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How did rent controls on new buildings affect the housing market two years later?

By Zoocasa

The Ontario government announced the Fair Housing Plan (FHP) in April 2017 and specifically designed it to cool the market. Included among the 16 measures the then-Liberals hoped would stop the runaway prices of the Toronto market, was rent control on private rental units, including those built after 1991.

Vacancy was at rock bottom and rents were rising rapidly — we all remember the CBC reporter whose rent shot up $1,000 in a single month.

Tenant groups lobbied for rent control, while developers claimed controls would only halt investment in building more units, and thereby increase rents anyway because of shrinking supply.

So how did it all actually turn out two years later? To understand that, we first have to understand the history of rental controls in the province.

Rent increases limited to inflation had been in effect since 1975.

But then, in the 1990s, rental prices started skyrocketing due to high demand and low supply - a similar situation to the one we’re in now.

Former Conservative Premier Mike Harris blamed rent controls for the low supply — developers had virtually ceased building rental towers after the mid-1980s, claiming less favourable tax measures and low profit margins thanks to the inability to raise rents in response to market conditions.

The supply of new purpose built rentals went from approximately 267,000 between 1961 and 1986 to just under 48,000 between 1987 and 2015, reports Michael Shmulevitch in his Urban Planning thesis.

Harris passed a bill cancelling rent controls for new buildings to incentivize developers to build towers en masse, as they did in the 50s, 60s and 70s.

Initially, it worked. The units under construction doubled from close to 6,000 units in 1993 from 2,200 units in 1991.

But tastes had changed, and renting had gone out of fashion. People were more interested in owning, and they could afford to do so, as land around the city was still abundant.

From 1996 to 2010, there was no net increase of purpose-built rental units.

What we got instead was condo buildings.

But all of a sudden, right before the FHP, renting became fashionable again.

People could no longer afford to buy a house in, or near, the city. Greenbelt legislation was in effect and no more land was available for new suburbs. We were stuck with what we had and were forced to build up, rather than out.

The purpose-built rented towers were old and outdated by then, and many were in undesirable neighbourhoods. Meanwhile, condos were shiny, modern and sleek, and — most importantly — available. Millennials weren’t that into owning anyway, and it felt good to be close to work, restaurants and the gym.

Condos became the de-facto rental towers; without the stability or professional management that the latter provides.

An incredible 76,000 private rental condos joined the market as rentals from 2007 to 2017 compared to just 2,400 purpose-built rental units.

Condos were so low maintenance, that anyone with capital could become a landlord while waiting to cash in on Toronto’s soaring property prices. And they did.

Speculators and investors entered the market practically in droves, scooping up whole floors of condos in order to rent. The incredible demand put enormous pressure on the slim pickings of the current rental stock and vacancy rates hit rock bottom.

Rent for condo units surged by 30 per cent from 2006 to 2018.
 
In fact, renting has become such big business that developers who literally had not built a single purpose-built rental tower in 30 years, finally started sniffing around.

By 2015, the Greater Toronto Area had 6,523 purpose-built rental units under construction — the highest level in over 25 years, according to Urbanation.

The free market was working. Supply had shrunk, prices had risen, and now more supply was coming, which would ease the pressure on prices.

But then, the government stepped in with the FHP.

So, what happened? Did developers convert all the rental towers under construction into condos? Did tenant protection increase?

As it turns out, rent control did little to cap rising rents. The average cost of a one-bedroom condo to rent in the first quarter of 2017 was $1,791. Two years later, it had jumped almost 20 per cent to $2,143, according to the Toronto Real Estate Board. Two bedrooms are now $2,811, up 15 per cent from $2,432.

As it turns out, renting is still big business.

It’s likely for that reason that the number of purpose-built rental apartments available in 2019 reached 1,849 units, according to Urbanation. That’s a 25-year high and nearly five times greater than the quarterly average since the first quarter of 2016. But it falls far short of the estimated 8,000 units needed every year to making renting in Toronto affordable again.

In short, the FHP had little discernible chilling effect on the market. It protects tenants as long as they never move, but once they do, they’ll continue to face escalating rents.

For more information on how the FHP affected home prices in Ontario, including Guelph real estate, Barrie real estate and York Region Real estate, check out the infographic below.

house made of 100 dollar bills

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