This article is part of a six part series. Read the full series:
1. Government Policy & Rental Supply | Rental Housing Supply 1
2. Ottawa’s Historical Renting Data | Rental Housing Supply 2
3. Corporations | Rental Housing Supply 3
4. Individual Investors | Rental Housing Supply 4
5. Rent Control | Rental Housing Supply 5
The Impact of Government Policy on Rental Housing Supply
“Few people are willing to brave the disapproval of their fellows, the censure of their colleagues, the wrath of their society. Moral courage is a rarer commodity than bravery in battle or great intelligence. Yet it is the one essential, vital quality for those who seek to change the world which yields most painfully to change.”
– Robert Kennedy
Ultimately, our society will need the courage and dedication to change if we truly want to ensure available and affordable housing. But it will not be easy as the correct answers can often be politically unpopular. It will take true moral character to make this right instead of using each incremental crisis as political opportunity.
The lack of rental housing supply and the resulting lack of availability and affordability has been the focus of this series. We have explored the impact of demographics, regulations, and incentives to determine causal effects. Without a shift in our policies, the housing crisis will get worse. While this may be good for investors and owners, it is most certainly not good for renters, and the more vulnerable in our society will be the most affected. In this final article, we will combine the conclusions of the first five topics to put together a set of recommendations.
In the first two articles, we explored the various influences of rental housing demand. This included rural to urban migration, immigration, and demographic shifts. Our overall findings conveyed that the Canadian population is growing by approximately 1% per year where Ontario and urban centres see a disproportionate amount of population growth. At the same time, we have seen a dramatic drop in rental housing creation relative to rental demand particularly since 1972. The three major influencers were changes in incentives and opportunities with corporate rental housing providers; initial opportunity and then increased risk for individual investors; and finally, the correlation of rent controls with the rental housing supply shortage.
In summary, the key conclusions are as follows:
- There are two distinct groups of rental housing providers: corporate and individual investors
- Corporate investors and developers saw significant reduction in financial incentives and the introduction of capital gains tax in the early 1970s during tax reforms. At the same time, condominiums were legalized in 1967 resulting in a shift of housing creation priorities as condominium creation has a better business case, in general, than purpose built rental housing creation.
- Financial and policy incentives shifted to individual investors who picked up the slack by buying condominiums and other single-family homes and they are now the largest category of rental housing provider. However, this demographic has a disproportionate and growing amount of risk related to inefficiencies and procedural strictness in the Residential Tenancies Act (RTA) which in turn is slowing down their ability to respond to housing needs.
- Rent controls are highly correlated to supply issues and economic studies draw definite conclusions that they are almost certainly a causal effect though not necessarily an exclusive impact. At the same time, while rent controls do have some short-term benefits for incumbent tenants, it generally has a negative impact for the renting community over the long term. It was also concluded that removal of rent control does have benefit in the quality of rental housing but by itself does not seem to have a strong correlation to rental housing supply creation.
The single-best lever to enable rapid supply increase is by enabling the individual investor. They are the most numerous as a group and likely have the most available capital as a group. They are the nimblest in that their creation projects can come to market very quickly. While financial incentives would help, the primary changes that would improve their contribution to rental housing creation would be shortening the time to have a case heard at the Landlord Tenant Board (LTB) and reducing the procedural strictness that often causes cases to be dismissed and restarted. In reducing the risk for the smaller providers there will also be improved accessibility for the more vulnerable in our society.
The next opportunity is to better balance the financial incentives for developers to create purpose built rental housing. While condominiums can be repurposed to rental housing, their purchase price is generally much higher resulting in supply of higher rent accommodations. Tax based incentives could be used as was done in the 1960s. Specifically indexing to inflation the capital gains cost base and perhaps allowing accelerated write offs of certain capital costs. Federal subsidies currently exist, but they are generally onerous in their requirements.
Finally, while politically unpopular, I strongly contend that rent controls should be relaxed. By itself, rent control relief will not likely improve supply but in conjunction with the other supply improvement initiatives, it will improve the quality of rental housing stock and further empower tenants. As a result, with supply and the ability to respond to tenants’ needs, rental housing providers will need to treat tenants as the valued customers that they are.
- Individual Investors (small mom and pop providers):
- Shorten the time to receive a hearing
- Offer more procedural flexibility so that cases are not dismissed over small technical errors where it would not otherwise have impacted the outcome of the hearing.
- Corporate Investors:
- Create incentives to better balance the business case between purpose-built rentals and condominiums to encourage more construction of rental housing. These could include no HST on purpose-built rentals (increase the NRRP to cover 100%); accelerated write-off of capital investments; reduce development charges of desired project such as purpose rental housing
- Introduce indexation of the cost basis in evaluating capital gains
- Rent Controls:
- Improve/Simplify the provisions to allow for capital expenditures.
- Allow increases to reflect the true rate of inflation for operational costs
- Ultimately remove rent controls but in combination with other incentives to encourage rental housing creation