How Effective are Rent Controls?

If you are someone who has been looking to rent an apartment or get into the housing market, you are likely aware of the continuing increase in prices and decrease in both availability and affordability. This is arguably due to an imbalance in supply versus demand.

A little over a year ago, the Fair Housing Plan was introduced in Ontario to help people find affordable homes, increase supply, protect renters and buyers, and provide stability to the real estate market. Looking specifically at rent control, has it lived up to its promises?

What Is Rent Control?

The purpose of rent control is to protect tenants from increasing rates with a specified, government-mandated percentage per year (usually in line with the Consumer Price Index). This is great for tenants that are locked in cheaper rents (think pre-2016), but not so great for potential new tenants who are subject to market prices. Due to the overwhelming demand and a very limited supply, landlords are passing these restrictions on to the new tenant.

Rent control prices also create lower tenant turn over, as people opt to stay in their units because they know the price they are paying is better than it would be if they were to go to another unit and be subject to market prices.

Supply Continue to be an Issue

As availability decreases with little to no new builds in sight, the rates for new tenants continue to creep up into unaffordable prices per month, based on current market trends. Rent control is arguably a reason why there is a lack in the development of purpose-built rental dwellings. Since 2017, at least 1,000 planned rental units have either been cancelled or converted into condominiums. With the current cost of development charges, coupled with the current rent increase regulations, many developers are looking to build residences that will bring them more worthwhile returns.

The amount of time it would take to get back the money put towards development charges through renting is much longer than it would take for condominiums and houses. The cost can be factored into the selling price as it generates a faster return on those charges. A study by Urbanationwarns that rental housing supply will continue to decrease, taking vacancy rates with them, with the current vacancy rate in the City of Toronto sitting around 1.3%

Rising Home Prices Mean Fewer Options

So, less rental options are available in Toronto, but what about buying a home? Although there has been no shortage of homes being built, the introduction of the stress test has made it increasingly difficult for first-time buyers to get into the market.

The amount of money needed to put towards a down-payment compared to the average wage in the GTA just doesn’t work in favour of first-time home buyers. Those who can pass the test are opting to purchase less expensive condominiums and town homes, which has caused the prices of those units to increase with the demand. Homeowners who are not first-time buyers and have two properties may choose to rent out one of their spaces; especially if they understand the current demand for rental housing. Just as it was mentioned above for rental buildings, the price of renting a home (whether it be the entire house or just one floor) is also steadily increasing.

Have Rent Controls Been Effective?

Overall, it appears that rent control has not had a positive impact on the current housing market. The government wants to lessen the blow of rental rate increases; however, this does not solve the issue for renters.

Rent control is a symptom to the problem rather than a solution. What is needed is the creation of more purpose-built rentals for the growing population. By providing incentives to builders, renters could benefit from an influx of rental units, thereby giving them more choice, forcing landlords to curb rental spikes to compete amongst each other.

About Nancy Savio –

Nancy Savio is a Contributing Editor for Media Classified, the parent company of 4Rent has been successfully connecting apartment hunters and property managers since 2009. Prospective tenants can explore a variety of rental listings across Canada, including condo-like apartments, single home-dwellings, student housing and more.