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Why rent controls don’t work

Posted by Yahya on November 13, 2020

Rent controls don’t work and are bad for the health of our real estate market (and therefore, the economy at large) for the same reason trade tariffs are bad for the economy: they interfere with the forces of supply and demand.

What one thing our law makers seemingly fail to understand is that the prices of rents — or how much a landlord can “get away with charging” as they prefer to the look at it — is not established by the collective “price gouging” appetite of real estate investors.

Rather, it is established by the same by the same forces that dictate the price of any other goods and services: supply and demand.

The concept is quite simple. The more something is in demand while the supply is constant, the price goes up. The more supply of something is available, while the demand is constant, the price goes done. And vice versa.

An example of this is back in 2017 when policy makers decided to remove a notorious de-regulation that allowed landlords to raise the rent after a term was finished, essentially allowing the market to dictate the price, with the goal of increasing affordable housing. This led to many landlords removing their properties from the rental pool and several rental purpose building projects to get scrapped, contributing to an already tight rental inventory and has the opposite effect of driving prices higher for tenants.

One thing this recent pandemic has shown us is regardless what kind of economic factors are holding up the market, and regardless of what kind of rent controls (or lack thereof) policy makers try to throw at it, prices will always inevitably be set by the supply of rental inventory available for rent, and the accompanying demand from tenants.

Most recently, we have seen a very drastic drop in rental prices in the downtown condo segment. Was it because of rent controls and their so-called goal of providing “affordable housing”? Quite simply, no.

A variety of factors and circumstances contributed to a supply of rental inventory (which I’ll probably go over in another blog post) that saturated the market with supply and diminished the demand, causing prices to drop. The by-product of this change in supply and demand? Affordable housing.

Despite what news media outlets would have you believe, rental properties are not owned by blood-sucking greedy rich people who are looking to exploit and squeeze every last dollar out of their poor lowly tenants. The vast majority of condos in the city that were purchased to be designated as rental properties are owned by average middle-class people, seeking to build wealth, contribute to their retirement and/or save for their children’s futures — and real estate is by far the safest and best vehicle to do so.

Take away the financial incentive for these landlords to invest in real estate and what happens? Quite simply, investors stop investing, builders stop building and this contributes to a severe shortage of rental inventory that will just cause rental prices to skyrocket. But in this scenario, a plethora of industries that rely on the purchase and sale of real estate (architecture, engineering, construction, marketing, sales, leasing, property management, interior design, mortgages/home financing, and the list goes on and on) all comes to a screeching stop, erasing jobs, diminishing the net worth of the middle class and reducing municipal, provincial and federal tax revenues.

Why does this matter? Because real estate is the largest industry in Canada and the largest contributor to our domestic economy. Which begs the question, do these policy makers barking for affordable housing really have the best interests of their citizens heart? Or is this simply an attractive political platform to run on? Everyone wants to pay less rent, but more so than that, everyone wants a robust economy, strong job market and financial opportunities that bring prosperity; and the real estate industry is the number one contributor to just that.

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