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Column: Rent Control is Bad Policy

My column in today’s The StarPhoenix

On a cold day in February, the NDP breached the topic of rent controls in Saskatchewan, with party Leader Dwain Lingenfelter calling for "next generation" rent controls that cap increases or only come into effect when vacancy rates are extremely low.

Justice Minister Don Morgan gave what has become a pretty standard response from everyone who opposes rent controls: "We think it’s a disincentive to having developers put more property on the market."

Despite a lot of opposition to the idea, the NDP has kept talking about the idea, partly because many across Saskatchewan are overwhelmed by the rent they pay.

The Canada Mortgage and Housing Corporation points out that rent in Saskatoon increased 10 per cent annually from 2006 to 2010. This brought up the average rent for a two-bedroom apartment to $950 a month in 2011 and will slightly increase to $975 in 2012. While a lot of apartments have come on the market, CMHC forecasts a net migration of more than 5,000 people to Saskatoon in each of the next two years, which means that rents will remain high, driven by strong demand for both new houses and apartments.

Higher rents are not always a bad thing. For a long time, Saskatoon had rent that was well below the national average. Increasing rental rates gave property owners a chance to make some needed improvements to their properties.

The quality of apartments has increased dramatically since the boom started and we started to see rental increases. Those improvements did come with a price for those living in the rental units. Apartments that rented for $650 five years ago are now more than $1,000. Even CMHC points out that Saskatoon has become a much more expensive place to live, which hurts our competitiveness as a city.

Rent control is the quickest way to solve the problem, and versions of it have been used in growing cities across North America.

To promote investment in new apartments, rent control often exempts new construction. New York City exempts apartments built after 1974 from rent control. The idea is that landlords can recoup their investment long before the rent is capped. For buildings constructed after 1974, landlords can opt into the program in exchange for tax breaks.

The problem with this is that, at the point where a building needs reinvestment as well as new revenue to pay for it, it loses that option and older buildings often deteriorate quickly.

Another approach is rent stabilization. Landlords are free to set prices of empty suites at whatever rent they can get. Once an apartment is rented, future increases are capped at a set rate. The idea is that it gives some security for both tenants and landlords.

This protects renters from unrealistic and unexpected rental increases, and it benefits landlords by providing tenants an incentive to stay and be responsible. Rate equalization also serves as an incentive for improvements in many cities. Landlords in many cities can apply for rental increases above the equalized amount if they make improvements to buildings. This can cut both ways, as tenants can apply for rent reductions if their apartments are not kept up to code.

Sadly, it never works that way in the real world.

As has been documented in San Francisco and other booming American cities, landlords were holding formal interviews or demanding credit reports (something we now see in Saskatoon) before choosing tenants because there are never enough rent-controlled units to meet the demand. Those who are most likely to benefit from a rent-controlled apartment are often the last to get it. Economist Paul Krugman put it this way: "In uncontrolled housing markets, landlords don’t want grovelling. They would rather have money."

Even if you are lucky enough to get a rent-controlled apartment, you also have some landlords looking for ingenious ways to evict clients so the apartment can be rented out at a higher price.

In Saskatchewan, rent control may solve a shortterm political problem, but it doesn’t solve longer term housing and economic problems. With rental increases predicted to rise incrementally in 2012, it may not even be needed.

What is needed is a continuation of the programs that address the supply issue. Existing programs such as the capital grants for affordable rental units, tax abatements for multi-unit housing, and forgivable loans for the creation of secondary suites have paid off. The rental supplement helps meet the gap between high rents and lower income families.

Rent control may be good politics, and in the middle of an election campaign that is important. However, it remains poor economic policy. There are better alternatives for both renters and our cities.

jordon@jordoncooper.com

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