.

More specifically, they were warned that many planned rental units might be converted to condos since rental units would be less profitable if rents were capped.

Sure enough, that appears to be happening, as 1,000 units initially intended for the rental market have been converted into condo units. This will further constrain the supply of rental units in Toronto, making it even more difficult for renters to find homes within the city.

This outcome shouldn’t come as a surprise. Housing is subject to the laws of supply and demand—just like any other good. This means that if demand rises, but prices are not able to move up along with that demand, the incentive for firms and individuals to supply the good in question (in this case, rental housing) is reduced. When this happens, a gap opens up between supply and demand in the market—in other words a shortage of rental housing develops.

What does this mean in the real world? Sure, for some lucky people holding leases, it may mean a slower pace of rent increase in the years ahead. But again, in the longer term it will cause problems as people who would otherwise have built rental housing instead pursue other investment opportunities. Meanwhile, some landlords will be reluctant to spend money maintaining and upgrading their buildings, knowing that their current tenants are paying below-market rates.

These consequences won’t always be as visible as the recent example that occurred in Toronto—with units explicitly intended for rental housing converted into condos. Usually, the process will be less easy to see, as firms simply quietly pass on opportunities to develop rental housing units in favour of other investment opportunities.

Over time, this means that there are fewer and lower quality rental units available on the market for people looking to rent. In other words, the policy sadly winds up hurting many of the people it seeks to help.

This is why the vast majority of economists believe that rent controls tend to have a negative impact on the quality and quantity of rental housing. The results of rent control have been consistently negative where implemented in places as diverse as New York, Winnipeg and Stockholm. Indeed, it can take up to 20 years to secure an apartment in some neighbourhoods in rent-controlled Stockholm.

Put simply, rent control is a flawed and discredited policy idea that does more harm than good. The chances that Toronto will avoid the same negative outcomes that have been experienced in other jurisdictions with similar policies are slim at best. The Wynne government surely meant well. Unfortunately, rent control is a misguided approach that is overwhelmingly likely to backfire.