Manitoba Wins The Race to the Bottom

The lowest rent control limit in Canada sends tenants to the back of the line

By Mike Chopowick, September 17, 2015

Only those with a long memory (even I am too young!) will remember Canada’s experience with hyper-inflation in the 1970’s. Inflation was routinely above 10% during that decade, resulting in a disastrous experiment with wage and price controls, which were thankfully dismantled by 1978.

In Ontario, one barbarous relic remains from those terrible times: rent controls on apartments. With inflation hovering around 2% in recent years, it’s a mystery why the government still shows any interest in controlling rent prices (though not the prices for any other goods or services).

Only four Canadian provinces still have rent control. Ontario will have a rent guideline of 2.0% in 2016, B.C. at 2.9%, while Quebec’s unique model has a 1.8% limit for most buildings, though actually landlords and tenants have more freedom to negotiate market rents in La belle province.

Not to be outdone, Manitoba recently won this perverse race to the bottom with a 1.1% rent control limit for 2016.

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You might ask what happens in provinces without rent controls? Do rents skyrocket there? A look at the chart above shows they don’t. Alberta saw an average rent increase of just 4.8% from 2014-2015, though we can really expect this to drop with the recent economic slowdown amid the oil price collapse.

Intuitively, some might think low prices for apartments are a good thing. The reason why rent controls are bad is basic economics: There are simply not enough rental apartments to meet the demand caused by an artificially low price. The result is that people who really need an affordable rental home get locked out by rent controls.

"Serious problems result when government sets prices below the equilibrium level. This causes consumers to want more of the product than producers have available. When the federal government restricted gasoline price increases in the 1970s, long lines formed at gas stations and only those motorists who waited long hours in line received the scarce gasoline."¹

Serious problems result when government sets prices below the equilibrium level. This causes consumers to want more of the product than producers have available. When the federal government restricted gasoline price increases in the 1970s, long lines formed at gas stations and only those motorists who waited long hours in line received the scarce gasoline.“¹

 

If you don’t believe this, let’s look at Sweden, which is quickly destroying its housing market with rent control. With artificially low, rent-controlled prices, having an apartment in Sweden in like winning the lottery.

“The low rents in attractive areas such as central Stockholm have encouraged many Swedes to stay put in their apartments and discouraged builders from constructing properties for lease. This has exacerbated a housing shortage that has sent prices and private debt to record levels in Sweden.”²

Some apartment units have close to 2,000 people waiting to rent them. The waiting list in many Stockholm neighbourhoods is three to five years, and up to twenty years in desirable areas. The Swedish National Board of Housing estimates there is a shortage of 40,000 rental units² – not because there is not enough apartments, but because who wouldn’t want to rent a one–bedroom unit at US$720/month?

The image above is a scan of a booklet sent to a rental applicant by Stockholm City Council’s rental housing service. See those numbers on the map? That’s the waiting time for an apartment in years. Yes, years. Look at the inner city – people are waiting for 10-20 years to get a rental apartment, and around 7-8 years in my suburbs. (Red keys = new apartments, green keys = existing apartments). Stockholm City Council now has an official housing queue, where 1 day waiting = 1 point. To get an apartment you need both money for the rent and enough points to be the first in line. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989! - See more at: http://marginalrevolution.com/marginalrevolution/2015/07/rent-control.html#sthash.xle6pUvh.dpuf

“See those numbers on the map? That’s the waiting time for an apartment in years. Yes, years. Look at the inner city – people are waiting for 10-20 years to get a rental apartment, and around 7-8 years in my suburbs. Recently an apartment in inner Stockholm became available. In just 5 days, 2000 people had applied for the apartment. The person who got the apartment had been waiting in the official housing queue since 1989!”3

 

We are already starting to see the negative impact of rent controls here, as high house prices put ownership out of reach for many young households. Ontario’s vacancy rate in April 2015 was 2.5%, a drop from 2.8% a year ago. Demand for rental housing is increasing, and high development charges and government taxes make building new rental housing a challenge.

Thankfully, tenants in Ontario now don’t have to wait years for a private sector apartment. If we don’t ease rent controls, however, tenants may have to get advice from the Swedes on how to best exercise patience while waiting at the back of the line.

 1 Fiona M. Scott Morton, “The Problems of Price Controls”, from Regulation (Vol. 24, No. 1, 2001).
 2. Niclas Rolander & Niklas Magnusson, “Sweden’s Home Shortage Sparks Attack on Rent Regulations”, Bloomberg Business, August 28, 2014.
3. Alex Tabarrok, “Rent Control in Sweden”, from http://marginalrevolution.com/marginalrevolution/2015/07/rent-control.html, July 24, 2015