Earlier this month, the government of Alberta proposed legislation that will allow landlords to impose only one rent increase per year. There is debate over whether the province should implement other forms of rent control.
Rent control is in effect already in B.C., Ontario and Quebec, in many U.S. cities and many European countries. Usually, rent control is perceived to benefit the person living in an apartment in a high-rent/low-vacancy environment. Is this really true? Does anyone lose in a rent-controlled environment?
Landlords are private enterprises, sometimes individuals but often small, medium or large companies. They have a choice as to where they deploy their capital, ingenuity and human resources.
Is $10,000 or $1 million best spent on a rent-controlled building or a building where the free market allows a better return of capital? Clearly, the return is better when deployed in a suite or a building where the rents can be adjusted with more frequency.
How does this benefit the tenant though? He/she receives a nicer suite, with more upgrades such as a new bathroom, new paint, new lights and new appliances. In a rent-controlled environment, those investments are usually not made - thus allowing the building to deteriorate. Is this what tenants and government want when they say "rent control" - deteriorating buildings in a slum-lord type of environment?
When looking at the (fairly upscale) English Bay area of Vancouver, with mostly rent-controlled apartments, this is visible for the trained observer. Look at less pristine parts of Vancouver and it is shockingly obvious.
Secondly, this lack of investment in existing apartment buildings ripples through the economy: Fewer painters are employed, fewer new bathrooms purchased, fewer carpets ordered and fewer fridges fixed, causing the economy of a rent-controlled city, state or province to experience far less economic stimulus by private enterprises, on a scale of millions of dollars affecting thousands of jobs.
A third drawback for tenants is the lack of available reasonably priced accommodation. Rental apartments are being occupied by tenants that "got lucky" many years ago, but don't really need them.
Fourthly, landlords collect less money than they could, which affects not only their income but also the valuation of their building. Let's use a specific example. Currently, we are negotiating the purchase of a 20-suite apartment building in a promising B.C. city. We are buying it for roughly $1 million or $50,000 per unit - primarily because the rents are too low.
If this city were not rent controlled (it is in B.C. on the coast with a view of the ocean) rents today would be about 30-40 per cent higher. Therefore, the seller could achieve a sales price of perhaps $1.4 million. In essence, he is penalized $400,000 because of rent control. Is this fair? A 40-per-cent "tax" on a capital asset in addition to annual loss of potential income?
No wonder few are building properties to be rented. Rent control stifles economic activity and taxes one group of society (building owners) to subsidize another. This is not to say that there are not people in our society that need support, but there are better ways to do it.
A fifth reason why rent control works against existing tenants is that a rent-controlled environment reduces the ability of landlords to view rental apartments as a solid investment and increases its chance to be converted to condos.
Often, the only way to make money in an old beat-up apartment building in a rent-controlled environment is to convert it to condos, thus changing the use and further reducing the availability of rental apartments to lower-income parts of society.
Of course, the example often cited in newspapers is that of low-income tenants forced out of their homes without rent control. Certainly, hardship can be created in a low-vacancy environment when rent goes from $450 to $850. There is a role for government to either subsidize rents to market levels or to purchase entire apartment blocks and use them for low-income tenants, as opposed to using rent control that benefit few and cost a lot in terms of lost taxes or economic activities.
Is it Safeway's or Sobey's responsibility to provide food for low-income people? Is it the shoestore's responsibility to provide shoes for low-income earners?
Why is it the landlord's responsibility to subsidize housing? Shouldn't all of society, usually through taxes, contribute?
There you have it. Rent control means deteriorating buildings, less overall economic activity, crowding out of capable tenants, increased condo conversion and taxing building owners - thus dramatically reducing rental availability. Is this what governments want when they say "rent control"?
(Thomas Beyer is president of Prestigious Properties Canada, which manages and owns - with more than 125 co-investors - more than 700 rental units in Alberta, Saskatchewan and B.C. In the next edition, Wayne Stewart, president and CEO of the Calgary Homeless Foundation, will write about affordable housing.)
