Posted by TenantNet on August 25, 1996 at 01:47:40:
The following report was sent to us:
J.D.Hulchanski, University of Toronto
22 August 1996
Presentation to the Ontario Legislature's
Standing Committee on General Government
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Comments on proposals contained in
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"Tenant Protection Legislation:
New Directions for Discussion"
Government of Ontario,
Ministry of Municipal Affairs and Housing, 1996.
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1. What is the problem? Rental supply.
The introduction to the consultation paper states that the "Harris
government knows there is trouble in the Ontario rental housing
market." This "trouble" is due to the fact that "the private sector
has no interest in investing in rental accommodation." I do not know
of any informed observer who could disagree with this starting
observation.
2. What happened to market demand for new rental supply?
Markets consist of supply and demand. If we agree there is no
private sector supply, what happened to private sector demand? Is
there no demand for rental housing in Ontario? If there is market
demand for a good or service, there will logically be market supply.
In order for a good or service to be supplied on a market basis the
'demand' needs to be effective market demand. Any 'business plan'
includes an analysis of the number, type and price sensitivity of
potential customers. If there are not enough customers able to
afford a particular product, there can be no long-term viable
business supplying such a product.
3. The 'income gap' between home owners and renters: 80% in Toronto.
There is very little supply of new rental units in Ontario because
there are not enough 'paying customers' for newly built rental units.
There is simply very little effective market demand for new
unsubsidized private sector apartments. Very few tenants can afford
the rents new construction require. Many tenants, perhaps a vast
majority throughout the province, have difficulty paying rent on
their existing older, lower rent, apartment units. About one-third
of all tenants in Ontario are receiving social assistance. The
median income of tenant households is about half that of owners.
Using the Toronto CMA as an example, the real (1991 constant dollars)
income of tenant households has declined by 8% between 1971 and 1991
while that of owners has increased by 20%. In 1991 tenant households
in the Toronto CMA had a median income of $33,500 while owners had an
income of $64,000 - a gap of $30,500. [Attached to this paper
(Appendix #1) is a three page review of recent trends in housing
demand and supply in greater Toronto. About half of all renter
households in Ontario live in the Toronto CMA]
4. Ontario has more ''social need" than "effective market demand."
Very few tenant households in Ontario can pay the rents new
construction require. There is thus tremendous social need for
rental housing but very little market demand. Markets cannot and will
not respond to social need. There is a small high end 'niche' market
for luxury rental (though condos tend to meet this segment of
demand). Other than this small niche, investment in new rental
housing is not economically viable. Rent controls are not
responsible for the serious problems with rental supply. The macro-
economic conditions which emerged in the early 1970s are responsible.
5. Which came first: rental market failure or rent controls?
Ontario's Rent controls were introduced in July 1975. The
government's consultation paper contains an appendix with some
helpful graphs explaining why a Conservative government in 1975 had
no choice but to respond with rent regulations.
-- Vacancy rates fell dramatically between 1971 and 1974, from about
3.5% to close to 1%.
-- Private rental starts fell from a peak of about 40,000 per year
in 1972 to a few thousand in 1975.
-- Ontario's consumer price index climbed dramatically throughout
the 1970s peaking at close to 12% in 1981 with interest rates
reaching 21% in August 1981.
These negative trends began for both tenants and investors before
rent controls. The early 1970s saw the beginning of 'stagflation.'
The old economic rules for rental supply, as for many key sectors of
the economy, were rapidly changed. Mortgage interest rates were not
only at historic highs but were deregulated and unpredictable. The
baby boomers were entering the ownership market for the first time,
pushing up housing and land prices. Condominiums were introduced in
the early 1970s for the first time, allowing higher income tenants to
own their apartments (thus decreasing market demand for new rental
units).
6. Market failure.
When these negative macro-economic conditions are combined with the
growing lack of effective market demand - the very low and falling
median income of renter households in the province - market failure
is the result. The 'demand' for rental housing is not effective
market demand. There can be and will be no supply response under
these conditions. Rent regulations are a response to market
failure. Ending rent controls will have no positive impact on the
supply problem - the lack of effective market demand. Macro-economic
factors, not a set of regulations, have caused the rental supply
problem.
7. Insupportable claims about the negative impact of rent controls.
There simply is no reliable evidence that rent controls produce the
range of negative impacts commonly attributed to them. Rent controls
in Ontario are a response to a problem, not the cause of the problem.
Rent controls are introduced grudgingly by governments in response
to severe market realities which allow owners so inclined to take
advantage of their market situation (e.g., by rent gouging) in a
market where the supply and demand mechanism no longer functions.
The impacts of rent control must be assessed on a case by case basis
in each jurisdiction, taking into account local market conditions and
the specific regulations of the system under examination, including
the system's loopholes and inconsistencies.
(A) Building Maintenance Discouraged.
We are told by the Ontario government that the "current system does
not ... create any incentives for landlords to put money into
maintenance...." On what research is this assertion based? With or
without rent controls landlords, like individual home owners, make
decisions on maintenance based on the expected market resale value of
their property. One of the more dynamic segments of Ontario's real
estate market is the buying and selling of existing rental buildings.
Existing units are a great investment option for some. [See for
example: "Investors go apartment hunting," Globe and Mail, July 2,
1996; "Buyers snapping up Metro apartments," Toronto Star, March
10, 1966.] There is also a great deal of evidence pointing out that
a rent control system like Ontario's with set annual increases and
related provisions does not have the theoretically assumed negative
impact on maintenance.
-- "Most evidence suggests that modern rent controls have little
or no impact on the amount of investment in rental housing. Such a
finding is primarily because of the non-restrictive nature of most
current rent control ordinances ... that allow for annual rent
adjustments to cover increases in operating costs."
- R.P. Appelbaum and J.I. Gilderbloom, "The Redistributional Impact
of Modern Rent Control," Environment and Planning A, Vol 22, 1990.
-- "A major conclusion of this paper which has relevance for
housing policy is that particular features of rent control
regulations significantly affect the impact that rent control will
have on housing maintenance and the quality of dwellings."
- N.K. Kutty, "The Impact of Rent Control on Housing Maintenance: A
Dynamic Analysis Incorporating European and North American Rent
Regulations," Housing Studies, Vol 11(1), 1996.
(B) New construction discouraged.
The government also claims that rent decontrol upon vacancy and the
weakening or abolition of other forms of tenant protections "removes
barriers to new investment." This is illogical. The existing stock
of rental units with their existing tenants represent the past in
terms of rental supply. How will forcing existing tenants into
paying higher rents for the same old units lead to new investment?
How many existing owners of rental buildings actually built their
buildings and how many are currently residential developers? If
there was effective market demand for new rental buildings, they
would be built. If there is mainly or only social need, the market
will not respond. The government is using an 'ideal type' theoretical
argument assuming 'ideal market dynamics.' The world is not an ideal
place and what is called 'nonideal theory' is the proper starting
point for policy analysis.
-- "By nonideal theory I mean a normative theory that takes into
account the uncertainties and complexities of actual practice; that
descends from the realm of neat generality to the realm of messy
particulars." - M.J. Radin, "Residential Rent Control," Philosophy
and Public Affairs, Vol. 15(4), 1986.
8. Reviving private rental investment -
the failed B.C. experiment.
In 1983 when the British Columbia government introduced measures
similar to those now being proposed for Ontario the minister
responsible for rent control asserted that "these deregulatory
measures will ultimately result in new real estate development, more
jobs and a continuing healthy availability of rental accommodation."
A dozen years later "British Columbia is home to the lowest vacancy
rates and some of the highest rents in Canada." [Rental Housing
Trends in British Columbia, BC Ministry of Housing, 1995.] There has
been no supply response in B.C. Rents went up and during the late
1980s prosperity a great deal of rental stock was either demolished
or converted to condos. [See my attached July 2, 1996 memo, Appendix
#2, for a summary of the B.C. experience with rent decontrol.]
There is no doubt that rent controls can distort and inhibit the
functioning of normal market dynamics. The B.C. Social Credit
government used this argument in the early 1980s. They did
everything they were advised to do according to the assumptions of
conventional economic theories. The rental supply experiment failed
because there were no normal market dynamics to distort or inhibit.
The starting assumption for the policy change was simply wrong. The
problem with supply was and remains the lack of effective market
demand in British Columbia - as it is in Ontario. [See Appendix #3
for a summary of the impact of removing rent controls on rental
supply in Vancouver.]
9. The rationale for rent controls:
Regulatory protection due to market failure.
Vacancy rates of at least 3 or 4 percent provide the market
protection tenants require. There are plenty of opportunities to
move and landlords worry about losing tenants and having vacant
units. One vacant unit for one year (at $800/month) costs $9,600 per
year. A portfolio of 500 units with 4 percent vacancy during a year
(20 units) costs $192,000 in lost rent. The market provides a severe
fine for landlords who are unable to attract and keep tenants.
When there is inadequate market demand and thus little new supply -
market failure - vacancy rates remain low and tenants require
adequate regulations to provide some degree of balance in the
landlord/tenant relationship. Given the rental market failure which
emerged in the early 1970s in Ontario's larger metropolitan areas
there are four rationales for rent regulations in this province:
1. Security of tenure (protection from economic evictions);
2. Maintenance of the affordability of
the existing rental stock;
3. Prevention of a regressive income redistribution; and
4. Mediation of conflicts relating to
rental tenure.
[For a discussion of these see: K. Hanly, "The Ethics of Rent
Control," Journal of Business Ethics, Vol. 10, 1991; and J.D.
Hulchanski, Market Imperfections and the Role of Rent Regulations in
the Residential Rental Market, Ontario Commission of Inquiry into
Residential Tenancies, Research Study No. 6, 1984.]
No system of rent regulations is perfect. Any system has its
complexities and inefficiencies. We do not live in an ideal world.
Change in the existing system must be based on an identification of
what is specifically wrong and on what specific measure will likely
address the problem. The government's proposals do neither.
10. The likely impact of the government's proposals.
On security of tenure.
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Rent decontrol upon vacancy provides an economic incentive for
landlords to use whatever means necessary to get existing tenants to
move. The government's consultation paper is based on the assumption
that landlords will act in an economically irrational fashion. It is
economically rational for owners of rental buildings to maximize the
rent levels and for some to consider a different use for their
buildings and land (i.e., to consider evicting all tenants so as to
obtain the 'highest and best use' for their investment through
conversion or demolition). The governments proposals eliminate many
of the current security of tenure protections and provide owners with
an economic incentive to force tenants to move.
On maintenance of the affordability
of the existing rental stock.
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The end of the housing stock protection provided by the Rental
Housing Protection Act means that vacancy rates will be much lower
due to the loss of units to demolition and to the ownership sector
(tenure conversion). Tenants will pay more but most will not receive
more and there will be fewer apartments available. Landlords who
currently maintain their buildings properly and treat tenants fairly
will likely continue to do so (but at higher rents) and landlords who
do not maintain their buildings will likely continue their current
practices (but also at higher rents). The government's proposals do
not protect the existing rental stock from arbitrary and unfair rent
increases. The proposals do not effectively encourage maintenance
since demolition will become an option. By allowing demolition the
government is providing an economic incentive for some owners to
cease maintaining their buildings.
On prevention of a regressive
income redistribution.
--------------------------------
The primary landlord/tenant issue is the amount of the monthly rent.
The government's proposals not only allow but encourage a massive
transfer of money from tenants to those who are lucky enough to own
rental property in the province. Let us assume conservatively that
only one-third of Ontario's 1.3 million tenant households (433,300)
will pay higher rents due to rent decontrol upon vacancy over the
coming three years and that the monthly increase is only $100. This
is a redistribution of $520 million from tenants to rental property
owners. What will tenants receive for this money? How will paying
additional money to existing owners result in an end to market
failure (the assumed ideal of supply and demand in equilibrium in a
purely private rental market)?
On mediation of conflicts relating
to rental tenure
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Macro-economic conditions, at the regional, national and global
levels, are not likely to improve the financial situation of lower
income households in Ontario. Many renters will never be able to
become home owners and many will not be able to afford higher rents.
The government's proposals will unleash some of the most bitter and
mean clashes between landlords and tenants. The government is at the
same time eliminating a system of mediating these conflicts without
even proposing a new one: "The ministry has not yet developed a
proposal for the new dispute resolution system."
11. The government's "trickle down" assumption.
A part of the assumed 'ideal' market outcome resulting from the
removal of tenant protection regulations is that some investors will
build at least some units and that even though these will be at the
higher end of the market other units will 'trickle down' to lower
income tenants. It is assumed that existing higher income tenants
will leave their rent controlled units and move into these newer and
potentially nicer units with their much higher rents, allowing others
to move into their previous older and presumably lower quality and
lower rent units. This process assumes economically irrational
behaviour on the part of higher income tenants who could easily buy a
modest condo and, in any case, are being provided with a rent
controlled unit as long as they do not move. When they do move, the
rent on their apartment can be raised. Furthermore, the end of the
Rental Housing Protection Act means that many of the vacated units
will be demolished or converted. Ontario's larger cities have a
twenty year history of residential 'up filtering' - gentrification.
The end of the down filtering chain is the slum. A visit to most any
U.S. city demonstrates the results of residential down filtering.
[See Appendix #4 for a brief overview of the concept of 'filtering'
in housing markets.]
12 Assertions vs. Evidence
-- "I shall suggest that the real purpose of rent control is to make
it possible for existing tenants to stay where they are, with roughly
the same proportion of their income going to rent as they have become
used to, and that in light of this purpose rent control might be
justified more readily in some particular circumstances or contexts
than in others. Thus the analysis I suggest is an all-things-
considered weighting of each situation in light of moral factors
relevant to the particular situation."
- M.J. Radin, "Residential Rent Control," Philosophy & Public
Affairs, 15(4), 1986.
Throughout the consultation paper there are numerous assertions that
certain rules or regulations or legal protections do not work, are
harmful, are inefficient, provide barriers, and so forth.
Where is the evidence for any of these assertions?
Where is the analysis that the proposed new regulations will be
better than the existing ones?
The assertions are followed by proposals that benefit owners of
existing rental stock, mainly the large corporate owners. There is no
conceivable way that tenants will be any better off. There will be
no significant supply of new rental units because the problem - the
lack of effective market demand - is not even recognized.
The number of tenants forced out of housing altogether will continue
to grow as a result of these proposals. There is already a process
of "dehousing" taking place in Ontario's cities. Growing numbers of
individuals and families who cannot afford to pay rent any longer
find themselves doubling up with others for a while and/or finding
themselves in rooming houses, shelters or on the street. These
proposals will harm the most vulnerable tenant households in the
province.
The certain impacts of the government's proposals include:
(1) RENT GOUGING - the transfer of a huge amount of money from
tenants to owners with very little if any benefit in exchange;
(2) 'DEHOUSING' - the harassment of some tenants by some landlords
so as to obtain a vacant rent-decontrolled unit;
(3) DEMOLITION AND CONVERSION OF RENTAL STOCK - even tighter
vacancy rates due to the loss of rental stock once the Rental Housing
Protection Act is abolished; and
(4) GLUTTING THE CONDO MARKET - for a few years at least, there
will be construction job losses, a potential decline or stagnation of
property values for condo owners, and a potential loss of new
municipal tax base as existing rental units are converted to
condominiums (i.e., units which can be sold for less than the cost of
new construction).
To arrive at these conclusions we need simply examine the patterns of
rational economic behaviour which will result under the proposed new
regulatory environment.
In summary, rent controls and the related tenant and rental stock
protections that currently exist are a response to the problem of
inadequate supply, they are not the cause of the problem.
This committee should recommend that these proposals be scraped and
that new proposals for rental housing supply be brought forward based
on a recognition of the problem of the lack of effective market
demand among Ontario's tenant population.
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J. David Hulchanski, Professor, Housing & Community Development
Centre for Applied Social Research, Faculty of Social Work
University of Toronto, Toronto, Ontario, Canada M5S 1A1
tel 416 978-1973; fax 416 978-7072; email: JDH@FSW.UToronto.ca
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