Why the New Rent Control Legislation Is an Early Christmas Gift for Condo Investors

Speaker 1: Christmas just came early for condo investors in Ontario, find out why on today’s episode.

Speaker 2: Welcome to the True Condos podcast with Andrew la Fleur. The place to get the truth on the Toronto condo market and condo investing in Toronto.

Speaker 1: Hi, welcome back to the show. Thanks for listening in. Andrew la Fleur here from TrueCondos.com. As always, appreciate your time, appreciate you lending me your ear for a few minutes here to listen to what I have to say.

Today’s podcast, I want to talk about the new rent control legislation, which has just come out, depending on when you’re listening to this. As of recording it was yesterday, as of listening to this, I have no idea, but the point is that rent control is back in Ontario. Sort of, kind of, not really, maybe, yes and no. Let me explain, so rent control. Let’s go back into time and do a little bit of quick catch up here. Rent control means the government tells you as a landlord how much you can raise your rent by, okay? We all sort of understand that and historically speaking, rent control was in place for a very long time.

The big boom in housing and rental housing in particular in Ontario was in the 1960s and 70s. That’s when you look around the GTA, you see a lot of apartment buildings that are now sort of historical relics. Many, many apartment buildings around that you see in general were built in that boom era of the 1960s and 1970s. What happened from then is rent control sort of stifled all new growth in that segment of the market. We did not see many apartments at all being built from that time period, the 1960s, the 1970s, up until actually very recently.

Rent control basically killed all new apartment construction, builders and investors and landlords were not interested in building new construction because of rent control from the 1970s, 80s, and 90s. In early 1990s, during the big recession, Mike Harris government, conservative government Ontario comes in and they introduce something to try to stimulate more rental housing being built and that was the so-called 1991 Loop Hole, which it used to be known as.

That basically said any new construction built, new rental units built after 1991 would not be subject to rent control and interestingly enough, we started to come out of the recession in the mid-90s and the housing market started to take off really from the mid-90s all the way up to today. We’ve seen pretty much steady growth every year, save a couple mini recessions here and there.

From the mid-90s to today and all the new housing units that have been built after 1991 and of course, that’s the vast majority of the condo market in Toronto, were not subject to rent control, but that all came to an end in 2017 with Kathleen Nguyen and her Fair Housing Plan at the end of April in 2017. About a year and a half ago, one of the big things in that was it reintroducing rent control across all properties in Ontario, so getting rid of the so-called 1991 Loop Hole.

Condo investors could no longer increase their rent by whatever they wanted, they could only increase their rent by what the government told them that we could increase our rents by, which again, is typically around the inflationary rate as they say inflation is according to their measures of that, around 1.8-2% sort of a range is the most you can raise it per year.

Rent control was back, it has been back, it was sort of a dark day for condo investors in a way when that happened. Certainly a very dark day for tenants when that happened. Well, yes and no. If you already had a place and you were locked into a lease, it was a very good day an it meant that your rents could not be increased as long as you stayed in the same property. The landlord couldn’t raise your rents more than 1.8% but if you were one of the unfortunate people who needed to find a place to live or wanted to move for any reason or were new to the area, whatever it was.

If you’re looking for a place to rent, it was actually terrible news because the supply of available apartments available has dramatically gone down. Basically, people are not moving, right? Rent control is locking people in place. If you know your rents are not going to go up, you tend to not want to move anywhere else because real inflation as we know is much higher than what the government says it is and out in the marketplace of available rentals, the new rental rates have soared since the Fair Housing Plan came into place.

In a way, that legislation did what it was intended to do, which is it locked in rents for most people, people who already had a place but the flip side of it, it made rents absolutely soar for people who did not already have a place. New rents absolutely have soared in the past year and a half up by double digits for sure since that was announced and basically the more time that goes by when you have rent control, the less likely it is that somebody’s going to move from their apartment or their condo because they are just increasingly over time becoming further and further ahead of the game so to speak. Their rent is less and less and less off of the current market rate, so you’re never going to move and tomorrow you’re never going to move even less than you did today.

Rent control is horrible. I’ve talked about it many, many times on this podcast. My position is very clear. Most investors would agree with me. It’s just not a good thing for the market. Studies have been done around the world. There’s so many quotes about it. I think it was Benjamin Towler … Not Benjamin Towler, some economist who said, “Rent control is the best way to destroy a city short of a bomb basically blowing the whole thing up.”

Rent control just absolutely decimates cities and it creates a horrible situation for anybody who is looking for a place to live in that city. Again, if you’re already in a place and you don’t ever want to move, it’s great for you. If you believe in the free movement of people and just the ability for people to move about and just change places where they’re living easily and quickly and without great cost, basic principles of capitalism in other words, rent control is horrible. Anyways, that’s the background.

What’s changed? Well, what changed, everything changed and at the same time nothing changed. Yesterday the conservative government comes out with their announcement they’re making a bunch of changes amongst other things. Rent control was one of the things they talked about and the big change they’re proposing and the legislation is obviously going to go through. There might be some tweaks to it perhaps, but it is a majority government so probably it’s going to pretty much as they say it is and it’s just going to go through.

Rent control is gone for new units as of yesterday, November 15, 2018. That means if you have a … From what limited information we have so far, from what I understand, they’re basically saying any new unit that has not been occupied before November 15, 2018, will not be subject to rent control. A lot of people got very excited when they heard this at the initial outset thinking, ‘Wow, rent control is gone in Ontario.’ It’s not really gone, it’s only gone for new unit created after yesterday, after November 15, 2018.

In a sense, as I’ve been telling people, a simple way to think about it is 2018 is the new 1991. 2018 is the new 1991, so whereas the old loop hole was any units built after 1991, now everything between 1991 and 2018 and everything before 1991, that’s all still subject to rent control. Basically, as of this moment, 99.99999% of all dwelling places in Ontario are still subject to rent control and a year from now, that number will still be 99% and two years, three years from now, the number will still be 98%, 97%. It will be a very, very, very high percentage.

It’s only the new units that have never been occupied before November 15 and any future subsequent new units that have never been occupied before, those are not subject to rent control. If you’re an investor, you have existing units that are way below market value that you rented out, I’m certainly in that category, where you have units that are $200, $300, $400, $600, $800, I’ve heard as much as $1,000 recently below current market value rents on a monthly basis, there’s nothing you can do other than continuing to wait for that tenant to move out so you can bring those rents up to market value.

That property will always be subject to rent control, even if the tenant moves out and you bring somebody else in. It’s not a new lease as of November 15, it’s a new unit as of November 15 that is not subject to rent control. Anything in your existing portfolio of completed occupied units investors, that is still going to be subject to rent control, so this is only for your new units that you have not taken possession of yet that no one has lived in them yet. If you go out and buy a resell property, if it’s new to you and you’ve never had someone occupy it as your tenant, it doesn’t matter. If it’s an existing property that somebody has lived in that property before, whether it’s you, the previous owner, the previous renters, whatever, that is always going to be still subject to rent control, okay?

That was one point of confusion a lot of people were wondering about so hopefully that brings a little bit of clarity to rent control and what it is. The question becomes who does this policy actually benefit? Well, it benefits almost no one and this is really the key point that I want to drive home to you in this podcast, if you’re still with me here. Sorry for the long explanation and intro to all this, but hopefully that gives you a little bit more clarity of how we got to where we are today.

But the key point I want to drive home to you is that almost no one will benefit from this, almost no one will feel any effect to this because again, it’s only moving forward on new units. Like I said, every single unit except for maybe a very small handful of units that happen to just take possession of … People are taking possession of these new units today in Ontario. Besides that, every single dwelling unit in Ontario is still and always will be according to the current legislation subject to rent control, okay?

The only people that this really is benefiting is anybody who’s buying or building new rental housing that doesn’t yet exist, so obviously, this is a podcast for condo investors that is very good news for pretty much anyone who is listening to this right now. It’s great news for condo investors who are buying pre-construction condos who haven’t taken possession of those yet.

For myself, I have a bunch of units that already exist. Those are going to be subject to rent control, but I also have a bunch of units that I haven’t received yet that are in my pipeline of units for my portfolio that I’m taking possession of in 2019, 2020, and beyond. Those units, I’m happy to say, will not be subject to rent control, so I will be able to increase the rents on those units after the lease term is up. Presumably not at any point in time in the middle of a lease term, but same as before where after the initial lease term is up, most lease terms are a 12-month lease, so after that 12 months, I’m able to increase the rent by whatever amount I wish. I’m not subject to increasing it by what the government tells me I can increase it by.

It’s great news for condo investors, but condo investors are a very, very … We are a very, very small portion of Ontario so again, on the surface it seems like it’s a big thing, but really it’s not for most people but it is for you and me. If you’re listening to this podcast, you most likely are a condo investor or somebody who has units coming in their pipeline that they haven’t taken possession of yet or you’re researching and you’re getting ready to buy that first condo, and so this is good news for you.

If, again, it’s another reason why we love investing in condos and buying new condos as opposed to buying resale. I got that question again yesterday I believe, I get it all the time. Should I buy resale or should I buy new? Well, here’s yet another reason why you always … When you’re investing in condos, you always want to buy new so buying new, buying pre-construction, will guarantee that unit will not be subject to rent control, but if you go out and buy a resale condo, even if it’s a brand new condo that somebody … If there’s a tenant in that condo, then you are subject to rent control forever.

Couple key … Some of my takeaways from this other than that main point that it’s great news for condo investors, early Christmas gift for us in a way, it does a couple of things. One is it … For condo investors, why it’s so great is now it takes away the worry, the concern, takes the pressure off you from getting that first tenant in there. When a new building registers and you’ve got hundreds of units with hundreds of investors all trying to rent out their places at around the same period of time, there’s a concern that … And it certainly does happen where rental rates are sort of driven sometimes pressured down below current market values because you’re just competing against a lot of other landlords to get that first tenant in place when the building is brand new, when you first get your keys.

Obviously, in a rent control environment your concern that instead of getting $2,000 a month for that unit, you let it go for say $1,800 a month just to get it rented out so it’s not sitting around empty, but then you’re locked in at that low rate and you can only raise on the 1.8% or whatever it is on that low $1,800 below market value so you’re just falling further and further behind. But without rent control on those units now, it really takes the pressure off. You can just go ahead and get that unit rented out because you know after that first year, you can raise the rent.

If your tenant doesn’t move out, you can raise the rent to market value after that first initial year, after that term, the lease term is up, and so it really takes the pressure off you and a feeling like I’m going to be stuck below market forever. No, if the market have moved up, if you are below market, you have that ability to raise rents up to market value if you choose to.

The other thing is it takes away the pressure and the worry of getting a deadbeat tenant, right? If you have a terrible tenant in your new condo unit, if things aren’t working out, if they’re just not a good fit for you, if they’re not paying the rent on time, if they’re destroying the property, whatever it is, it gives you as an investor another tool to potentially get that tenant out and get a new tenant in place by simply after again, after the lease term is up, you can issue a notice that the person’s rent is going to be increased by whatever amount you wish, and either the tenant is forced to pay that amount or they have the option of leaving and going somewhere else.

It gives you that ability again, where if you have a really bad tenant situation and you want to part ways, as of right now under rent control, there’s really no way for you to evict that tenant unless they just stop paying rent and you go through the whole … Or they’re damaging the property intentionally, then you go through the eviction process through the courts, but that can obviously take a lot of time, energy, and effort. This way you can simply issue a notice of rent increase to whatever amount you wish, which would either force them to pay up or to leave and you go your separate ways and you get a new tenant in there.

Again, that’s the beauty of not having rent control, those two things for condo investors. Very good news for us in that regard. It’s rewarding those of us who are continuing to … And if you’ve listened in to my advice over the past year and a half as I’ve talked about how do we respond to rent controls and investors, well we just need to keep buying, keep building our portfolio, keep getting new units, which will take advantage of the higher and higher rents.

Another point is that I think at the end of the day my analysis of this, it’s mostly a political move and probably a pretty savvy one by the conservatives. It sort of plays to their base on the right wing to sort of say yeah, like rent control is gone and people are getting very excited about it. On the left, the other side of the spectrum, people are freaking out and saying oh, rent control is a horrible thing, it’s going to ruin us all, it’s cruel and unusual punishment kind of thing.

But there I think the left is going to calm down and realize actually as I said, like this affects almost no one in Ontario. It’s a very, very small percentage. It will take many, many, many years for there to be any sort of … In terms of Province wide, for there to be any critical mass of properties and tenants who are not subject to rent control because it’s only for new properties moving forward so it’s going to take many, many, many years for the effects to be broadly felt by this.

The left is going to calm down even though they’re freaking out and the right is rejoicing in everything but they’re going to also calm down and realize this doesn’t really do anything, except again, for those of us who are new condo investors. We do benefit, we will benefit, we are going to feel the effects and the benefits from this for all those units we’re getting in 2019, 2020, and beyond. It is good news for us, but again, we are as condo investors a very, very small portion of the population. In the broad overall Ontario sense, we are like a drop in the bucket, right?

But it’s great for us. It’s really great for us. It’s good news so I’m very happy about it and excited about it personally, but when I take a step back and I take off my condo investor hat and just put on my how is this for Ontario sort of perspective, it’s a drop in the bucket. Like it doesn’t really … Again, most people are never going to care, even most real estate investors. Most real estate investors are not buying brand new properties in a broad sense across Ontario, they’re buying existing resale properties and renting those out. Again, even in the real estate investing world, it is not affecting most people and most people are not going to see any change, but we are not in that world. We’re talking specifically in the condo investing world so it’s good for us.

Some of the questions that are coming up is how do they define … A big question is what about buildings that are partially occupied? I know of some condo buildings downtown, for example like 87 Peter Street downtown, the building is currently partially occupied so some units have got occupancy already and people are living in there, some units have not got it yet and they’re getting it in December, January, and so on. Is the whole building going to be subject to rent control or not? Or does it go unit by unit? Is it just the actual individual unit? That’s a point of clarity we need to find out on how that will work.

Another question people are starting to wonder and ask about, will this drive demand from the tenant perspective? Will tenants be driven to want to get into older buildings because the older building … If you get into an older building, you know you got rent control, so you know your rents are not going to go up versus if you look across the street at a brand new building, you go into that unit, you know that you’re going to be subject to rent control.

My comment on that would be a couple things. One is tenants, renters, they always want to be in the newest building. Again, this is another reason why we invest in condos. Condos are commodities. The newest buildings are always the most in demand. People like new things, people want to live in places that no one has lived before. It’s a good feeling. It’s like new car smell, new car feeling, you know? The same thing with condos, like you get into a brand new condo that no one’s lived in, it feels great versus going into a condo that’s been lived in and roughed up and smells like the last guy, whatever. There’s always going to be appeal … The appeal will not change for new properties.

The other thing is that again, it’s a supply issue, like very little turnover in existing old rentals that are under rent control because it’s controlled. You’re most likely below market value, like this is the whole problem in the first place. People who are in rent control units are not moving, nobody’s moving. Your tenants, if you have tenants out there, you know what I’m talking about. They are not moving. You’re asking them hey, how’s it goin? Are you going to move out? No, I’m not going to move out because I’m way below market value. That’s going to continue.

Will tenants try to get into old buildings? Maybe, but there’s nothing available in old buildings, right? Nobody’s moving in old buildings so good luck. Are they going to just say no, I’m not going to go in a new building? No, they’re not going to say that, they’re going to go in whatever they can get because there’s no supply anywhere, like we have a major supply problem and this is why rental rates are still going to continue to rise at an above sort of normal way above inflation sort of a rate.

The other question is will this drive big time demand from investors to get into pre-construction condos? Right? Because investors are saying hm, I can buy these pre-construction condos now and that unit will not be subject to rent control versus these other types of investing will and other properties that I’m looking at will be subject to rent controls.

To that, I don’t know. Maybe, we’ll see. We’ll see. It certainly won’t hurt things. The pre-construction market in 2019 may benefit from that increased interest in new construction perhaps. We’ll see what happens in 2019. I don’t think it’s going to be anything major but there may be some increased interest in buying new and buying pre-construction from the investment sort of community because of this. We’ll see what happens.

The other big question is this going to stir more purpose built rental, right? The pension funds and the big builders, will they start to build more purpose built rental? I do believe they will. I do believe that the trend that we saw that occurred after the Fair Housing Plan and when the Fair Housing Plan was coming in about a lot of these … They were going to build a rental building and then they decided no, we’re switching it to condo and we’re just going to sell these things off. We saw a lot of buildings do that with the introduction of rent control from the Fair Housing Plan so I think we will see more and more investment money from the big investors look at putting in more purpose built rentals because they know it’s not going to be subject to rent control. I do believe that we will start to see that.

Again, just from a macro perspective of where the city of Toronto is going and the direction that we’re going as a market, it’s becoming very expensive so less and less people can afford to buy. More and more people over time will be renting similar to other big cities around the world, so I think you will over time see that the big developers will over time shift more and more and more, not over night but slowly more and more towards building rental buildings and away from building condo buildings because that’s just the direction that our market and the maturity of our market, that’s where things are going.

Just interesting looking at the debate back and forth on Twitter about all this and how do we solve this problem of rentals in the first place. Maybe I’ll just finish with that and some thoughts on that. The real problem is not this whole … It’s like do we need more supply, do we need more reducing demand, the real problem, it’s very simple, the problem that Toronto has and the reason why rents are increasing so much is very simply, it’s called immigration. We have too much immigration.

If you believe in keeping prices down, the solution is very simple. Just stop immigration. Stop new people from coming into the city. The city is growing too quickly. We cannot build enough new housing to accommodate the people that are coming in. It’s very simple. You can look at … We’ve got to get rid of the green belt, it’s a supply issue. We’ve got to remove red tape so we can build 50 stories instead of 40 stories and add more supply to the equation. We’ve got to increase interest rates so we reduce demand.

You can look at all these different things left and right and let’s tax the rich and take that money and build housing for the poor. You can go that way, this and that, but it’s very simple, it’s just immigration. We are growing at the fastest rate of any city probably in … Certainly in North America, potentially in like the western hemisphere, the first world so to speak. We’re growing very, very fast and so we just cannot keep up with the growth. It’s very simple. If you really want to solve it, just that’s what you need to do is just stop immigration.

Is that ever going to happen? No, of course not. It’s federal government policy, it’s just … It’s never going to change, like we need that. We need the growth to occur. Immigration is … We’re not slowing down immigration, we’re increasing immigration. The problem is only going to get worse, right? I’m just sort of … it’s a bit facetious, there we go, here but my point is just that it’s … There is no solution to this problem. This problem will continue and so we as condo investors can continue to benefit from this problem that exists by continuing to invest in and buy rental condos because we know that rental rates will continue to rise over time because we just can’t meet demand and more and more people are coming into our city every year. We will continue to grow and as we continue to grow and continue to not build enough new housing to accommodate that growth, prices and rents will continue to rise and that’s why we are still bullish on this market and why we continue to invest here.

There you have it. That episode ended up being quite a bit longer than I thought but hopefully you got some value from this, hopefully you got some insights into what’s happening and hopefully you got, if you’re a condo investor especially, you’re encouraged to keep investing. You’re happy to hear the news about no rent control on your future units coming down the pipe and yeah, and hopefully if you are thinking about getting into investing that this is something that’s going to also just encourage you to get off the fence and jump in.

If you have any questions or if you’d like to know how you can start investing in condos or where to start or what to do or how to build your portfolio even more if you’ve already got units, again, you can always find me by e-mail Andrew@truecondos.com or you can call or text me at 416-371-2333. Until next time, happy investing.

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