Rent controls hamper apartment construction

(Part 1 of 2)

On the surface, you would think WinnipegREALTORS® and its over 1,300 members are rubbing their hands with glee over the fact that immigrants and newcomers to our city have no choice but to buy a home as a result of the dearth of available apartment units in good condition, but this is far from the case. A healthy and balanced housing market includes an adequate supply of various property types, including new, existing and rental accommodations.

The policy on rent controls outlined in a 2001 position paper produced by the WinnipegREALTORS® Civic and Legislative Affairs Committee has not changed. Essentially, it calls for the Manitoba Government to move toward the Ontario model which allows voluntary vacated units to be removed from rent control guidelines. This was something the local Professional Property Managers Association (PPMA) also advocates.

But this is not the only solution to help turn around the shrinking rental universe, which has declined despite some new units being added in recent years. CMHC reported Winnipeg only had 322 apartment unit starts in 2008 and just 237 for the first eight months this year. At the same time, its local economist, Jeff Powell, told the Winnipeg Free Press he expects to see more condo conversions this year, resulting in desperately-needed rental units being lost. This trend of apartment-to-condo conversions is not likely to let up as REALTORS® involved in the most recent projects indicate owners can get a better return on their investment. Apartments are limited by rent controls so they do not attract the money a condo conversion can generate.

Another challenge to building new apartment units is increasing construction costs — a higher cost per unit than what the artificially suppressed rent control market units are renting for. When the newly-occupied units become vacant, the owner has to compete with units far cheaper to rent in the existing controlled rental market.

WinnipegREALTORS® realizes it is still a daunting task to build new apartment units across Canada, even where rent controls do not exist or are far less restrictive. It is behind the Canadian Real Estate Association’s effort to unlock property reinvestment by advocating for changes in federal tax treatment of rental property to create more incentives for developers to build new units and owners to refurbish existing units. 

Simply put, REALTORS® want the capital gains tax and the recaptured capital cost allowance to be deferred when an income property is sold and the proceeds are reinvested in another income property. Many Canadians of modest means who own rental property are reluctant to sell in order to reinvest in another property because of tax consequences. Paying the capital gains tax and recapture of the capital cost allowance leaves investors with less equity and unable to acquire a property of similar value.

Reinvestment would help create additional housing capacity to meet the demands of rental housing and urban intensification. According to the Canadian Federation of Apartment Associations, purpose-built rental housing starts across Canada have declined over the last 35 years from an average of 60,000 starts to an average of less than 15,000 starts per year, despite population growth.

In addition to stimulating the needed supply of new and refurbished apartment units in extremely tight rental markets, such as in Winnipeg’s, unlocking property reinvestment will also benefit the economy. New research from Altus Group Economic Consulting estimates that between 2006 and 2008 the typical multi-unit residential income property transaction in the Greater Toronto Area, Greater Calgary Area and the Greater Vancouver Area generated $287,850 in ancillary spending. The study also found 53 jobs were created for every 100 transactions.

By making multi-family real estate a more viable investment for Canadians, who bear personal responsibility for their retirement as a result of corporate Canada’s shift from defined benefit to defined contribution pension plans, a move to stimulate new apartment rentals will enable Canadians to relocate their real estate holdings to correspond to another city, something that is done easily with a stock or bond portfolio.

Besides calling for the provincial government to really address the rental housing shortage in a meaningful way, WinnipegREALTORS® has set up a rent regulation review committee headed by veteran REALTOR® and real estate broker Mel Boisvert. Its mandate is to review and make recommendations on the mechanics and operations of the rent control/rent regulation system in Manitoba. The thought is that if we have been unsuccessful in moving the yardsticks to loosen up our rental market, then the least we can do is make every effort to make things as palatable as possible for landlords and tenants. 

For example, if we discourage many of the small mom and pop landlords from carrying on their role as important providers of rental housing, they can reap the benefits of rising house price increases by selling their rental properties to new home buyers. All this does is exacerbate things further by reducing the rental supply. 

Note: CMHC economist Jeff Powell said the vacancy rate in some areas of the city is as low as 0.1 per cent while the average is 0.9 per cent.

The committee will also look into making recommendations on how to improve the existing rental stock (e.g. creating incentives for landlords to retrofit and create more energy-efficient rental properties). Overall, committee members intend to look at how the Residential Tenancies Act can be fairer and more balanced for both tenants and landlords. 

Whether it be a strong adherence to a strict rent control regime or the lack of administrative flexibility to allow for changes to encourage more upkeep and maintenance of a shrinking rental universe, the provincial government at least has to be open to considering the recommendations coming from the committee. This includes setting up its own task force to review the act with representation to include landlords and tenants.

Avrom Charach, who chairs the Canadian Federation of Apartment Associations and is a spokesperson for the Professional Property Managers Association, recently said that rent control has been a major contributor to Manitoba’s current housing crisis. Moreover, he wants the next NDP leader and premier of this province to deal with it even if it is a political hot potato.

“It is high time Manitoba recognizes the untenable situation it has gotten itself in with all these years of rent controls and give up its charade of bringing in unrealistic rent control annual guidelines (one per cent this year),” said Charach. “It only perpetuates a problem that cannot get much worse without really hurting the very people rent controls were intended to help. Tweaking rent control guidelines is only a band-aid solution that will fail miserably in the end.” 

(Next week: part 2)