Rent Control Policy: Allowing Municipal Control of Maximum Allowable Rent Increases
A low vacancy rate for 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, created (in part) by rent controls.
Rent control has been – and continues to be – a widely debated topic. Economists and business advocacy 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 policies vary widely, with controls in British Columbia falling under the general category of “second generation”, where rents are initially freely negotiable, but limited in the amount a rent can increase during continuous occupancy. Landlords are able to increase rent to prices the market will bear, but only for new renters who enter into a rental agreement for vacant units, a practice common referred to as rent decontrol (Saskatchewan Chamber of Commerce, 2011).
British Columbia's Residential Tenancy Act (RTA) contains several 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 37 of the Residential Tenancy Policy Guideline 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 the inflation rate plus 2%. The inflation rate is based on a 12 month average percent change in the all-items consumer price index for BC. The BC system does allow landlords to apply for exemptions on a case-by-case basis (Government of British Columbia, 2012).
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), therefore, it contributes to – rather than mitigates – the rental accommodation supply/demand problem (Miller, Benjamin, & North, 2014).
The Provincial system in BC is neither sensitive to localized issues of supply and demand for rental units, nor does it differentiate affordable housing from premium accommodations. For example, the CMHC 2016 Housing Market Outlook for Kelowna shows that the rental apartment vacancy rate is expected to drop from 0.7% in 2015 to 0.5% in 2016, and then rise only slightly to 1% in 2017 from the construction of new rental units. The availability of other types of rental units (e.g. condominiums, secondary suites, carriage houses, etc.) are expected to keep rent increases for purpose-built rental apartments in line with or below the general rate of inflation. (Canada Mortgage and Housing Corporation, 2016).
The Policy and Planning Department, City of Kelowna, published the results of a Rental Developer/Landlord Consultation process in conducted in 2010. The purpose of this study was to gain insight into Kelowna’s rental accommodation marketplace, and key perceptions of private-sector developers, for what should be improved upon or changed. 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).
Municipalities do have tools to encourage private sector investment in purpose-built rental accommodations, including various financial incentives, reduced development cost charges, and relaxation of density and other infrastructure requirements (e.g. parking ratios). But with Provincial control over rent pricing – the key determinant of long-run profitability for developers of rental properties – municipalities are significantly constrained in their ability to create an attractive environment for local development of residential rental property. Accordingly, municipalities are inhibited from responding to local cost of living and supply/demand conditions with a full package of incentives for private-sector developers to increase rental housing stock, where needed.
THE CHAMBER RECOMMENDS
That the Provincial Government:
allow municipalities to formally choose one of two options:
follow the existing provincial policy re: maximum allowable rent increase restrictions; OR
determine, use and enforce their own maximum allowable rent increase amounts above the provincial policy;
maintain all other aspects of existing rent control policy as a provincial jurisdiction for all other areas, irrespective of (i) or (ii).
Canada Mortgage and Housing Corporation. (2016). Housing Market Outlook: Kelowna CMA. Ottawa: Government of Canada.
Government of British Columbia. (2012, March). Retrieved February 2, 2014, from Residential Tenancy Policy Guideline, 37. Rent Increases: http://www.rto.gov.bc.ca/documents/GL37.pdf
Government of British Columbia. (2014). Residential Tenancy Branch. Retrieved January 30, 2014, from http://www.rto.gov.bc.ca/
McEwan, J. (2010). City of Kelowna Rental Developer/Landlord Consultation. Kelowna: City of Kelowna.
Miller, R. L., Benjamin, D. K., & North, D. C. (2014). The Economics of Public Issues 18th Ed. New Jersey: Pearson.
Saskatchewan Chamber of Commerce. (2011). Issue in Focus - Rent Control in Saskatchewan. Retrieved January 30, 2014, from Saskatchewan Chamber of Commerce: www.saskchamber.com/files/.../Rent%20Control_Final_Sept%2010.pdf