Our View On Rent Control: Who Actually Benefits?
Usually rent control is perceived to absolutely benefit the person living in an apartment in a high rent / low vacancy environment. Is this really true?
Let's first remind ourselves that landlords are private enterprises, sometimes individuals but often small, medium or large companies. When choosing where to deploy their capital, ingenuity and human resources--be it $10,000 or $1,000,000 worth-- they are naturally inclined to spend it on buildings that are subject to free market forces where the rents can be adjusted with more frequency. They will shy away from rent-controlled environments that may distort the value of their investments.
But how can such higher rents possibly benefit the tenant? Very simply, when landlords are encouraged to invest in their buildings the tenant may receive a nicer suite, with more upgrades such as a new bathroom, new paint, new lights, and new appliances. He/she also benefits from general property improvements and quality maintenance of common areas and facilities that all tenants share. In a rent controlled environment those investments are often not made...thus allowing the building to slowly deteriorate. This is often the long-term effect and unintended consequence for governments and tenants who say they want “rent control”: deteriorating buildings in a slum lord type of environment. When looking at the fairly upscale English Bay area of Vancouver, with mostly rent controlled apartments, this ongoing process is visible to the trained observer. It is shockingly obvious in the less pristine parts of Vancouver.
The lack of apartment building investment that rent control promotes then goes on to ripple through the entire economy. Fewer painters are employed, fewer new bathrooms purchased, fewer carpets ordered and fewer fridges fixed... causing the economy of a rent controlled city, state or province to lose out on millions of dollars worth of economic stimulus by private enterprise, and the associated employment that it creates.
What is most suprising to many people is that rent control can actually make it harder for renters to find reasonably priced accommodation. Yes, that's right, rent control can result in reduced availability of reasonably priced accommodations because apartments often remain occupied by tenants who “got lucky” many years ago, and who don’t really need these places now.
For example: Wilma and Chris Smith are a retired couple living in Vancouver near English Bay in a 3 bedroom + den 1600 sq ft apartment, with a balcony, and a view of the ocean. Incredibly, they only pay $950/month, and all because they rented it over 10 years ago for about $600/month during the slump in the Vancouver real estate market in a city with rent control. Today they don’t need such a big place because their two sons left a few years ago, but why leave and pay $2000 for a similar suite a block down the street? They win, as BC has rent control. The Chad’s on the other hand, are a couple with 2 teenage children and can’t find a place in the area. Without rent control, the suite the Smith's occupied would have been vacated as the rent would have been adjusted to $2000, a price the Chad's are more than happy to pay because he works as a consultant in downtown Vancouver and she is a part-time nurse. The Smith’s would have moved into a smaller suite, perhaps even bought a condo. Instead, the Smith’s win, the Chad’s lose, the landlord loses, and the BC government loses as they now collect less tax. As you can plainly see, in this situation there are three losers: the government, the Chad’s and the landlord. The only party that benefits are the Smith's who happened to get lucky, even though they can now afford a more expensive suite. This is how rent control can actually reduce available housing and penalize immigrants and inter-provincial migrants. Surely this is not what Vancouverites or municipal and provincial governments want.
As mentioned earlier, rent control also affects landlords negatively. Many people don't care much about this until they learn that a situation that demotivates landlords can further aggravate the problem of affordable housing.
When the apartment building owner collects rents that are below the local area's market value, this not only affects personal income but it also reduces how much the building is worth. Obviously these are extremely powerful disincentives to owning a rental property. Let’s use a specific example: currently, Prestigious Properties is negotiating the purchase of a 20 suite apartment building in a promising BC city that has rent control. We are buying it for roughly $1.0M or $50,000/unit – primarily because the rents are too low. Without rent control, rents today would be about 30-40% higher because the building is on the coast with a view of the ocean, and the seller could achieve a sales price of perhaps $1.4M. In essence, he is penalized $400,000 because of rent control. It's like paying a 40% “tax” on a capital asset in addition to the annual loss of potential income. Rent control stifles economic activity and taxes one group of society (building owners) to subsidize another. This is not to say we should ignore those people in our society that need support. But we should do it with legislation that continues to make it attractive for people to own rental property. Otherwise, and this is unfortunately what has happened in many North American cities, no one wants to build rental properties anymore, and those who do own them want to convert them to condos and sell them, seeing this as the only way to get a reasonable return on their investment.
Of course, the example often cited in newspapers is that of low-income tenants forced out of their homes without rent control. Certainly hardship can be created in a low vacancy environment, when your rent goes from $550 to $850. There is a role for government to either subsidize rents to market levels to certain low income tenants or to purchase entire apartment blocks and use them for low income tenants, as opposed to using rent control which benefits few and costs a lot in terms of lost taxes and economic activities.
There you have it. Rent control means deteriorating buildings, less overall economic activity, crowding out of capable tenants, less affordable housing, increased condo conversion, and taxing building owners - thus dramatically reducing rental availability and increasing rental pricing. Is this what governments want when they say “rent control”?
For the record, Prestigious Properties owns about 200 apartment units on Vancouver Island and up the Sunshine Coast in BC, plus about 950 units elsewhere in North America. We take great pride in the fact that when we upgrade our buildings we provide a quality living environment for our customers in places they can call home, while also stimulating local economies. We invite you to have a look at some of our current investment properties and interests.
