Rent controls — said to be the most efficient way of destroying a city

by Avrom Charach

The time has come to change or abolish rent controls in Manitoba.  Manitoba remains the only province or territory which has and enforces strict rent controls. 

Manitoba also remains the jurisdiction that consistently has the least investment in new purpose-built multi-family residential buildings. It is seeing reinvestment in existing stock but our provincial government turns a blind eye to the cost of operation and repairs when setting their guidelines. All of this leads to record low vacancy rates of 0.1 per cent in Brandon, 0.9 per cent in Winnipeg and a decline from 3.5 per cent to 1.2 per cent vacancy in Portage La Prairie. 

Nobel Prize winning economist Paul Klugman wrote in an editorial published in the New York Times, “A 1992  poll of the American Economists Association found 93 per cent agreed that a ceiling on rents reduces the quality and quantity of housing.

“The issue of rent controls is among the best-understood issues in all of economics.” 

He concluded that politicians do not want to take his or any other economists advice because of “the Murphy’s law of Economic Policy.” This is defined as the more proven something is in economics, the less policy-makers want to listen to an economist. The government in Manitoba subscribes to this Murphy’s Law.

The province just announced a one per cent allowable increase in rent for 2010 presumably due to low consumer price index (CPI). For almost a decade, the Residential Tenancies Branch has received record numbers of applications for rent increases above the guidelines because the guideline ignores rising costs faced by landlords. Any homeowner recognizes that the costs of running and maintaining a home increase faster than CPI. The effect of this one-per-cent guideline will be a further disincentive to investment and construction at a time when Winnipeg and the province are looking for new housing for a growing population. 

Ontario abandoned strict rent controls 10 years ago, allowing rents to increase to market levels whenever a unit is vacated, and allowing tenants and landlords to mutually set rents higher than guideline. Quebec and British Columbia have similar rules. All other Canadian jurisdictions have no rent controls. 

Manitoba’s only significant change in 30 years is an improvement but is not good enough. A landlord can now pay a $150 application fee, invest no less than $3,500 in specified types of repairs and have two (or more) site inspections of a suite before they can receive permission to raise rent on that one suite when a tenant voluntarily vacates. This is allowed for 10 per cent or less of suites in any given building per year, about one-third of the average turnover of suites. 

Ontario saw a more than 300 per cent increase in spending on suite maintenance by simply changing their legislation, while Manitoba added staff, overhead costs and bureaucracy to achieve a less marked improvement.

 Before it abandoned strict rent controls in the late 1990s, Ontario had vacancy rates below one per cent. Since then, the province has seen significantly more rental units enter the market and regularly have vacancy rates in excess of three per cent. A balanced market is achieved between a two- to three-per-cent vacancy rate. 

Saskatchewan, which removed rent controls at the same time as Ontario  made its changes, sees more new development than Manitoba and had a balanced market until their recent oil boom.  

CMHC statistics show that Winnipeg had a net loss of more than 1,500 rental units in the last 10 years while rents have increased every year. More frighteningly, Winnipeg’s rental market has lost more than 4,800 units since 1992 — an 8.5 per cent decline in rental units. 

Why has this happened?  

Disrepair due to low rent guidelines has caused many buildings to be boarded up while other owners convert units to condominiums as a way to leave the rental market.  

Where will the 7,850 new immigrants predicted to arrive by 2010 live when rental units keep disappearing?  

In many provinces, 30 per cent or more of all condominiums are bought to act as investment property and are rented out. This does not happen in Manitoba because of our restrictive rent controls.  

In the five years between 2004 and 2008, Manitoba’s allowable guideline rent increase totaled 10 per cent, while CMHC reported a 17.9 per cent total increase in rents charged.  This happens because a large number of landlords apply for above guideline increases. The application is cumbersome and must be completed for every single rental property. The application is used to prove  costs in excess of the guideline. 

The fee for submission is $150 for a single-family dwelling to triplex and $500 for larger properties. The fee and expertise required for this process discourages most small owners from completing the process. Small owners must watch their properties decline or sell them to condominium developers.

Ontario, facing a lower CPI than Manitoba, is allowing two per cent as their 2010 guideline. In British Columbia, the rent control guideline is set by taking the CPI, adjusting for the basket of goods faced by landlords and adding two per cent. With a lower reported CPI than Manitoba, B.C. is allowing a 3.2-per-cent guideline for 2010. That is much closer to the average actual rent increases in Manitoba reported by CMHC. 

The Professional Property Managers Association has suggested that, if rent controls are not removed, we adopt such a transparent CPI-based system, instead of one where the calculations and reasons are locked up and not accessible, even with a FIPA request. It is purely economic, allows for repairs and has no appearance of political interference. 

Statistics show Winnipeg regularly experiences higher percentage rent increases than much of Canada. We also see regular reports of low investment and declining numbers in rental stock while other jurisdictions see more higher-quality rental stock and lower rents. What we have here is proof of what every student of economics learns, price controls do not work — they do more harm than good. 

Nobel Prize winning economist Gunnar Myrdal wrote, “Rent control has in certain Western countries constituted maybe the worst example of poor planning by governments lacking courage and vision.”  

Unless Manitoba’s government comes to realize what every other province and territory has realized, we are doomed to even more declines in housing quality.  

Swedish Economist Assar Lindbeck sums it up best, “In many cases rent control seems to be the most efficient technique presently known to destroy a city, except for bombing”

(Avrom Charach is the chairman, Canadian Federation of Apartment Associations, spokesperson for the Professional Property Managers Association, and vice-president of Kay Four Properties Inc.)