Let Us In!
There is a desperate need for more rental apartment supply in Canada. CMHC data shows that the national rental vacancy rate last year was just three per cent. According to the U.S. Census Bureau, the rental vacancy rate in the United States is closer to seven per cent. The blended number for the entire country hides the grim fact that the vacancy rate was 1.1 per cent in the Toronto Census Metropolitan Area (CMA), and 0.9 per cent in the Vancouver CMA in 2017.
When vacancy rates are this low, landlords have all the power, allowing them to raise rates significantly due to limited alternative options for tenants. Cries of rent gouging and “renovictions” raise the ire of industry groups, and grab media attention for the need for expanded tenant protections. Those complaints led to government intervention in the way of expanded rent control legislation in Ontario in 2017 and British Columbia in 2018.
These are well-intentioned but unwise decisions by the government. As any first-year economics student is taught, price controls have enormous unintended consequences, and often make things much worse. It is also worth noting that there are two sides to every story, and some rent gouging is done to remove bad tenants, as there are tenants listing units on Airbnb, starting grow-ops in their suites, and skipping out on rent. A landlord told me a tenant of his removed all the doors and trim in the house for a giant bonfire in the backyard!
The best way to improve rental market conditions is to add more available supply, either by private investors buying more ownership units to lease out, or by building more purpose-built rental apartments. Despite increasing demand for rentals via strong immigration and decreased credit availability for mortgages, it is still tough for rental developers to make the numbers work. Expanded rent control is just another disincentive.
“It’s very challenging to build new purpose-built rental housing in the current record-high construction cost environment, especially when we are seeing discouraging government regulations such as strengthened rent control recently announced by the B.C. government. Also, operating costs have been increasing over the last 10 years at a compound annual growth rate of almost eight per cent per annum according to a recent study by LandlordBC” says Aly F. Jiwan, CEO of New Westminster-based Redbrick Properties Inc.
“The Ontario government’s recent removal of rent controls on new rental units was a good step that we strongly urge the B.C. government to consider. Without a similar move, the private market rental housing supply will slow dramatically and we need much more rental housing supply,” adds Jiwan. “Four decades of underbuilding has created the significant rental housing shortage that B.C. faces today. Throughout history and in every jurisdiction they have been tried, rent controls just do not work and end up harming tenants, the very people government wants to help. Jurisdictions without any rent controls, like Alberta, have much healthier rental markets.”
In Ontario, increased municipal fees and charges have resulted in many developers converting would-be rental projects to condominium tenure. According to Naram Mansour, president of Toronto-based Carlyle Communities, “Rental development has become more challenged in the past couple of years given a significant increase in development levies, which have risen by approximately 40 per cent in the last 12 months and nearly 80 per cent by the end of 2020, coupled with a 20 per cent-plus increase in hard construction costs. Notwithstanding the rising rental rates, growth in the cost of land plus input costs has outpaced the growth in rental rates, driving returns lower for developers who would have otherwise considered building new rental buildings.”
Developers and their financial backers are not going to build new housing if the return is not high enough to offset the risk. High and rising land and construction costs are two of the biggest factors impacting the creation of new rental supply, but as various levels of government reiterate the need for more affordable housing, they continue to add disincentives for the development industry in the form of land-transfer taxes, development charges, parkland dedication fees, delayed approvals, and rent control. If you’re looking for someone to blame for a lack of new rental development, government bureaucrats with their hand out and politicians ignorant to the economics of rent control is a good place to start.
Ben Myers is president of Bullpen Research & Consulting, a boutique real estate advisory firm that works with land owners, developers, and lenders to better inform them of the current and future macroeconomic and site-specific housing market conditions that can impact their active or proposed development projects.
Follow Bullpen on Twitter at @BullpenConsult or find Ben at www.BullpenConsulting.ca.