Toronto

Toronto Real Estate’s Newest Lie: Rent Controls Force Landlords To Lose Money

Toronto Real Estate’s Newest Lie: Rent Controls Force Landlords To Lose Money

The Toronto real estate scene appears to be grossly misinformed when it comes to rent controls. Since Ontario announced the Fair Housing Plan, real estate agents, developers, and even politicians have said the province is attacking landlords. You’ve probably heard someone on the news, or even a friend, discuss how the “unfair” the new Rental Fairness Act is. They’re under the impression that the new controls will force landlords to rent at a future loss. Turns out the Province isn’t that mean, and the fear mongering is bulls**t. Rent controls are designed to preserve cap rates, while preventing predatory increases against tenants.

First, WTF Is A Cap Rate?

There’s one term you’ll need to know in order for the rest of this to make sense – cap rate. Cap rates, for those that don’t already know, is the percentage of net operating income (NOI) that a landlord makes, compared to the cost of the rental. Oh yeah, if you’re not an accountant, the NOI is the amount of annual rent the landlord charges, less expenses. Basically, a cap rate is the percentage of profit you’ll make annually, compared to the price you paid for the rental unit.

Still unclear? Let’s work through a quick example. Let’s say you buy a condo for a $1,000,000, and decide to charge a tenant $8,000 per month for rent. That works out to $96,000 annually. Let’s say taxes, maintenance, and insurance remove 10% of that value. In this magical world, there’s no other costs. Your NOI would be $86,400, and your cap rate would work out to 8.64%. Look at you, you know how to calculate cap rates! Remember this term, because we’ll come back to it later.

Ontario Fair Housing Plan, and Expand Rent Control

The new Ontario Fair Housing Plan extends rent controls to almost all rental units. This means if you bought a condo, and decided to rent it out, you’re probably bound by rent control guidelines. The maximum amount the rent can be raised is limited to the Consumer Price Index (CPI) for that province. For example, this year your rent can only be raised by 1.8% in Ontario, as outlined in the Rent Increase Guidelines.

Real estate agents, developers, and even politicians think this forces landlords into an unprofitable situation. The most commonly cited example I hear is “what if condo maintenance fees, or property taxes rise quickly? Landlords shouldn’t be forced to take a loss.” From a casual market observer, that’s a valid question. From someone in the industry, it’s either ignorance or propaganda. The province does not force landlords to take a loss, they can apply for an “Above Guideline Increase.”

Above Guideline Increases

The Landlord Tenant Tribunal, the peeps in charge of enforcing guideline increases, confirmed to me, that landlords may qualify for an above guideline increase. If the landlord faces a sudden rise of expenses, they can apply to have the province accommodate the new costs, even above the guideline. They just need to prove that the costs are necessary, “extraordinary,” and not frivolous. Structural issue? That might qualify. Want to make a cosmetic change and charge the tenant? Probably not. Point is, they can make valid rent increases. They just can’t raise rent whenever they want.

Source: CMHC, Government of Ontario, Better Dwelling.

Rent Control Tackles Quickly Rising Prices

Rent controls don’t impact cap rates, they control rising home prices. If you can apply for an above guideline increase, you’ll likely maintain your cap rate. The only people that are impacted, are new investment property buyers. These people can’t just offer 18% more than the previous buyer, and pass on the new cap rate to the existing tenant. Like many people had begun doing in 2016.

The real reason the industry is against rent controls, is it cools condo prices. Buying an existing rental property means you are now buying the cap rate, as is, for the most part. This limits the price increase on the unit, because who buys a property with a s**ty cap rate? This in turn impacts comps, which throttles the whole system of price increases.

Fun Fact: These types of buyers that buy a rental property at inflated prices are called “predatory landlords” by The City of New York. The reason being, if you pay a high price compared to rental income, you likely intend on raising rent by a lot. The city now publishes a list of people that do this automatically, to help determine who’s displaying a pattern of bad behaviour.

Killing the ability to raise rents by as much as a landlord would like, kills rapid price increases. This is especially true for secondary units in the condo apartment segment. If you entered your career as a landlord with a decent cap rate, you should expect it to hold up fairly well. If you enter it with a terrible cap rate, expect that to last the lifetime of that property. There’s a reason you don’t see a lot of professional landlords buying after rapid price increases. It’s not because of those darn Liberals ruined the market.

Those about to argue that rent should be controlled by the free market, are right in my opinion. We should have a free market. A free market includes the elimination of taxpayer guaranteed mortgage backed securities, and banks controlling their own risk. No taxpayer liquidity injections that exceed the market cap of the bank, when they screw up. Until then, government controls are going to be needed.

Update 4:21PM EST: The manager of the Ontario Ministry of Housing has reached out, and would like me to clarify: A condo landlord can apply for an AGI, to show that the fee increase was the direct result of an allowable increase. Keywords being “direct” and “allowable.” I’m guessing if the fee increase is the result of something trivial like a condo rebrand, they’re not going to let you pass that on to the tenant.

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  • Reply
    Alistair McLaughlin 2 years ago

    Personally I think rent controls are a bad idea. But… anyone who bought an “investment” property to Toronto in the past 5 years is cash-flow negative by definition. Unless they paid cash for the place. So blaming rent control is a convenient scapegoat for their lack of arithmetic ability.

    • Reply
      Trader Jim 2 years ago

      I don’t like rent controls either, but at the same time someone who bought a house thinking they should go up 10% per year forever, is also someone who probably thinks that they should be able to raise rent even more.

      The market really deteriorated when everyone began seeing real estate as a get quick rich scheme, instead of a slow way to preserve wealth and forced savings.

    • Reply
      MOAR 2 years ago

      “blaming rent control is a convenient scapegoat for their lack of arithmetic ability”

      This is also why tenants used to get hit with $100-200/month increases after the first year they get a new landlord. New landlords think it doesn’t matter, the value of the property is going to go up, so I can do negative carry. Then they realize, they can’t afford to subsidize a tenants rent for the next 20 years.

      The industry says the rent subsidy is the problem. Their inability to understand cap rates is the real problem. You should never be buying a property with a less than 2% rate, and hope property value gains will make up the difference. You’re not investing, you’re gambling.

      • Reply
        Alistair McLaughlin 2 years ago

        Agreed in full. The landlord class – especially the get-rich-quick wannabe amateurs who joined the party late – brought rent control on themselves. They bid prices up to the point where cash flow was negative and cap rates were pitiful, then hiked rents to try to force tenants to pay for their own incompetence. They got the rent controls they deserve.

    • Reply
      MH 2 years ago

      Until banks own the profit and taxpayers own the risk it’s not a free market, and this crap-show is bound to repeat again and again if unchecked.

      • Reply
        Alistair McLaughlin 2 years ago

        I think you mean “until banks own the profit and the risks”….

        Taxpayers owning the risks is the very opposite of a free market. It represents the socialization of losses.

        • Reply
          MH 2 years ago

          You are right, that’s exactly what I mean. My post should have started with “as log as” instead of “until”.

          • MH 2 years ago

            Sigh… “as long as”. Writing is not my forte today.

  • Reply
    Stop Ford 2 years ago

    If Dougie gets elected, good luck trying to explain this to him. He’ll rally his uneducated flock to believe whatever the real estate industry wants.

    • Reply
      Mmr 2 years ago

      He is getting elected. Time is up for liberals. Wayne approval is 19 percent that’s even half of what trump approval is lol.

    • Reply
      Rick 2 years ago

      Ford will get rid of rent controls, thankfully. At least he’s smart enough to realize that it does more harm than good.

  • Reply
    MOAR 2 years ago

    The poorly informed believe that rent controls sent rents “soaring.” They don’t understand that home prices won’t be able to rise as quickly once they’re in place, thereby making both rents and homeownership more affordable.

    We need to stop giving a voice to the real estate industry. Or at least the voices that counter their narratives need better platforms. Really enjoying that you guys are taking on the industry in a logical, and constructive way. Great job!

    • Reply
      Rick 2 years ago

      ” The poorly informed believe that rent controls sent rents “soaring.” ”

      You mean the vast majority of economists that studied this far more than you have?

  • Reply
    EC 2 years ago

    The 8% cap rate used as an example in the otherwise great article is a thing of the past. The current cap rates in Ontario are well below 8% for income properties and that’s of course directly related to predatory practices and speculation that had spilled over from the residential market into the commercial market. Whereas prior to 2016 one could still pick up a multiplex for around 8-10% cap depending on the location, we are now looking at cap rates as low as 2% (with some going into negative cashflow) and not just in the primary markets. The standard of counting expenses such as maintenance and property management by the agents when listing a property seems to have disappeared completely as a way to artificially inflate the net. I’m a professional landlord and although my existing properties have tripled in price (as opposed to cap value) I have not been able to purchase anything new for the last 2 years (anything I had looked at would end up running on a negative cashflow based on the asking price).

    • Reply
      Mmr 2 years ago

      Any one who bought condo in 2015 and earlier are cash flow positive when with 20 percent down. Prices were 50 percent less for condo just two years ago. It’s only now and last year if you buy you can’t make money with rent any more.

    • Reply
      Igor 2 years ago

      I believe the 8% is just an example, but you’re 100% right. For an individual property in Toronto, you’re lucky to find a cap rate above 2% right now. Rents are far detached from home prices. Professional landlords that have proper expectations of what costs are, can’t add to their portfolio here.

      Here’s where we see a flood of inexperienced landlords, or slumlords jump in. The inexperienced landlords will lose money, and pray that they don’t go bankrupt. People like you that do the math, will wait and buy it at a discount later. The slumlords will try to figure out how to kick them out, so they aren’t subsidizing rent.

      There’s quite a few rental buildings listed on the MLS right now. I’m guessing these are landlords that realize the rate of appreciation far exceeds anything they can make through rent over the next few years.

      • Reply
        EC 2 years ago

        It’s not just inexperienced landlords. A lot of the multiplexes have been bought up by speculators and by foreign holding companies likely doing some money laundering. When the prices in the area doubled pretty much overnight, I sold one of my larger buildings in SW Ontario. This was a little over a year ago. The building got picked up by a domestic speculator who bullied a number of the long-term tenants out of the building to jack up rents to new tenants. Tried to bully others into accepting illegal, 30% – 40% increases (without applying for an exemption which he knew he wouldn’t get). I hear from my former tenants that he’s now ready to put the building back on the market and I suspect the asking price will be roughly 30% higher now that he’s been able to increase the cap rate by tactics I personally wouldn’t be able to stomach. With respect to money laundering, a couple of other buildings on either side of mine sold around the same time as mine, both to foreign holding companies. One went back on the market pretty much right after closing, for marginally higher price than the buyer paid (not high enough to offset agent and other closing costs). The other one went back on the market a few months later. Neither would be breaking even at best once re-sold (hence my hunch about money laundering).

  • Reply
    Sammy 2 years ago

    Are you saying buying a condo to rent out is a good idea right now? Because I would have to disagree.

    • Reply
      carlton 2 years ago

      Condo cost – 500k .
      mortgage payment – 2500 per month. approx. maintenance / property taxes – 600 per month approx. Grand total of 3100 per month

      The maximum rent someone willing to pay to rent – 2- 2300 per month.

      If your gonna lose approx 800 per month, who in there right mind would even consider this? And rates are headed upwards presently. Can you imagine running the numbers on detached rental at 1 mill…… renters are kicking ass!

      • Reply
        Bluetheimpala 2 years ago

        And that’s why people will sell at a loss potentially if the asset value begins to drop. Being on the hook for something that perpetually loses money and no way of recouping by selling the asset is scary. Time will tell. Tick tock

  • Reply
    TORenter 2 years ago

    I got a call telling me my rent was going up again by the allowable 1.8% which was followed by a rant from the real estate agent who runs the property. She was pissed off that they couldn’t raise it enough to cover the increase in condo fees that her client was facing, and that the government has overstepped. Yes… this is the ‘landlord’ telling the renter that she should be able to jack the rent up by whatever she wants. It’s her property. I pay $2300.00 a month plus utilities for a one bedroom condo downtown. This type of predatory behaviour is the reason the government was forced to take action in the first place. There is always a cap and consequences for excessive greed, and rent control is just that. I am paying her mortgage and I’m fine with that, but I’m not going to cover her unforeseen expenses, that’s why I rent. Her risk… her cost.

  • Reply
    Rick Knowlan 2 years ago

    The Cap Rate definition in this article is incorrect. The overall capitalization rate is (Net Operating Income / Market Value), not (NOI/Purchase price). Big difference. The cap rate of an apartment rented out for $1,500 per month in 2013 in Vancouver is a lot less today, even if the rent was increased the maximum permissible amount per year under BC’s regulations. Rent controls that limit rents to increases less than the increase in market value don’t preserve cap rates.

    • Reply
      Commy Realtor 2 years ago

      I work in commercial real estate, and the definition in the article is CORRECT, but your definition is also right. At the time of purchase, cap rate is expressed as purchase price, because the purchase price is not necessarily market value. This happens often in strategic fire sales, settlement of debt, etc.

      Determining market value is also difficult in the future. Just because one street on your block sells in a quarter, doesn’t mean you’ll get the comparable comps. If I bought a condo in Toronto last year, I likely won’t get 20% more by selling it today. Is a cap rate diminished by 20% the next year? That’s not how it works. The value may be checked against commercial values 5 or 10 years down the line for a better idea.

      Do you honestly think a commercial properties commit to 5 years of rent increase at CPI, and have their cap rate drop 5 years in a row?

      When in doubt, check Investopia:
      “The capitalization rate of an investment can be calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property.”

  • Reply
    Bluetheimpala 2 years ago

    What about residential? Good info but I don’t think anyone here cares about commercial rules. Be Relevant or GTFO.

  • Reply
    landlord yyz 2 years ago

    landlords should be able to increase the rent upto 5%. Toronto refuses to invest in rental buildings and therefore put the onus on small time landlords who own condos and detached houses or small multiplexes to take all the risk and then they simply regulate you with rent control. condo owners should sell their units and get their profit/equity out. force the government to make rental buildings. rental buildings are usually disasters and end up as smelly broken down s-holes that no one wants to live in. Bring in Dougie – no more rent controls. Seems like most commenters here are social NDP voters (aka – losers who want handouts).

    • Reply
      carlton 2 years ago

      Sounds like your f**ked, good luck with rentals!

    • Reply
      Tim 2 years ago

      What onus? The reason people don’t build purpose built rentals is because speculators are driving prices up well beyond fundamentals. Small landlords are racing PB operators to the bottom, and they’re happy to see you go bankrupt trying to compete with them.

      Purpose built operators build when conditions are right. If they can’t, they sit on a vacant lot. There’s a reason PB rentals only go up after market crashes.

      • Reply
        Alistair McLaughlin 2 years ago

        Tim is 100% correct. Why are we building condos only to have most of the units snapped up by specuvestors and then rented out? Because prices have gotten so stupid the professionals who would normally create PB rental buildings won’t touch this market. Who pushed the market that high? The same speculators who are buying the “investment” condos and now are crying about rent controls.

        • Reply
          Greg 2 years ago

          why didn’t Companies build PB rentals 10 years ago or even 5 before prices went up ?

          • Alistair McLaughlin 2 years ago

            PB rentals are harder to finance. Condo units can be pre-sold, and financing is thus way easier to get and much cheaper too. This has been the case since the mid-1980s. Will this ever change? Yes. When speculators stop buying pre-built units, the cost and the difficulty of financing condo towers will approach or even exceed that of financing PB rentals, and PB rentals may then become the better long term risk.

    • Reply
      Mmr 2 years ago

      Don’t agree with you insulting people. But yes please vote for Doug. Otherwise we will become Cuba very soon.

    • Reply
      Alistair McLaughlin 2 years ago

      Translation: I effed up. I didn’t properly consider the risks before gambling on – I mean investing in – a rental property, and now I’m stuck with negative cash flow.

    • Reply
      Grizzly Gus 2 years ago

      LOL because “Socialist” NDP voter’s worry about reading up on housing market stats and analysis from sources that do not quote RE agents as “experts”.

      Whats the matter Landlord? Your cash flow negative investments not looking so hot right now?
      Brilliant investor decision making………… I will over pay for something at record low interest rates because I can just get someone else to overpay later. If my carrying costs go up or capital appreciation slow down I can just up my rent until its cash flow positive. Who wouldn’t pay over 3000 a month for a one bed condo to cover my costs?

      When the shit hits the fan for you, please don’t be one of those schmucks looking for welfare or EI. Our government has enough debt as is and we don’t need to be further overstretched bailing out idiots like you.

      • Reply
        landlord yyz 2 years ago

        I’m up $400K on my rental property and the rent turns a small profit. I’m ok. I just don’t like rent control. I see that duplexes and triplexes are being bought in little italy, annex and don’t understand the prices. for eg. triplex sold for around 1.7M where rent is only around $6K max net a month. this was just a few days ago. This is definitely an investment property. what gives?

        • Reply
          Grizzly Gus 2 years ago

          Those older triplex and duplex homes were probably subject to rent control already. Remember the exemption was for newer build units made after i believe 1991….. Mostly condos. In regards to those places in the Annex, they’re overpriced an due for a correction. Eventually someone will realize you could get a way bigger dividend on 1.7 million (unless of course most of that 1.7 million is debt) I see the rent control as similar tool to the mortgage stress test. It helps to put an earlier ceiling on market exuberance to limit the fall out from the eventual crash………. which I believe is now underway. I don’t think getting rid of foreign buyer tax or rent control at this point can stop it………Back to the mean

          • Grizzly Gus 2 years ago

            If you are cash flow positive and have enough equity in the investment where you wont have to worry about renewals or refinancing then you should be able to whether the storm. That 400k gain was only on paper anyway, and long term should get back there one day.

          • landlord yyz 2 years ago

            Thanks for the analysis.

    • Reply
      Alistair McLaughlin 2 years ago

      rental buildings are usually disasters and end up as smelly broken down s-holes that no one wants to live in

      If you think a condo tower full of rental units owned by individual investors will hold up better than a purpose-built rental building after a decade or so, then you are terribly naïve.

      I’d live in a purpose-built rental complex managed by a professional property management firm any day over a condo tower full of units owned by amateur Trump wannabes. Even owner-occupied condos can go to crap after a few years. I can just imagine a condo tower full of rental units owned by cash-squeezed individual speculators.

      By the way, I’m Conservative and will be voting for Dougie, not because I think he’s right about this issue, but because Wynne is destroying this province and needs to be stopped, and the NDP will just spend us even further into the hole. So can $hit-can your NDP whiner schtick. You made an investment – a poor one – and assumed that tenants would cover any miscalculations on your part. That’s your fault.

      condo owners should sell their units and get their profit/equity out.

      Yes, all at once please. See how much fun that will be. 🙂

      • Reply
        Mmr 2 years ago

        I ageee totally. When I bought condo few years back first thing my agent told me to calculate if it will cover the carrying cost or
        Not. That agent even factored in increase in condo fee interest rate go up etc and then make a safe investment. Any one invest in last two year in condo for rental made a very bad decision. And yes liberals and ndp will bankrupt us.

        • Reply
          Tim 2 years ago

          wasn’t there a study recently done that over 90% of “investors” in these boxes in the sky who purchased over the last 3 years are in negative cash flow….LOL imagine.

          Your told you will make money IF
          You pay the mortgage, pay the taxes and pay for some shlump to occupy your box in the sky…..only to have 100,000’s other people do the same thing, along with new boxes in the sky being put up and proposed on every street corner in Toronto/GTA? there are so many proposed developments in the pipes its mind boggling…

          Meanwhile, you can find quality S & P, TSX and Global large caps spitting out 3,4,5,6 divis and don’t have to worry about “loser” tenants, repairs, maintenance, uncontrollable op costs, spikes in property taxes, gov intervention and such. Which all impact your negative cap rate to boot (at this moment in time).

          But then again this is Canada, there is only so much air here……=)

          • Alistair McLaughlin 2 years ago

            Buy that sky box now. They’re not making any more air!

      • Reply
        Tommy 2 years ago

        A condo building full of rental units owned by individual investors will almost ALWAYS hold up better than purpose-built rental buildings. Why? Higher paid, better quality management due to monthly maintenance fees paid by all of those investors, and each of them incentivized to ensure the building is operated property to maintain the value of their investment. In other words you have two layers of management – the investor AND the condo corporation.

        Compare the average rental buildings now to condos that are 20 – 30 years old. The condos are in better condition, while the rental buildings are dirty, destroyed, and infested with rats, mice, bed bugs, and cockroaches.

    • Reply
      Willy 2 years ago

      I disagree with you. Instead of raising the rent 5% there should be a correction in prices and then the cap rate goes back up to normal levels

  • Reply
    Asian Invasion 2 years ago

    I always suggest that buyers do their math very carefully when buying a property to rent out as an investment. Run the real numbers, and be VERY negative. This is not the time to be optimistic. You don’t want a few months of vacancy or an emergency repair to ruin your margins. I strongly advise against negative carry, hoping that the rise in property prices will make up the difference.

    Not all Realtors are created equal. A good one will tell you this is not the right time to buy a rental property in basically all of Ontario or BC, and will tell you when the right opportunity comes along.

  • Reply
    Bluetheimpala 2 years ago

    Can we stop with the politics? Seriously if the run up to the ON elections means daily slamming of whatever party you detest, this site is going to shit fast. The problem at hand is so much larger than politics and anyone who thinks the train can be stopped or slowed or diverted by the provincial government is throwing away a vote if that is the basis for your decision making. Don’t look for short terms bandaid, if the Satan party had a strong, longterm approach to housing and investment transparency I would go balls in for the dark prince. Live in the light. BD4L

    • Reply
      Alistair McLaughlin 2 years ago

      Satan doesn’t need his own party – he just won the PC leadership. Sorry, I couldn’t resist.

    • Reply
      RM 1 year ago

      I agree with Blue. This is not the place for political trash-talking. Be objective and vote for the party who has the best plan for getting Ontario back to some sort of sane equilibrium.

  • Reply
    Bluetheimpala 2 years ago

    Fed raised rates and forecasting 3 more this year. BoC will have to follow suit. We could be in low 4% by fall. Winter is coming. Tick tock.

  • Reply
    Greg 2 years ago

    Private Landlords should all revolt ! give everyone 30 days notice to vacate – take back your units.

    • Reply
      Grizzly Gus 2 years ago

      Yeah and let’s just leave them empty!!!!!! That’s definitely what a smart investor would do. If I cant raise rents on my condo unit at will then I’d rather not even collect it period!

      If you make it as far as 2022 before your assets are liquidated please me know. Ill be looking for deals.

  • Reply
    Max 2 years ago

    I can understand and sympathize with renters who have seen increases that do not correlate to their earnings. However I think there is so much more it:

    1) Landlords can’t just raise rent 10% yearly, there is a limit. Regardless of how much some people complain of the increase, there are many people out there who can afford it and will. They have the right to compete with you and pay more to be in the place they want to, too bad if you can’t afford it. The competition is fierce out there and people are outbidding each other not only for condos, but even for rooms. If a landlord raises too much, eventually people won’t be able to afford it or won’t be willing to pay. Price will have to adjust or leave the place empty.

    2) CAP rate is not static. Unlike the statement in the article. If i buy an condo for 100k and make 8k profit (rent-costs) I do make 8%. Now, come next year the condo costs 200k and I make same 8k… all of the sudden my ROI (based on opportunity cost) is slashed to 4%! why would I keep the condo as an investment if I can take my money out and invest it somewhere else that can give me the 8%? I’m leaving 4% on the table! — yes, yes… you’re making appreciation, but appreciation usually follows a spike and then plateaus. If the perspective is that prices are not going to raise significantly in the next couple of months, and on top of that my money is tied up in an iliquid investment. I might as well take my money out and put it else where. Without rent control, I can maintain my ROI based on capital cost.

    3) When you have rent control, rents raise slower than real inflation. Therefore, in ten years time, when I want to sell the property, I will be “stuck” with long term tenants that I can’t get rid of, and my property price will suffer when compared to other properties in the market that have newer tenants paying market rent. As an investor I steer clear of long term tenants precisely because of this, and I’ve passed up a bunch of properties that I simply cant justify market price because of below market rents. If it’s a single family home, or a condo where you can buy and move in, maybe not so bad, but for multi-residential properties… this is a killer.

    4) Rent control reduces mobility. People under normal circumstances move because financial situation changes, because family grew (or reduced), changed jobs and want to be closer… the idea of being able to rent is in part due to the flexibility of easily moving without the costs of changing properties (realtor fees, land transfer tax, closing costs, etc). With rent control, this flexibility is lost. People won’t move because now they would have to pay market rent and either get something smaller for what they are paying, or pay more for an equivalent. They are “shielded” from the true market cost of a living space, and in order to remain shielded renters don’t move worsening commute times, family time/space, pollution, etc.

  • Reply
    Paul 2 months ago

    It also seems to be that when rent control is in place for a long period, the market ends up being socialized. For example, if you look at Sweden, most rental housing is now developed by the public sector. Why does the market end up socialized? This is because rent control destroys the ability of the market to function.
    Rent control destroys the market in at least 2 ways.
    Firstly, people do compare rents so their is a limit to how much you can charge for an apartment compared to nearby properties. I am including landlords in this statement. Landlords are anchored by the rents in their existing apartments and that limits what they will consider in an apartment when it turns over. Thus rents do not rise to what the market will bear in a rent controlled market.
    Secondly, without the spikes in rental rates that you do get in an uncontrolled market, their is no period where development is really attractive. The spikes are tempered by the rent control regime to such an extant that without an abnormally long boom (ie, longer than the time it takes to consider, plan and develop a building, say 7 years) the economics fall apart prior to construction.

    The other issue is that a market with rent controls is that they tend to go hand in had with higher risk. I have owned apartments in Toronto for 5 years. In that time the ability to evict has declined. It used to take 4.5 months to evict a non-paying tenant; it now takes close to 6 months. 6 months with no rent on a unit is a great deal of money!

    Certainly their are problems with free rental markets, but it seems to lead to a better housing stock and a vacancy rate that allows more choices.

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