Do Rent Caps Make Sense?

Recently, the Ontario Government has purposed to “stabilize the rent increase guidelines”. According to the Ontario government “tenants would benefit from greater certainty that would ensure affordable and stable rents so they have safe and affordable housing. For landlords, this would ensure a fair return so they can properly maintain rental properties.” As a property manager in Toronto, and a real estate investor, I struggle to see how a cap on rent increases benefits tenants, investors or improves the affordable housing issues in Ontario. Has the government stopped to think about what impact this change will have on unit quality, investor’s enthusiasm or history?

Unit Quality:

It can be argued, that with rent ceilings, tenants can spend more of their disposable income on other consumables like cars, electronics, furniture etc… and as a result, their quality of life will be enhanced. This transfer of capital works in theory however, in reality and in the past, when there is little monetary incentive for landlords/owners to invest in residential housing, either development of new housing slows down or stops or investment into existing housing halts. With less quality supply, the tenant ultimately suffers in the long run. Why would a landlord put more money into a property if their returns are capped by the province? This outlook is one that has been shared by many economists. Their suggestion is to let the market dictate the rents. If a place is priced too high, nobody will rent it.

Investors Enthusiasm:

Currently, the annual rental increases are determined by the province using the CPI (consumer price index). Issues arise when factors like HST are not added to the equation as well as the skyrocketing electrical , and water costs. In addition, there will inevitably be increased interest rates which, will impact investors as well. It is not about padding profits, but if the financial model ceases to work, then investors will put their money somewhere else. When investors stop investing in real estate, the supply will decrease and that can’t be good for tenants.

History of Rent-Caps:

You don’t have to go far to find examples of rent ceilings failing. In New York there is scarcity of affordable housing and an increase of bribery or payoffs to get into a low rental establishment. The people who should be benefiting from this movement are simply not. If the Ontario government wants to increase affordable housing they need to provide incentives to landlords to maintain, improve and increase the number of units available in Ontario. If there is more supply, landlords will have to provide better quality units at a more competitive price.

A rent cap sounds more like a political move geared to make voters think the Government cares about affordable housing. In actual fact, rent caps could potentially decrease inventory, and decrease the quality of units available on the market today. When that is the case, nobody wins.

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4 Comments to “Do Rent Caps Make Sense?”

  1. Andy Coats says:

    Yes, it is a political move. I agree. However, you can’t separate government and politics in a partisan democratic system – it’s how things get done. Our government must get more involved in rental guidelines – caps is just one method. Adequate housing is a basic human right – affordability is one factor impacting that adequacy. The Canadian government signed the UN accord that stipulates that. It can’t be left to the free market, and historically it hasn’t. Rents, especially in larger urban centres, are spiraling upwards, something must be done.

    • Leo says:

      I do agree that there is a shortage of affordable housing however imposing rent caps are not the answer. When you penalize investors and take away their cashflow, they start to look elsewhere for returns. There will be a supply issue going forward if these laws are passed. Greater tax breaks for lower income individuals, government rebates for landords that do repairs to improve the living conditions for their tenants, raising minimum wages, providing free financial planning or even subsidies could be potential solutions.

  2. Andy Coats says:

    Those are actually all very good suggestions Leo. Hopefully the government will listen. Perhaps more municipalities could adopt the new “living wage” guidelines instead of “minimums”. The cashflow problems affect tenants as well as landlords and they need money left over to invest after the bills are paid also.

  3. I understand the urgent need for more affordable housing in Canada and the Federal and Provincial governments have an important role to play in facilitating this basic human right. That being said, I agree fully with Leo’s concerns about rent caps not being the best mechanism in accomplishing these objectives. I remember visiting Vienna, Austria about 20 years ago and seeing many old dilapidated apartment buildings in the City s and being told by Austrian businessmen that these old run down buildings were the result of City and state laws freezing rent increases. I was further told that the city and state laws also imposed obligations on such building owners to keep the apartment buildings in good repairs, however, without sufficient revenues, this was for many such owners an impossibility, and not being able to sell these liabilities, they left the country to avoid financial ruin. This was an un intended consequence of a socialist government wanting to provide affordable housing to its citizens,

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