Rent Control: Phasing Out Provincial Control of Rent Increases (2014)

Year: 
2014

Rent control has been – and continues to be – a widely debated topic. Economists and business groups generally take a position against rent controls, while socially-minded advocacy groups generally stand in support of controlling residential rents. The former groups argue that rental housing stock decreases in both quantity and quality under rent controls; the latter groups argue that lower income individuals require protection from market effects.

Rent control policy in B.C. has become increasingly restrictive with successive governments. In the 1980’s the Bennett government allowed unlimited rent increases, with tenants only able to challenge rent increases above 15%. In the 1990’s the Clark government continued to not limit the amount of a rent increase, but required the landlord to justify increases in response to all tenant challenges. And in 2002, the Campbell government introduced the most stringent rent controls establishing limits on rent increases. Currently, rent control policy in B.C. limits rent increases during continuous occupancy (to inflation +2%), with landlords only able to increase rent to prices the market will bear when a new renter enters into a new rental agreement on a vacant unit, a practice common referred to as rent decontrol (Saskatchewan Chamber of Commerce, 2011).

The Chamber of Commerce has more typically favoured free enterprise market economy principles, while also respecting the need for regulations with respect to fair treatment.  To that end, the Chamber believes that current rent control policy does not exhibit the right balance of fairness and market efficiency.  It should be acknowledged that the BC government does not limit increases for its Crown Corporation services to the public to inflation +2%, regulated utility services are not similarly limited, and manufactured (mobile) homes that are rented to tenants do not have the same stringent rent controls as built housing. 

The current limits on allowable rent increases (inflation +2%) effectively creates a disincentive for the production of new rental housing stock by creating large opportunity costs (the cost of the foregone alternative) for builders/developers.  The limit artificially depresses the most important determinant of long-run profitability and returns on investment – rents.

Developers have much greater opportunity to maximize returns on their investment in properties that generate revenue based on market pricing (e.g. sales of single family homes and condominiums), accordingly, tighter rent control policies are a key determinant of rental accommodation supply/demand problems (Miller, Benjamin, & North, 2014). The problem of low supply of residential rental accommodation can be a significant barrier to employment, particularly in locations that have high home ownership costs.  Employers who hire for short-to-medium durations are especially constrained by a lack of suitable rental stock. The BC Chamber of Commerce has direct feedback from a number of local Chambers with very active economic development in their communities and key shortages of rental accommodation.

With low incentive to build new residential rental housing, rental stock continues to depreciate.In B.C. there are approximately 2,000,000 households (Statistics Canada & CMHC) and of those approximately 563,000 are rental units (BCNPHA). The vast majority of rental units are over 40-50 years old and virtually no new purpose built rental units have been created since 1988. (Landlord BC). For example, purpose built rental housing in Vancouver (131,500 units) has original construction dates between 1961-1970 for 42% of its stock, and construction dates of 1950-1960 for another 24%. Therefore it is not surprising that the condition of the rental stock in Vancouver has less than 5% of units in good condition, 6-14% in fair condition, 15-30% in poor condition and over 30% in critical condition. (Altus Group - City of Vancouver Rental Housing Study - 2009). The problem with older rental units is that they are, in many cases, no longer adequate in terms of the electrical wiring, plumbing, ventilation, boilers, roofs, building envelopes, parking and amenities. Often the highest and best use of older rental stock is to demolish it and rebuild. (Burgess, Crawley, Sullivan and Associates - 2008).

The rental housing stock in B.C. is generally old and is not in good condition. It is priced below market values in many cases. And most importantly, it is in low supply with significant demand (in part) because of B.C.’s trend toward increasingly stringent rent control policy.

B.C.’s rent control policy – the Residential Tenancy Act (RTA) – contains many protections for renters including (but not limited to) controls on tenancy agreements, security and damage deposits, dispute resolution, site inspections, discrimination, notification and maximum allowable rent increases. The Residential Tenancy Branch is a large government bureaucracy created to assist renters and landlords with compliance via information and rent-related services (Government of British Columbia, 2014).

Section 43 of the RTA, among other things, requires that rent increases be calculated in accordance with the regulations. Requirements for timing of rent increases and notice to tenant provisions are set out in Section 42 of the RTA. The Residential Tenancy Regulations (RTR) in Section 22 set out the basis for the determination of the rate allowed and in Section 23 sets out the grounds for allowing additional rent increases. Policy Guideline 37 outlines the details of the maximum allowable rent increase, specifically: proper written notice periods (3 months in advance of increase), frequency of increases (limited to annual increases for continuous occupants), and maximum annual increase.

The allowable increase is held to inflation +2%.  The inflation rate is based on a 12 month average percent change in the all-items consumer price index (CPI) for BC.  The CPI tracks prices for food (17.15%), shelter (27.05%), household (10.61%), clothing (5.06%), transportation (19.4%), health care (4.81%), recreation (12.46%) and alcohol & tobacco (3.41%). Upon analysis the portion of the CPI relevant to rental housing is about 8.6% of the CPI total. These limited items represent only 65.8% of the costs of operating a rental building. Accordingly, the CPI is a poor proxy for covering the costs of operating a building (Burgess, Cawley, Sullivan & Associates, 2008).

The RTA does allow landlords to apply for exemptions from the rental increase limits on a case-by-case basis (Government of British Columbia, 2012). Some of these additional rent provisions are in Section 23(1)(a) of the RTR and are tied to comparison to other rents in the same area. However, the Residential Tenancy Office (RTO) requires such specific evidence, which is generally not available, that the provision is practically not very workable. As well, the legal costs of contested increases can be exorbitant.

Other provisions in Section 23(1)(b) allow for rent increase where significant repairs or renovations are done. However, the RTO requires that these have to be unforeseen repairs and renovations and nonrecurring within a specified time frame.  Section 23(1)(c) permits additional rent increases if the landlord has incurred a financial loss. This requires provision of financial statements to prove the loss. his creates the problem of having to lose money before anything can be considered rather than anticipating the need. It seems patently unfair to require a landlord to prove they lost money in order to get a rent increase to cover the losses.

B.C.’s rent control policy is neither sensitive to localized issues of supply and demand for rental units, nor does it differentiate between affordable housing and premium accommodations. Affordable housing is frequently a concern raised with respect to the rental cost. The issue has been analyzed for average gross tenant household incomes versus average gross rents, such that the share of income that rentals amount to can be determined on average, as described below.

Analysis across 22 BC Census Agglomeration (CA) areas and 4 Census Metropolitan Area (CMA) regions, sheds light on the issues of affordable housing as they relate to rent.

Rent, as a percent of income, ranged from a low of 15.5% in Kitimat to a high of 25.8% in Kamloops for 2005/2006 data. 

Household spending across Canada for 2008 showed similar percentage costs for shelter with a clear offsetting proportion for personal taxes (Urban Futures: In the Eye of the Beholder – Housing Affordability in British Columbia - 2010).

There are many existing government programs that provide necessary assistance to people in need, to ensure that lower income individuals and families have adequate accommodations. Some of these programs are: the Federal Guaranteed Income Supplement for Low Income Seniors, BC Shelter Aid for Elderly Renters (SAFER), BC Provincial Housing Program, BC Senior’s Supplement, BC Regular Income Assistance, BC Hardship Assistance, BC Housing Rental Assistance Program, and a number of programs to assist people with disabilities.  But rent controlled jurisdictions have a skewed distribution of rental housing, curtailing the supply and increasing the unmet needs for such housing (CATO Institute Policy Analysis 274 May 1997).

Jurisdictions without rent control have a normal distribution of affordable housing that meets the needs of the market. In fact, absence of rent control will enable supply in the market to more adequately meet demand – a movement toward more, newer housing stock. Numerous national and international studies show this to be the case in jurisdictions without rent controls. 

To illustrate this point, the 2013 Kelowna Rental Market Report shows a residential rental vacancy rate below 2% for six of the last ten years, with the 2013 vacancy rate falling to 1.8%.  This very low vacancy rate (i.e. the lack of rental housing supply) is attributed to the combination of a slower pace of expansion of purpose-built rental apartments in 2013 compared to previous years, and an increase in demand for rental accommodations associated with improvements in the economy (Canada Mortgage and Housing Corporation, 2013). 

This persistent problem led the City of Kelowna, Policy and Planning Department, to conduct a study of Kelowna’s rental accommodation marketplace and the perceptions of private-sector developers.  The results of this rental developer / landlord consultation process were published in 2010.  In this report, 25% of developers surveyed cited rent controls as an economic barrier to building/operating rental housing developments, and further, that rent controls on units from the Residential Tenancy Branch played a role in preventing landlords from maintaining their rental stock (McEwan, 2010).  

There are many stakeholders likely be involved in consultations with the government with respect to any changes to the Residential Tenancy Act and its regulations. They include the TRAC (Tenant Resource and Advisory Centre), the PIVOT legal society, West Coast LEAF, Active Manufactured Homeowners Association, BC Public Interest Advocacy Centre, the Community Legal Assistance Centre and the Housing Justice Project. A joint paper from these groups is seeking 13 new control provisions, including increased levels of rent controls on tenant move out (BC Residential Tenancy System 13 Recommendations for Positive Change).

Landlord BC is the association that represents the industry. They have been challenged for some time to deal with the government initiatives such as the carbon tax on natural gas used for heating, and demand side management (DSM) programs from BC Hydro and FortisBC.  Simply put, rent controls do not provide landlords the ability to raise the necessary capital to upgrade housing systems in response to these initiatives.

Landlord BC has set out the following recommended policy approach.

LandlordBC proposes the following seven solutions to balance landlords’ rights to operate in a free market, while protecting tenants’ rights to access safe and stable housing.

  • A flexible solution for government to phase out rent controls.
  • Establish an industry-led review body to protect tenants from unreasonable rent increases.
  • Provide quality assurance standards for tenants through the industry-run Certified Rental Building program, and holding landlords accountable for their actions.
  • Offer an industry-led, non-binding mediation process to tenants and landlords of LandlordBC apartments to help reduce cases that go to dispute at the Residential Tenancy Branch.
  • Explore funding and development of industry-led Rent Banks.
  • Support government’s continued funding of the RAP and SAFER programs.
  • Support a Tenants’ Tax Credit (Finance Ministry).

Recently the government of Saskatchewan has eliminated its rent control legislation without deleterious effects. Saskatchewan has a model for industry led assistance, which was a quid pro quo for the change in that province. In addition, the government of Alberta and the Territorial governments are successfully operating without rent controls.

In the United States, notable jurisdictions with rent controls such as New York are considering phasing out temporary rent controls which, by law, must be renewed in the legislature every two years. In 1994 Boston, Massachusetts scrapped its rent control legislation (Cato Institute – Policy Analysis). There is a clear shift in policy direction toward rent control reversals and phasing out rent controls. Below are principles worth considering when phasing out rent controls:

  • Phasing out rent control on new purpose built rental accommodation immediately. (This rental housing already would come into service at market prices anyway and this policy change would enable new rental units to be built without the prospect of price controls)
  • Phasing out rent controls from the oldest stock toward the more recent stock in a scheduled manner and or on the poorest condition stock scheduled toward the better condition stock. (This enables the emphasis of the policy change to be placed on the need for quality upgrading of the units)
  • Phasing in of exceptions for the rent control for major capital requirements during the rent control phase out, including provisions to enable investments for reduction of GHG emissions and DSM implementation, as well as for all of the major building systems which can require periodic replacements or rebuilds. (This will further emphasize the building condition issues driving the policy change)
  • Phasing out rent control based on presentation of a building management and longer term related rent plan to the tenants for discussion. (This would underscore the landlords willingness to communicate and assist tenants in planning as a part of demonstrating the reasonableness of the rent)
  • Phasing out of all rent control eventually on a reasonable schedule with complementary establishment of more streamlined regulation of tenant rental issues, including initiatives from the industry to implement standards and provide for dispute resolution as the first point of resolution with escalating mediation before exceptions reach final resolution under the terms of the RTA. (This will show good faith toward building a less confrontational and adversarial climate between landlords and tenants over time)

THE CHAMBER RECOMMENDS:

That the provincial government:

  1. Develop and implement through legislation and regulations an approach to phasing out rent controls, such that tenants are treated fairly and landlords can count on receiving reasonable rental income for their property.

  2. Maintain rental regulations for ensuring fair treatment of tenants and work with the industry to streamline dispute resolution mechanisms for tenants and landlords. 

  3. Work with the rental housing industry to enable and facilitate programs to manage cases of serious tenant hardship resulting from fair and reasonable rental increases.