Welcome to the Urbaneer.com blog where we explore all facets of place, culture and design in Toronto, Ontario, Canada.
Recently I touched briefly on the issue of rent control in Urbaneer’s Winter 2017/2018 Toronto Real Estate Forecast - Part Two and in How Our Three Levels of Government Are Impacting Toronto Real Estate Right Now - which explores the measures being implemented to assist with affordability for Toronto’s growing rental pool. However, given the complexity of the issue of rent control, I felt it important to examine it in greater depth.
Rent Control refers to a system of rent regulation in Ontario, Canada which limits the amount by which the rent paid by tenants for rental accommodation can increase. It is governed under The Residential Tenancies Act, 2006. Each year the provincial government sets the maximum increase a landlord can set as new rent to a tenant.
Rent control is meant to protect tenants and to assist with affordability. Until April 2017, the restriction on how much rent could be raised year-over-year was limited to buildings built prior to 1991, but in the Spring of 2017, the provincial Fair Housing Plan has now extended these rent control policies to all units regardless of age.
On the one hand, these rent control initiatives succeed in closing loopholes that were present under the past rent control act. It is well-documented that rents are rising in Toronto at a rate that far outpaces inflation (in some cases 30 per cent, according to this story) so measures to assist low and middle income people (particularly those on fixed incomes) are necessary. If rents reach that far beyond inflation, people will be priced out of the city altogether, which has wide-reaching socio-economic impact, so most agree that something has to be done.
On the other hand, being a landlord isn’t easy and many of the policies that are currently in place favour tenants. An article by Christopher Seepe, entitled, 'This Is What Causes Housing Shortages', is detailed below; it outlines the various challenges for the owner of a tenanted property.
This Is What Causes Housing Shortages
Tenants may think the government is looking out for tenant interests, but if that was true there would be no pandemic housing shortage, multiple offers, outrageous selling prices, extremely low vacancy rates, high rental tenant property taxes and eight-year affordable housing wait lists.
Ontario’s recent “Rent Fairness Act” continues the brutal, gratuitous, dystopian, anti-landlord legislation meted out by short-sighted, vote-pandering politicians who have literally (not metaphorically) persecuted landlords for decades; all of it resulting in the national pandemic critical housing shortage. Examples:
- Of 46 offenses in the Residential Tenancies Act (RTA), 34 solely benefit tenants, 10 reciprocate with landlords, one benefits the landlord and one prevents landlords from kicking vote-canvassing politicians off their property.
- RTA and the Human Rights Code (HRC) have unintended discriminatory consequences, including:
- The broken Landlord and Tenant Board (LTB) and RTA make all people with no credit, work or rental history (single moms, foreign students and refugees) extremely high-risk tenants for landlords.
- Hoarders’ rights override the rights of all other tenants. Vermin, fire hazards and more ruin the lifestyle of neighbours and significantly negatively impact property value. Firefighters can refuse to enter a burning unit if they cannot turn 360 degrees with full respirator gear on. Landlords must accommodate challenged tenants to the point of a landlord’s undue hardship, which is not defined in legislation.
- The tenant qualification process of public agencies is not aligned with the needs of the landlord.
- Landlords submit 91 per cent of LTB applications. Seventy-five per cent are for tenants not paying their rent. The average LTB eviction is five months (versus 25 days in some other provinces), costing an average $5,200 that is rarely collected. LTB offers free, taxpayer-funded duty counsel service to tenants but offers nothing to landlords.
- A tenant can pay the sheriff full rent arrears on the day of their eviction and start the whole process again.
- Ontario spent billions on solar power programs. Result: average $217.33/kWhr in Ontario versus $67.89/kWhr in Quebec. Government then punished landlords by preventing landlords from passing on utility costs to the actual consumers (tenants) of that energy.
- The LTB won’t evict tenants who sign and then breach a no-smoking clause in their rental agreement. The whole health industry pushed for this change and the provincial government still denied it. Eleven per cent of Canadians smoke daily and 64 per cent don’t smoke.
- The HRC denies requests to teach landlords about landlord responsibilities but hosts free full-day seminars for tenants.
- The RTA and municipal bylaws require landlords to remediate mould caused by a tenant’s actions, even though it’s not caused by the building’s envelope.
- The rent of a tenant switching from a single bulk meter to an individual meter must be reduced by the cost of energy consumed over the previous 12 months. Therefore, the most energy-abusive tenants receive the greatest rent decreases while energy-conscious tenants are penalized.
- The RTA sets the practical limit on building repairs and maintenance: three per cent of property income for three years. The 270,000 Ontario social housing units have a $1.2 billion capital shortfall. Toronto faces $2.6 billion in building repairs and will close 400 homes in 2017 and 1,000 by 2018.
- Some municipalities charge tenants up to 2.5 times the property tax rate of condo and single- family homeowners.
- Rent control doesn’t benefit low-income tenants. Tenants who can afford to pay market rents receive the benefit of lower rents and successfully beat low-income tenants competing for tenancies in the government-created housing shortage. Shrinking housing inventory forces buyers to stay in rental housing longer. There are 171,360 Ontario families waiting for affordable housing (2015), some for as long as eight years.
- The federal budget gave a $209.4 million bailout for social housing repairs but nothing to the private sector faced with the same issues.
- A tenant’s unpaid utility bill is added to the property owner’s property tax bill, even if the landlord proves that their tenant signed an agreement to pay their own utilities. This is like holding police responsible for all the crimes committed by the criminals they didn’t catch.
- Municipal bedbug and garbage bylaws hold landlords responsible for cost of cleanup even if the tenant caused the infestation or doesn’t sort their garbage.
- Housing shortages lead some tenants to illegally rent out a rental unit or portion at a higher rent.
- The LTB won’t hear cases where tenants who damaged a property moved out. Small Claims Court won’t hear any case involving a landlord-tenant dispute.
Society can’t exist without housing. Private sector landlords built homes for more than nine million Canadians, and relatively affordable housing to a subset of more than three million. Canada’s total social housing sector accommodates about 1.5 million Canadians.
Private sector landlords willingly accept extraordinary financial and legal risks to provide safe and healthy housing. Landlords are not social workers, financiers or otherwise an extension of government social housing programs, policies and other political agendas.
About 39,000 rental units were built in 1972 alone versus a net of about 22,500 units in the 25 years following. Look at the success of the housing programs of the 1960s and early 1970s and replicate that success.
*Footnote: An anagram of “LandlordTenantBoard” is ‘Abandon Rent, Add Troll’.
- By Christopher Seepe, REMonline.com
Does It Make Sense To Own An Income Property In Toronto Today?
I recently weighed the pros and cons in of owning investment property in Dear Urbaneer - Does It Still Make Financial Sense To Invest In Downtown Toronto Real Estate?. Using actual properties for sale and my accurate estimate of income, the return is mediocre to non-existant. Now that rent controls impact the capacity to generate a return, one has to count on the real estate market escalating in value to bring a profit. Otherwise it's a risky place to park capital. Apparently this is the mind set of most investors, as revealed in a CIBC report detailed in this CBCNews article "Rental Investors Bought Half Of GTA Condos Last Year, But Rents Fall Short, CIBC Report Says" (where more than 44% of the investors with a mortgage were cash-flow negative).
It’s worth noting that owning a rental property is a business, whether you are a corporation or a private investor; it is a shrewd move to leverage market conditions in order to improve the return on your investment, to grow your business and to generate profits. The problem, of course, is that the commodity in question is shelter. This basic need is rapidly becoming unaffordable. For policy makers, the answer to the affordability dilemma is to restrict rent increases.
Rent control limits a landlord’s ability to raise rents arbitrarily, but it also limits their ability to charge a price based on what the market is dictating, which creates a subset of other problems. And as we’ll explore here, the ripple effect of rent control is widespread - and it not landlords that are negatively impacted.
The real problem with rent control is its unintentional effect on supply in the rental pool, which actually erodes affordability, and has consequences for investors, tenants and even the local economy. The other major problem is how it solidifies a social divide and can place extreme price pressure on available units.
As housing prices continue to escalate in Toronto and the market begins to transition towards a more rental-based model, this is indeed a crucial point in time - which could significantly shape the trajectory forward for Toronto - and not just for the housing market.
Challenges For Renters And Landlords In The Hot Toronto Real Estate Market
The new mortgage stress rules have pushed would-be freehold home buyers into the condo market seeking more affordable housing. This flux of buyers is competing with real estate investors, snapping up condominiums which might otherwise become rentals in our low-vacancy market. With this increased competition to purchase condos, bidding wars have ensued and prices have invariably gone up.
With greater competition in the buyer pool, investors are forced to pay more for property. With tighter margins, landlords have to pass these costs onto renters, which has driven rent up substantially in a short period of time. Here is a story that discusses that phenomenon, as well as discussing how many landlords have found the tight margins too much and have sold (or plan to sell) their units: “End-Users Flooding Condo Market To Detriment Of Renters”.
Another issue that has emerged with rising rents is that data suggests that renters are getting evicted at an increasing rate as landlords try to circumvent the restrictive rent control measures. Evictions grew a great deal in Toronto last Spring. What is interesting though is that the top reason for tenants to be evicted in the past was for not paying rent; there has been a dramatic increase in evictions for a landlord’s own use (called N12 applications). Anecdotally, it is believed that many of these units were not for owner-occupancy, but were potentially being re-listed for rent at a higher rent.
It's been documented that the number of N12 applications rose substantially in the last two years, with the highest volume of these applications occurred in the month before rent control measures under the Fair Housing Plan took effect and for the four months following that. Read this for more information: “Own Use' Evictions On The Rise In Toronto”. However, there's a risk now, as new policy outlines an owner caught doing this can be fined upwards of $25,000.
The Rental Landscape In Toronto
No question, rents are climbing swiftly and supply is tight in Toronto.
According to a study from Padmapper, Toronto has now surpassed Vancouver as the priciest rental market in Canada. At the writing of this story, average rent for a one-bedroom apartment was $2,020, which marks a substantial increase of 15.4 per cent , year over year. As the vacancy rate has shrunk (at its lowest level in 16 years) rents have increased in tandem. Click here to read “Toronto Finally Has The Most Expensive Rent In Canada”.
Rents for condominiums have risen similarly; in a recent report from Urbanation, average rents soared past $2100 in the last quarter of 2016, which marks a rise of 9.1 per cent, year-over-year. Here is a story from the Globe and Mail that explores that more in depth.
The vacancy rate is so tight that behaviours of Toronto’s scorching housing market are crossing over into the rental market. In Q4 2017, 17 per cent of rental listings went for over asking price, according to Urbanation. This figure has jumped 10 per cent in two years. Click here to read “Multiple Offers Now Common In Toronto Condo Rental Market”.
With affordability rapidly evaporating in Toronto, no question action needed to be taken. So last spring, the Government stepped in to introduce a number of measures to help with affordability, most of which were aimed at the real estate market. However, part of the Fair Housing Plan addressed the eroding affordability and the tight supply in the rental market, among them: rent control.
The problem is that rent control is a single solution to a multi-faceted, economically complex problem and analysts widely agree that this is a bad move for Toronto affordability. CIBC Economist Benjamin Tal does not mince words in his report entitled “Rent Control: The Wrong Medicine”: He says, “the reality is that you cannot tax your way to real and sustainable change.”
He continues, “Rent control is the exact opposite of what the GTA market needs. We need more rental units not less. If history is a guide, such policy will mostly hurt the people it’s trying to protect. Clearly efforts and funds should be devoted to affordable housing in the GTA, but rent control should be a non-starter.”
Why is it that rent control creates additional problems? There are a number of reasons.
How Rent Control Shrinks Supply
Considering cause and effect, rather than high rents, many analysts and pundits point the finger squarely at the lack of supply in rental housing as the culprit behind eroding affordably and tight vacancy rates. Introducing stringent rent control policies will only tighten it more. When you consider that the physical supply is shrinking, and demographic data suggests that rental demand is swiftly rising, then we’ve got a problem.
TREB notes that the supply of rental accommodations has far lagged behind the population growth in Toronto and will continue to get worse. Jason Mercer, TREB’s Director of Market Analysis writes in a statement:” "Looking forward, we continue to have concerns that rent control legislation announced in conjunction with the Ontario Fair Housing Plan will preclude additional rental supply coming on stream, both in the purpose-built and investor-held condominium apartment segments.”
Here is a breakdown of how how supply will be limited as a result of rent control.
There will be less new development. When you limit the upside earning potential on any investment, it is less lucrative for investors. With rent control in place, there is less incentive for developers to build more units, which shrinks the supply pool even more. Red tape slows development, extends the timeline for generating revenue and limits their profitability. Developers will withdraw from purpose-built rentals and move towards other types of projects that make better business sense.
Investors may sell. For property investors, there is greater incentive for them to sell their rental properties in this kind of market. First of all, the market is favourable to cash out and realize a potentially sizeable return on their investment today. Secondly, with caps on their ability to maximize their investment through rent control, it is more appealing to take that equity out of your property investment and put it in another asset class altogether. More and more of the rental pool is becoming condo-based, which is problematic, because it is non-permanent. Those units could easily become owner occupied or sold in the coming months, which pulls back on supply.
No one will move. Rent control policy is attached to a piece of property, not an individual, so once a person locks into a rent controlled unit, there is little incentive to move, which can also take units out of the supply pool. As these rents stay well below market value, people will remain in place. This not only draws from the supply pool, but puts extreme pressure on available units, which creates a divide in the market.
We’ve Seen What Rent Control Does In Other Cities
While the supply/demand argument and affordability is theoretical, there are real-life examples of how rent control can negatively impact supply and create oppressive conditions in the rental market.
New York City reflects what can happen in a rent control environment. An already tight vacancy market became even tighter as supply waned, with developers converting apartments to condos for sale, with the potential that their income stream won’t be sufficient.
The average one-bedroom apartment in NYC goes for just under $5000 a month, but rent-controlled units are well below that with rents that were locked in years ago, so people won’t move out, drying up supply again. Here is an article that elaborates on that.
Stockholm, which much like Toronto, saw a surge in housing prices and a super-tight rental market in the last few years. In reaction, they implemented rent control policies. What has happened in the years since? Supply has shrunken considerably to the point where the average wait to secure rental accommodations is 9 years- and in some neighbourhoods is as long as 20 years.
Consider this: Stockholm is Europe’s fastest growing capital, with high birth rates and is a draw for immigrants. Meanwhile, in the wake of the introduction of rent control, coupled with restrictive policies from the government, developers have largely been deterred from investing their money to build more supply to meet this demand. Meanwhile, people are reluctant (or unable) to buy a home as escalating housing prices place real estate far out of reach for the middle class.
This sounds a lot like present day Toronto, no?
The housing crisis in Stockholm demonstrates how far reaching the impact of rent control is. It’s impacting local industry.
There are rules around businesses buying up housing stock to house employees, so that they can recruit talent. This has created problems in the local economy for businesses trying to draw the talent they need to stay viable. It has even threatened to force small companies out of business. This demonstrates how deeply interconnected the commodity of housing is to the greater economy and how addressing a single strand in this complex web with rent control hurts a lot more people than it helps.
According to Swedish think tank Confederation of Swedish Enterprise, 61 per cent of Swedish companies struggled with recruitment in recent years, with 31 per cent directly linking this challenge to a lack of housing supply for their employees.
Here is a good article from the BBC that describes the plight in Stockholm.
While they haven’t gotten a ton of support from their Federal government, local Government in Stockholm is raising some interesting potential solutions to increase supply in Stockholm, including moveable modular homes and an innovative co-living space for global entrepreneurs.
Like Stockholm, Toronto is a highly globalized city, which will continue to make it a draw for industry and immigrants. If the essential infrastructure (i.e. housing) isn’t available, how will industry growth be sustained?
Damage Already Done?
Indeed, in Toronto, there has already been impact from this implementation of rent control . This report: “New Study Finds Ontario's Rental Housing Supply Is Facing A Shortfall Of Over 6,000 Units Per Year To Meet Annual Demand” commissioned last fall by the Federation of Rental-housing Providers of Ontario showed that proposed rental projects were sitting at a 25-year high with 28,000 units in the pipeline. Since the introduction of rent control, over 1000 planned purpose-built rental units have converted to condos. As it stands, there is a projected shortfall of 6000 units a year.
Other Impact Of Rent Control
For the segment of units that wouldn’t be subject to rent control, the rents will be inflated as a consequence of low supply and high demand; in fact, there will potentially emerge a black market for rentals, which is problematic on many different levels. We could see unit hoarding as supply dries up.
In limiting the rent (i.e. the income stream) for landlords, as in any business, costs will have to be cut elsewhere. That means that there will be less available cash to direct towards building upkeep and improvements, which could diminish the living standards of the tenants that rent control is meant to help.
What Is The Solution?
The soaring rents and low supply of rentals in Toronto require some sort of support and intervention. If rent control isn’t the answer, then what is? There are a number of possibilities, but increasingly supply is at the base of a healthy, sustainable marketplace.
It’s time to think outside the box, like they did in Sweden, with modular houses, etc. If affordability is ultimately to be policy-driven, the policies should be in support of the supply side, perhaps through developer incentives, creative use of existing land or opportunity subsidized housing and more, rather than targeting your policy rather unilaterally at the landlord.
Pricey Vancouver has tried to think outside the box with rental zoning, which aims to help streamline the process for developers and reduce their risk as a means to draw them towards purpose built-rentals. They have a lofty goal of adding 72,000 housing units including 20,000 purpose-built rentals to help alleviate the affordability crisis in the city.
The province of Ontario has proposed inclusionary zoning, which has had some success in U.S. cities, where developers include a mix mix of below-market-price homes or condominiums within their new developments. The idea is that the municipality makes up the difference in cost to the developer, keeping units affordable. This idea is not without its critics, with many feeling like that will be a tough bill for municipalities to pay, and that the amount of units that will actually come into the market is a drop in the bucket.
~ The Urbaneer Team
Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage - (416) 322-8000
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