Rent control wrong answer for Calgary’s rental woes

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Appeared in the Calgary Sun, April 12, 2023
Rent control wrong answer for Calgary’s rental woes

Rents in Alberta are on the rise, as the economy recovers and the province once again becomes a magnet for people across Canada. An increase in demand for housing without a corresponding increase in supply is a recipe for higher housing costs. Unfortunately, bringing new supply onto the market takes time. But it’s the only solution to the problem unless people stop moving to Alberta.

Of course, some well-meaning housing advocates have other ideas. For example, some people want the provincial government to impose limits on rent increases (i.e. rent control) to deal with rental affordability. One advocacy group is pitching a two per cent cap on rent increases, which given current inflation rates, would actually mean a reduction in inflation-adjusted rent. While it’s understandable that people are worried about affordability, this cure would be worse than the disease.

Rent control has been used extensively throughout the western world. The most extreme examples have had devastating results. Consider Stockholm, Sweden—a poster child for strict rent controls and perfect illustration of how the seemingly egalitarian approach is extremely inegalitarian. As Bloomberg reported in 2022, the average wait time for a rent-controlled apartment in Stockholm was 9.2 years, with waits in the 20-year range in some parts of the city. Consequently, existing residents pay below market rents while wannabe renters are out of luck. It's no surprise that Swedish economists have been some of the harshest critics of rent control. Assar Lindbeck, famed professor of economics at Stockholm University, once said that “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Why do rent controls make matters worse?

For starters, they reduce the after-tax rate of return on housing investment, which reduces the incentive to build new units (including rental units) and maintain existing units. If faced with rent controls, developers in Calgary may leave for other cities. Long-term, this hurts affordability by choking off new rental supply and/or eroding the quality of existing rental housing.

Indeed, the profit motive is precisely what leads people to build the housing in the first place. As Adam Smith wrote, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” If developers don’t see a prospective return on their investment, can you blame them for not wanting to build? It’s not much different than when a high-skilled worker decides to move because they can make more money elsewhere. Rather than trying to mandate prices, we should allow more competition. Permitting more housing development would put downward pressure on housing and rental prices.

This isn’t just a theory, it’s fact grounded in clear evidence that as the number of available units goes up, rents go down. Why? Because the balance of bargaining power shifts away from landlords and towards tenants. In other words, allowing the supply of housing to meet demand is the way to lower prices, not mandating lower rents and hoping developers will continue to build housing in Calgary.

Calgary needs more housing to keep rental prices in check. More supply and more competition is the best remedy for high prices.