May 17, 2017

Will New Rules Lead to Cheaper Ontario Rents?

Toronto has a reputation as the land of high real estate values. For years, single detached home prices in the Greater Toronto Area have been out of reach for the average buyer without serious budget stretching. Personal finance experts have been telling anyone who would listen that renting was the smart choice because rents were lagging behind housing prices.

That advice has been handed out over and over for the last few years, but in today’s rental market it’s no longer applicable. If the recent headlines are any indication, rents in Toronto are finally catching up with sales prices, and many renters are faced with rental increases as high as 100%, or worse, eviction.

As rents continue to increase across the city, government officials have been spurred into action. MP Adam Vaughan recently announced $2.5 billion to be spent over four years on low-interest loans for rental construction. On top of that, Premier Wynne introduced the Ontario Fair Housing Plan, 16-point plan designed to lower property taxes for rental units and provide subsidies for rental construction. The plan pledges provincial land for development of affordable housing and – possibly the most talked about measure – expanded rent controls, which had previously only been available for rental units built before 1991.

Short Term Outlook: Rent Hike Relief

Under the new rent control rules, landlords may only increase rents by the rate of inflation, to a maximum of 2.5 per cent per year. There are some exceptions to this rule, such as if the landlord does renovations to the unit or building. The new rules will also tighten rules around “landlord’s own use” evictions, wherein a landlord can evict a tenant if they plan to occupy the unit themselves. This change comes after several stories about tenants evicted by a landlord claiming to be moving into the unit, only for the tenants to see the unit for lease a few weeks later for dramatically increased rates.

These new regulations have largely applauded by renters, and for the large part, should throw cold water on rents in Toronto – at least for the short term.

Medium Term Outlook: Potentially Fewer Rental Buildings

As popular as these regulations have been with renters, developers are voicing their concerns about the viability of developing rental housing going forward. Yes, the expanded rent controls mean Toronto residents can expect to see their soaring rental prices stabilize in the short term, but they fail to address the root of the issue. Rents are increasing because there isn’t enough supply to meet the demand, and with the new regulations, what little supply there was could dwindle further.

Last year, only 2,000 rental units were built to accommodate the 80,000 new residents that called Toronto home. This dramatic discrepancy between supply and demand is on-trend with the previous few years. The supply of rental housing needs to increase to solve this rental crisis over the medium to long term. But as long as it is not profitable for a developer to build a rental building versus Toronto-area condos, we’ll continue to see upward pressure on rental prices.

Long Term Outlook: Hopefully More Developer Incentives to Come

Fortunately, the other measures put in place by the provincial government do help to make rental unit development more attractive for developers, and more could be done. For example, the city could rewrite the rules surrounding laneway housing to make it an accessible option for landlords. Laneway housing is an excellent way for the residents of Toronto to take matters into their own hands and increase the supply of rental units without affecting the overall character of key neighbourhoods.

Related Read: Could Laneway Housing Be the Answer to Toronto’s Hot Housing Market?

But laneway housing and the measures in the Ontario Fair Housing Plan are just a few pieces of the puzzle. The bottom line is this: as long as developers see more profit in developing condo buildings over rental buildings, there will continue to be a lack of supply of rental housing, and the upward pressure that imbalance exerts on prices will be felt by everyone – renters included.