Challenges and Controversies in Canadian Housing Policy: The Soaring Rents

Commentary

Rents in Canada have increased over the last few years and already financially stressed individuals and families are seeing their standard of living decline.

Regardless of assurances by government officials that wages are keeping up with the standard of living, Canadians know better. Housing and food prices are increasing far above headline CPI and few workers are getting raises greater than their cost of living. It is bad enough to see your standard of living decline. It makes things even worse when those you elected are gaslighting you.

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There is a propensity for people in Western nations in general, and Canadians in particular, to demand that government immediately solve a perceived problem, ignoring whether government has the ability, much less the desire, to improve things. In the case of the housing crisis, the situation was created by governments in the first place. The individuals and institutions that created the crisis might not be the best people to solve it. I use the term “perceived problem” purposely since we have had serious issues for a long time which most people ignored and therefore did not demand be fixed.

Currently, there have been increased demands to impose rent controls as a quick panacea for rising rents. Canadians should learn by now that quick fixes by political opportunists result in poor outcomes. This is especially true if those “solutions” are a result of maladaptive policies and, as in the case of rent control, involve an immoral transfer and confiscation of wealth to buy votes.

The housing crisis we face is really three issues that are related but different.

The first is the steep rise in interest rates which has seen the mortgage costs of houseowners and landlords soar. Borrowers got used to artificially low interest rates that were unsustainable, if one had any awareness of the past. Many behaved like the lowest interest rates in human recorded history would last forever. If interest rates close to zero were a great idea, surely the ancient Mesopotamians, classical Greeks, the Templars of the middle ages or some other group would have figured it out. These low rates created maladaptive investment behaviour. Instead of investing in assets like businesses, stocks and bonds, people merely bid up homes to the point where average home prices were outrageously high compared to household incomes. This problem is one of complete government failure.

The second issue is the lack of supply. Canada is one of the most sparsely populated nations on Earth, yet our housing bubble is the worst in the developed world by some metrics. We continue to grow our population dramatically, but do not build enough additional homes. Again, governments are entirely to blame here. Toronto is hamstrung by environmental activists. The Greenbelt prevents expansion and constricts supply. Taxes and regulations have disincentivized builders from constructing new buildings. Environmental initiatives and regulations add costs to potential new construction to the point of making new buildings uneconomical. A builder will not, and should not, construct buildings where rents cannot cover costs. This is government failure and not a failure of the free market. The housing business in Canada is far from the free market model.

The third issue is rising rents. Some Canadians have been faced with large increases, but frankly the problem, although a major one for some, is exaggerated by the press. Those renters facing a doubling of rent, as I have seen on TV news broadcasts, are certainly not the majority. Bluntly, landlords are facing higher interest rates and need to stay in business. The banks and pension funds that supply the debt also have obligations to fulfill. Renters are in a tough position but adopting rent controls would be a disaster for everyone. We should learn that the way to correct economically maladaptive policies is not to implement other bad policies. This is short-term vote buying, and Canadians need to stop being bought off so easily.

Rent control results in many bad, unintended consequences. However, unintended is not the same as unforeseen. I remember the bad old days of the 1970s and early 1980s when rent controls were strict and ubiquitous. Yes, some of us lucky enough to live in rent-controlled buildings were fortunate. However, do not assume this benefited the poor. When I arrived in Toronto in 1979, I lived in a building full of young professionals. They made good money and kept getting promoted and seeing their incomes grow. Every year their rent was cut in real terms at the expense of the landlord.

There were almost no poor families in the building, as you had to know someone to get in. Also, “key” money became a thing. Renters who were moving out of an apartment would agree to sublet their place instead of letting the lease expire. They would charge “key” money or a cash payment. This is de facto theft with the renters monetizing the value of the dwelling instead of the owner.

Obviously, this also forces struggling people out of the market. In the mid-1980s, I was asked to pay $2,000 to a renter for an apartment of over $5,000 in today’s dollars. Effectively, key money was a hidden rent only those with ample cash could pay.

The supply of new apartment buildings was effectively frozen as they became uneconomic. There was a chronic shortage of places. I had friends who could not find apartments even though they could afford them. Also, landlords were incentivized to not spend money to upgrade their buildings. The result was that once-fine apartments turned into dumps within a decade.

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