Expanding rent controls in Ontario will further damage housing affordability
There’s growing interest at Queen’s Park for the expansion of rent controls to address high rents in Ontario’s biggest cities. Most recently, Premier Kathleen Wynne (pictured above) expressed skepticism that a former Ontario government’s removal of rent controls on relatively newly constructed buildings did anything to meaningfully boost the rental supply. The implication here is that in light of rapidly rising rents, mandating lower rents is the preferred solution.
But a quick review of the economic theory and empirical evidence surrounding rent control shows this would be a badly misguided policy response.
In a normal housing market, the price of housing, like anything else, is determined by supply and demand. If supply can’t keep up with demand for sought-after goods, such as housing units in attractive markets, the price will go up. Absent artificial constraints on new builds, the increased price of housing should lead more developers to decide that building new units is in their financial interest. Rent control—or even the threat of rent control—can change that calculation, since it would make building condominiums (which are sold in a mostly-free market) more attractive relative to purpose built rental units that might be subject to rent controls. That would further exacerbate the problem of increasing rents.
Moreover, capping rental increases would also have an impact on the quality of existing stock. After all, housing units deteriorate over time, requiring constant maintenance, and eventually require significant renovations. If landlords cannot increase prices to make those renovations worthwhile, they may simply decide to do the bare minimum—or even less—to keep their rental units livable.
This is not because landlords are “bad” or “greedy” (isolated incidents notwithstanding) but because landlords, like everyone else, must earn a living. If they are not getting a return on their investments, they have no reason to invest in a sector where they won’t be able to earn market returns. After all, there are plenty of other investments out there where potential returns aren’t similarly capped artificially.
One particularly troubling problem with rent control is that governments don’t even need to go ahead and implement the policy to cause harm—simply suggesting this flawed policy model is on the table can be enough to discourage investment and create some of the harmful consequences we’ve described. If the spectre of rent control hangs around, some prospective landlords may decide it makes more sense to simply invest in stocks or bonds rather than risk assets on rental properties. Indeed, CIBC economist Benjamin Tal suggests that recent increases in new rental unit construction could be threatened by talk of rent control, pushing developers to opt for condominium development.
Rent control is a thoroughly discredited policy idea with next to no support among economists because of the harmful unintended consequences. Experts agree almost unanimously on the economics behind these points. Indeed, surveys of economists regularly show that upwards of 90 per cent agree rent controls reduce the quantity and quality of housing available.
Simply by putting the policy back on the table, the Wynne government makes investment in new rental housing less attractive. Actually pursuing the policy would dramatically exacerbate these harmful effects.