Does Rent Control Kill Rental Supply?

While many in Canada argue yes, data and the experience of other economically liberal countries says otherwise.

Last week, I had the pleasure of interviewing Murtaza Haider, an economist and Professor at Toronto Metropolitan (formerly Ryerson) University to discuss why he believes that rent controls killed the supply of purpose-built rental housing in Ontario. You can watch the full interview on the Move Smartly YouTube channel here - or listen to it on our Move Smartly podcast here

I left our conversation with two main conclusions. 

Firstly, the idea that rent control prevents investors and landlords from wanting to build or provide rentals and needs to be removed to encourage the provision of rental housing appears to be a view rooted in political ideology rather than scholarship. Most North American housing economists take a very neoliberal (free market) approach to housing policy (which de-emphasizes the role of government regulation and largely subordinates it to the freedom of the market considerations), which differs from the approaches of their European counterparts.

These academic differences mirror the different housing regimes in North America vs Europe: most European countries, including those with liberal economies, have built a substantial supply of rental housing without abandoning rent controls for tenants — and indeed, often the opposite — seeing them as a non-negotiable part of their market economy. 

Secondly, if rent controls are a disincentive to owning multi-unit rental housing in Canada, we would see that reflected in cap rates (the annual rate of return) on multi-residential properties, which would be rising to compensate investors for this disincentive. However, according to commercial brokerage Colliers, cap rates for multi-res properties have declined from just under 7% in 2009 to 3% in 2022, showing that the demand for this type of investment remains high, even with rent controls.

What is critical to understand here is that the rate of return on multi-unit residential properties is falling because strong demand amongst investors has driven up sale prices; as sale prices increase, the rate of return on those investments falls.

Here, we need to make a critical distinction between two different actors involved in increasing rental supply, builders and landlords - because the business of building rentals and the business of being a landlord are not the same.

Many builders of the type of larger, purpose-built rental buildings needed to increase our supply at the scale experts estimate we’d need to make renting more available and affordable do not want to be long-term landlords. They want to build and then sell to an operating company that invests in, leases out and manages rentals. For these builders, removing rent controls is not an incentive to building rental buildings. 

That’s why policies incentivizing the construction of multi-unit rental housing would be more effective than removing rent controls. These policies include an accelerated capital cost allowance (in Budget 2024), deferred capital gains tax, and recaptured depreciation due upon the sale, provided the proceeds are reinvested into building more new purpose-built rental housing. Canada had these policies in place during our last apartment building boom, and economist Mike Moffatt and others have correctly advocated for them. 

Removing rent controls would be a windfall for the largest corporations, including REITs that own, lease and manage rentals for the long term, an incentive that isn’t needed given that demand for rental housing is already so strong as I discussed above re: cap rates.

Renters are amongst those most negatively affected by Canada’s current housing availability and affordability crisis. There is no rational economic or social justification for abandoning rent control, which offers renters security of tenure and the opportunity to build a viable life for themselves and their families, and has not, as it has been shown by the data in Canada, dampening the enthusiasm for being a landlord, where investors continue to grow and outnumber the first-time buyers of homes.

In other words, getting into the landlord game is already attractive enough; getting into the rental building game isn’t, so it’s the latter that needs to be encouraged.

John Pasalis is President of Realosophy RealtyA specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).

Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here:

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Policy     |     Renting     |     Economics     |    

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