New Rent Controls coming to Ontario, Should Condo Investors be Worried?

Rent control is a terrible idea but the provincial government is probably going to to do it anyways. Should you, as a condo investor, be worried? Find out on today’s episode.

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

Speaker 1: Hi there, welcome back to the show. Thanks for listening. On today’s show I want to talk about rent control. It’s a very hot topic in the news right now. I’ve got a lot of strong feelings on it, I will try to keep my ranting to a minimum but I apologize in advance if I start to go off course. It is a subject that has got me fired up and yeah, I just can’t believe what I’m hearing in the media and the headlines this week about rent control.

So, just to catch you up to speed if you haven’t heard already, the provincial government is… one of the things that they’re mulling over as they get ready for their budget coming up soon is new rules around rent control and instituting… as of right now there is no rent control on basically any condo in Toronto, on most condos. Anything built after 1991 is not subject to rent control. Anything built before that is subject to rent control which is, essentially, you can only raise your rent once a year at the rate of inflation which is around 1.5% right now. If you’re built after 1991, which most condos are, and certainly any condo that we are talking about investing in here at True Condos is obviously brand new and built today or tomorrow and therefore it has not been subject to rent control.

So, if rental rates are increasing at a fast rate, more than inflation, which often they are, then you are able to as a landlord increase your rents but any amount you wish. And this is one of the amazing tools and amazing reasons why we like to invest in condos.

Provincial government Kathleen Wynne is coming along and basically saying we have a housing affordability crisis and we need to do something, somethings about it and one of the things we’re looking at is introducing rent control. Exactly how it’s going to shake out, I mean most likely it sounds like they’re going to something with regards to rent control. How it’s going to shake out exactly we don’t know, so we can’t speculate on that.

But, there probably’s going to be something so, you know, brace yourself for that. There’s going to be something. How it plays out exactly we don’t know.

Benjamin Tal of CIBC, who’s been interviewed on this podcast before, he put out a great note, bulletin, article, whatever you want to call it. He’s the chief economist of CIBC. This guy really knows his stuff, he’s brilliant on housing, excellent economist, and just a great guy, great speaker. Very funny guy if you ever get a chance to listen to him. But he put out this great article, and we’ll reference it a bit here, but he’s basically, his headline is “Rent Control’s the Wrong Medicine”, this is a bad idea for our market, and if you’re trying to improve housing affordability this is going to have the exact opposite effect of what you think it will.

It seems to me, I mean first of all, that we have very short memories when it comes to this stuff. No one seems to be going back in time to when rent controls were introduced in the first place back in the early 90’s, and we need to as ourselves why do we have, you know, why do we have a lack of rent controls on condos and anything built after 1991? What is the reason for that? Why did the provincial legisl… you know the provincial government in 1991, which by the way was an NDP government, an NDP government, a left-wing government was the one that put the… that removed the rent controls in the first place in the early 90’s. And they did it because, again at the time, there was a housing crisis. Rents were… or there was just no supply of new rental product coming online after years and years of rent control, which was introduced in the 1970’s, in the early 70’s.

So when you have a housing crisis, rent control is really the opposite, basically is what Benjamin Tal is saying of what you want to do. He quotes a couple of great… I had a couple of great quotes here from other economists, left-leading Swedish economist Assar Lindbeck says, “In many cases rent control appears to be the most efficient technique presently known to destroy a city except for bombing.”

Okay, the next one from Milton Freedman, who he says is the ultimate free-market, sort-of right wing economist says, “The introduction of rent control is politically feasible only in areas with no recent experience because only an electorate uninformed of it’s consequences will support it.” I think that’s really the key quote for me. “Only an electorate uninformed of it’s consequences will support it.”

So, the problem is that nobody is around really much anymore, or certainly does not have a loud voice in the discourse out there in the market place who was around in 1991 when the rent controls were removed in the first place. I’m certainly not pretending to have been there myself. I was obviously just a kid in 1991 when this was the case. But, it seems to me that the electorate and most people renting today, and anybody who’s supporting this idea of bringing in rent control, I mean I’ll admit on the surface it seems like rent control’s a good idea. It seems like you would want to restrict rents from going up too quickly on people, that certainly makes sense. You’d want to have some kind of restraint on a landlord’s ability to increase rents. On paper it makes sense, but again, go back and look at our history, study the past, and you’ll see there are clear and very convincing arguments as to why this rent control was removed in the first place.

Some of my thoughts, I think the scariest part about this whole thing is that what started this whole interest in rent controls was a couple of news articles in the mainstream media. The CBC, I’ve written about it and ranted about it on podcasts in the past few weeks and months. The CBC and then others have done articles about one, or two, or three tenants in the city who have received notices that their rental rates are going to be increasing by some large number. The one this week was 100%. Somebody’s rent is being increased in Queen West by 100% from $1650 a month to $3300 a month. And, so, that’s the headline. That’s what people see, rents increasing by 100%.

Unfortunately people just take that at surface value and they think that’s actually what’s happening in the marketplace but of course, in reality, nobody’s rent is increasing by 100%. No landlord is going to get $3300 a month for a one bedroom unit. It’s simply a case of a clumsy, you could say, a clumsy landlord who wants to get rid of a tenant and the only way that they can seemingly think of to do that is to jack their rent up by 100%. You know, if they had have just done it by, you know, maybe $200 instead of $1600, probably would’ve had the same effect and certainly would not have made any headlines. It’s not very interesting to say, “Rental rate went up 12%,” but that probably would’ve had the exact same effect of removing that tenant. No media story, no hullabaloo or whatever you want to call it, and nobody cares. Life goes on.

But, you know, that’s what happened, the tenant brings this to the media, the media says, “Wow, this is a great headline, this is going to get a lot of clicks. Let’s put it out there.”, and that’s exactly what they did. Now we have the premiere of the province basically talking about implementing new policy which will affect one of the largest sectors of our economy. One of the most important sectors of our national economy let alone our provincial economy, which is the GTA Real Estate Market. And, they’re talking about implementing new policies based on basically just a headline that is a lie. And, the lie is that rents are going up 100%. Rents are not going up 100%, rents are maybe going up 10% a year right now. We’ll see what the new numbers come out next week from Urban Nation.

But if you at how rents have been going up over the past, say, five years, it’s been around three, four, five percent. Some quarters it’s one or two percent but that’s about it. Let’s say an average of three or four percent over the last five years. We’ve had one quarter of double digit, you know, nine, ten percent rental increases. One. We’ve had one quarter out of the last, say, five or six years, of 10% rent increases and suddenly we have a rental crisis? We have a housing affordability crisis in our entire province because of this? It’s absolutely ridiculous that we’re at this point where again, it’s the power of the media. It’s interesting to see who these things play out. Might create a cynic out of me but we got one or two headlines and that all of a sudden we change the course of the major part of our economy in our most populous province because of it.

It’s scary, but it is the reality of the world that we live in today. So, like I said, it’s going to happen. We don’t know exactly how it’s going to be implemented but it’s looking very likely that something’s going to come down the pipe in the budget in the form of new legislation or whatever. So, we as investors, how do we prepare for this? How do we respond to this? I mean, the question of should we be worried, should we be worried about this as condo investors? No, I’m not worried about it. I mean, I’m worried about the society and government as a whole that we’re creating policy, like I said, based on a couple of headlines that are completely just misleading. But should we be worried as condo investors and should we be running for the hills, and is nobody… you know should we not buy, are condos going to be a terribly investment or something?

Not at all. Anytime artificial restraints are introduced to a market, money’s kind of like water. It just flows through, and over, and around anything. And in a free market, at the end of the day, everything evens out and there’s always an equilibrium. So, I mean, if rental rates go down then the asset prices go up. I mean, and vice versa. It’s just the way that it goes in a free market so if somehow if rental controls… we don’t know again how it’s going to play out or what effect it will have, but if there’s some negative impact to rent controls on the market in one area, there will be a spinoff and there will be a positive impact on another area, most simply that, like I said, if somehow rents are restricted, or the income of the asset is restricted, then the value of the asset will go up.

That just tends to be how it is so that’s the beauty of real estate. That’s the beauty in investing in a cash flow producing asset like real estate. That, you know, you always are going to win. If you own the asset you always are going to win. No matter what happens over the long-term, if you own the asset, you’re always going to come out on top.

So it’s nothing to be fearful of. It’s change, things will be different, you know we might have to approach things differently. You might have to change your strategies of what types of unit we buy, what neighborhoods we buy in, how we go about renting out our units, the type of tenants we put in our units, when we buy, when we sell. There might be some changes in strategies that come in or it could be nothing. This could be all, depending on how it’s actually implemented, like I said. But, at the ene of the day, if you own that asset you’re always going to win.

Yeah, so that’s some thoughts there from me to begin things here. What else? I’m just looking at my notes. We don’t have, just to emphasize, we don’t have a rent… housing affordability crisis or renting affordability crisis. It’s completely untrue. Yes, rental rates are rising, you know. Put it this way, rental rates are rising every quarter for the past five, six years at, you know let’s say three percent. We’ve had one quarter at 10%. When you look at the price of low-rise housing it’s been rising at 10, or 15, or 20 or 30% for, like, 10 years straight.

So how does, you know, one quarter of decent, unusually high rental increase rates compare to 10 years of low-rise housing price increases? I mean if there’s any part of the market that is in crisis certainly it is the low-rise housing market, resale market for purchase, and is certainly not the rental market that, you know, it’s ridiculous that we’ve had one hot quarter and suddenly the whole world is falling apart. And look out, we need rent control.

Meanwhile, 10 years of rapid price growth and the the government has just sat there and basically done little or nothing, so, you know it is what it is. What else? What else here? As I look at my notes I think I’ve covered a lot of it. I mean, again one of the things I’m starting to study and look at on my own to understand and prepare for rent control is what has happened in other cities with rent control? And it’s very easy to look that up and Google it, and look at how rent control devastates housing affordability and economies housing markets, housing markets, and artificially distorts them around the world.

Stockholm is a great example where the average wait time is something like nine years for an apartment in Stockholm. Many buildings and many, you know, in the core of the city, you’re looking at up to 20 year waiting lists for buildings. It freezes people, nobody moves, it’s completely unfair both to tenants and landlords. People end up, you know, people who don’t need to benefit from it end up benefiting, and people who would, should benefit from rent control end up not benefiting from it.

Key money. Key money is a term that again if you’re under the age of 40, you’ve probably never heard of that term, key money. But key money was a very common thing back in Toronto in, you now, the 70’s, 80’s, and the 90’s where, up until the rent control was removed, were basically tenants who were locked into these rent controlled units would, you know you’d basically have a black market for rentals where you’d have this unit locked down. It’s almost like seasons tickets to the Leafs, and you’re selling that lease to somebody else for thousands of dollars for maybe a year or two. And then you go from there, are people paying off landlords to allow them to live in the unit as opposed to somebody else because they know they’re in the rent control environment? Illegal subletting and all this stuff, it just creates a major tension and adversarial nature in the market.

Ultimately, rent control at the end of the day, it’s like you put up a big sign over the city and you’re basically telling people, “Go away”. You look at Stockholm and, you know to some extent New York City and other places that have major rent control issues like this, it’s like you’re basically saying, “You want to come here? Good luck, forget it. Don’t even bother. 20 year waiting list, go somewhere else, you know, we are not open for business, we are not open for growth, we’re not open to change, we are a stagnant city that, you know where nobody moves.” And you’ve got these wealthy people making, you know, $100,000 a year and they’re paying $1000 a month in rent because their grandmother got that apartment back in the 70’s, and you know, whatever you might, what have you.

So, yeah I think that’s enough for now. Next week I’m going to hopefully interview Shaun Hildebrand from Urban Nation, and Shaun’s got some great thoughts and insights on this. He works as a consultant with a lot of purpose-built rental developers as well. So he’s got some different take on things as well, so love to get his insights on it for you too, so stay tuned for that.

And definitely, definitely, definitely check out Benjamin Tal’s article, which I will include a link to in the show notes for this episode, and read that. Great read. Truecondos.com/podcast of course to find all the show notes for this episode.

This is episode 139 and I’ll include a link there to Benjamin Tal’s article, and others for you there. So, until next time I hope you have a great week and I hope you found this podcast useful. Talk to you soon.

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