Tougher rent control in Ontario puts new supply at risk, say owners

Expanded rent control will discourage the development of new units, says the apartment owners’ association.

Thestar.com
April 18, 2017
By Tess Kalinowski

If the province expands rent controls to include units built after 1991, it will douse a renewed interest in building purpose-built rentals that is set to help ease the Toronto region’s tight vacancy situation.

That’s the warning of the association representing 2,200 owners and managers of 350,000 rental units.

Clamping down on rental increases in newer buildings puts 9,000 units and $2.7 billion in potential investment at risk, said Jim Murphy, CEO of the Federation of Rental-housing Providers of Ontario (FRPO).

Rentals built before 1991 in Ontario are subject to annual rent increases of about 1.5 per cent.

But Premier Kathleen Wynne has said her Liberal government is increasingly concerned that the exemption on units built after 1991, is leading some landlords to charge untenable increases, including a case reported in the Toronto Star recently in which a landlord told tenants that rents in their building would double to about $3,300 a month in July.

Although nobody is in favour of doubling rents, this isn’t the time to clamp down on rents in newer buildings, argues FRPO because the number of rental starts rose 50 per cent last year over 2015.

An unscientific survey of 14 of its members, who own or manage thousands of units in Ontario, found more than 90 per cent were planning future purpose-built rental developments. An overwhelming majority cited higher rents, the rent control exemption and low interest rates as key factors in those plans.

“Not all rentals are created equal. Affordable housing is a concern, but rent control is not the magic bullet,” said one survey respondent. “Rent control has contributed to the creation of the condo market.”

Murphy said “the timing on post-1991 couldn’t be worse in the sense that even the government wants purpose-built rental. They want it to be part of the solution and part of the overall housing mix.”

The association’s survey report coincides with a Tuesday meeting by Federal Finance Minister Bill Morneau, provincial treasurer Charles Sousa and Mayor John Tory to discuss possible solutions to the scorching real estate market that is making it increasingly difficult to buy or rent in and around Toronto.

Instead of applying the same rent controls to units built post-1991, the landlords association is recommending the government consider two alternatives:

• A “rolling” 20-year exemption on newer rentals that would allow developers to get through one full life financing cycle of their buildings before provincial rent guidelines take effect.
• A 10 per cent cap on the amount landlords can raise the rent in buildings built after 1991.

It is also suggesting that leases contain a clause notifying tenants what the allowable increase on their unit will be.

Since rent controls were introduced in Ontario in the 1970s, purpose-built rental development has been scarce, said Murphy. But lately the economic and regulatory environment is increasing rental stock.

According to the association’s report, obtained by the Toronto Star, the total supply of new housing is critical to the availability of new rentals.

“Shortfalls in total housing production can be expected to have pervasive long-term negative effects for tenants (because of reduced movements to home ownership and because there will be fewer opportunities for homeowners to create accessory units within existing low-rise homes),” says the report by Will Dunning Economic Research.

The condo craze is also bolstering the supply of rentals on the market. If a third of the 43,725 condos expected to come online in the next two years are rented, that’s 15,000 new units, according to the report.

Of 100,000 condos currently being rented in Toronto, 67,000 of them were built after 1991, said Murphy.

“There’s no question rents have increased fairly sharply in the last four years,” said David Horwood, vice-president of Effort Trust, which owns between 20 and 30 apartment buildings in communities around Toronto such as Hamilton and Kitchener.

But he thinks smaller, less-professional landlords are part of the problem. One reason purpose-built rental development lags condos is that the risks are greater in the latter category, he said. Condo buyers can sell pre-construction contracts to help finance their projects. But rental developers have to wait for project completion before they see any return on their investment.

“The only real risk (condo developers) have is if the market crashes between the time they take these contracts and the time they deliver the building, it’s possible some people will walk away from their deposits. But I don’t think that’s a real risk right now,” said Horwood.

After failing to build anything new since the 1970s, the third-generation family business is “finally at a point where we think we have a business case to build new,” said Horwood.

Effort Trust has five projects in the works that have taken five to seven years to develop. It expects building permits on two of them in the next three months — “providing we have certainty.”

“I want to build because I feel we can build buildings at a fair margin and build quality product,” said Horwood. “But I won’t build it if I worry about three years out from now.”

It’s not that the projects won’t happen at all, “if we have a bad feeling about this,” he said. “But they’ll probably go condo for sale because we don’t want the risk. We’ll share it with our purchasers.”

Toronto’s mayor says he wants to discuss with the province and Ottawa a proposed vacancy tax, increasing the supply of affordable housing and the need for better data.

“This is not a photo op,” said Tory of Tuesday’s meeting with senior politicians.

“I think it’s a very important first opportunity for the three representatives of the three government to sit in a room together and actually compare notes,” he said Monday.

Politicians at all levels have been meeting with “experts” about what is driving up the market and creating a lot of fear.

In those meetings, Tory said he’s heard “there’s an element of speculation that has found its way into our housing market that is helping push prices up.”

“Some of it is just caused by the desirability of living in Toronto but I think the key becomes to identify, who is responsible for that speculation and what could you do about it that was responsible and effective,” he said.