Rent control isn’t the solution to Ontario’s housing problem

Theglobeandmail.com
April 19, 2017
By Marcus Gee

Practitioners of economics, the dismal science, often quarrel among themselves, but on one thing at least, they tend to agree: rent control is a thoroughly awful idea.

Because landlords face limits on how much they can raise rents, they often skimp on maintenance. That’s bad for renters, who have to live in deteriorating housing. Because developers face limits on what they would earn from rental projects, they build fewer of them. That’s bad for renters, too, because apartments are harder to find.

As CIBC economist Benjamin Tal puts it in a smart new report on rent control, “If history is a guide, such policy will mostly hurt the people it’s trying to protect.”

Yet, against all common sense, the government of Premier Kathleen Wynne seems willing to expand Ontario’s rent-control regime, cancelling a “loophole” that exempts buildings constructed after 1991. If it proceeds, it will hand Ontario cities a poisoned chalice - something that seems good at first, but in the end does great damage to the receiver.

When Ontario first brought in rent controls back in 1975, the consequence was just what economic theory and real-life experience suggest. A 1988 University of Toronto study found that the effect was “to reduce new construction, to accelerate deterioration and conversion of the existing rental stock, to generate a severe rental housing shortage” and to reduce government tax revenue.

New rental construction fell off sharply and stayed depressed for years. Builders created about 28,000 apartments a year in the five years before controls and about 5,500 a year in the five years after. The situation was so bad that even an NDP government recognized that something had gone badly wrong. In hopes of spurring developers to start building again, it decided to exempt rental stock built after 1991. Every government since has kept that exemption.

Ms. Wynne argues that the exemption never had its desired effect. New rental construction did not take off. But it is now. Several big rental projects are planned in downtown Toronto at intersections such as Church and Wellesley, Bathurst and Bloor and Gerrard and Bay. Big institutional investors are getting into the game, attracted by the reliable returns. By one estimate, 28,000 rental units are in the pipeline.

Extending rent control could squash this revival just as it is getting started. In Modern Principles of Economics, a popular textbook, Tyler Cowen and Alex Tabarrok argue that “even a modest rent control can sharply reduce the value of new apartment construction. Developers who fear that rent controls are likely will immediately end their plans to build.”

Expanded rent control could affect the condominium market, too. Many people buy condos with the thought of renting them out, hoping to sell or move in later. If what they can get from rent falls, they are less likely to buy in the first place and developers are less likely to build. So the result of expanding rent controls could be to reduce the supply of new housing. That is the very opposite of what a city in the grip of an affordability crunch needs.

But it’s not necessary to speculate about what rent control would do. Decades of experience, here and elsewhere, show what a mess it can create.

New York brought in “temporary” rent control during the Second World War. It has stayed in place in various forms ever since, with a predictable outcome. As Mr. Tal puts it in his report, “Roughly half of the apartments in the city are under rent control, the other half is constantly under-supplied with a clear impact on prices.”

The result is a two-class housing system. Tenants hang on for decades to cheap, often crumbling rent-controlled apartments while everyone else scrambles to find a decent place.

No wonder that most economists are in accord about rent control. Sweden’s Assar Lindbeck famously said that “In many cases, rent control appears to be the most efficient technique presently known to destroy a city - except for bombing.” Nobel Prize-winner Paul Krugman once wrote in the New York Times that “Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.”

Supply is the key word. The long-term answer to the affordability crunch is to build more places to live. Any government that brings in rent control risks choking off the supply of new rental housing when it is needed most. The dismal scientists are right: rent control is a thoroughly awful idea.