Quantifying The Damage, Considering Solutions May 2000 by Robert. C. J. Hanson
This short report discusses the damage caused by rent control in Winnipeg and suggests a number of approaches to ease out of them. Although it was written in November 1996, complete inaction by the Province of Manitoba since then means that its observations remain valid today. The most interesting part describes how rent controls have devastated the assessment value of Winnipeg apartment buildings, thereby transferring a large portion of their property tax load to owner-occupied homes. In other words, it observes that home-owners are subsidizing the damage caused by rent control with higher than necessary property taxes. As high property taxes correlate to some degree with lower property values one might draw the conclusion that rent control in Winnipeg is one reason the city has the lowest property values in Canada. Robert Hanson left this short, but interesting, insight into the modern public policy scourge of rent control before passing away in early 1997. During a long career he was a long-time Winnipeg investor, a commercial real estate broker and was founding Chairman of the Apartment Investors Association of Manitoba, an association of landlords. The purpose of this paper is to show cause for alarm and promote joint communication and cooperation between all levels of government, departments within government and the private sector so that an orderly use of resources can be designed for the mutual benefit of all the stakeholders. Since 1946 when a dirty zoning provision was introduced to accommodate the returning men after World War II, short term legislation has been the typical response by all levels of government and all political stripes, to long term needs for housing. Special interest groups have pushed for and obtained government funding in support of demands for housing. Both public and private housing have been the victims of politically motivated representatives who have, for their own benefit, distorted the facts. The results have been wasteful for the taxpayer and costly for the investors. So much priority has been given to the tenant that, for over 20 years, the homeowner and other property tax payers have been subsidizing tenants. A tenant minority has been holding provincial governments at ransom by pledging votes in 5 key ridings in return for controlled rents. The only reason that any political party keeps rent controls is to stay in power. Statscan provides information about the rental and housing stock. A complete inventory of product does not exist but we know that there are 46,000 units for which there is no information and yet there are 30,000 owners who supply such a major share of the housing stock. A large part of the rental accommodation industry is in deep trouble and has entered a phase of decline that is devastating investors. Controls are also producing an urban flight in neighborhoods and scarring their economic and social well being. No single level of government controls all aspects of housing. However, no attempt has been made to coordinate policy between these levels. Hence, duplication, over spending, improper allocation of funds, waste and chaos has dominated this industry for decades. In 1976 market value of a rental unit was about 85% of replacement cost. In 1993 market value had collapsed to about 43% of replacement cost. The decline in equity is the result of Rent Control and the fact that “regulated cost pass-through” was never a reality. Both tenant and landlord accepted the principle of “regulated cost pass through”. However, when the legislation was finally written, cost pass-through was not achievable. This was either a mistake or it was done by design. If it was a mistake, then the government should be prepared to rectify the problem. If it was done by design, then the process has resulted in the confiscation of investor’s capital and has resulted in huge assessment changes with a corresponding readjustment to property taxes. The definition of landlord ranges from a landlady who takes in a boarder to the large corporate owner representing many shareholders. A landlord is an investor who may be an operator or may hire professional management. There are 56,394 units in 1,970 structures but we do not know how many people own them. That leaves 46,181 units in buildings ranging from single-family houses to rooming houses. How many people own these rental properties? Who are these people? We estimate that there are 30,000 owners in this group. Communications The most visible of the rental housing stock are the apartment blocks examined by CMHC and public housing projects. In Winnipeg, about 38,000 privately owned units are managed by professional management companies (all are in the phone book). This leaves 18,000 apartment units and 46,181 other units that are owner managed. We estimate this group of rental units is owned by over 30,000 ownership groups that we know very little about and with whom communication is non-existent. The majority of owners are registered to couples many of which live in part of the buildings they rent. If you have all the addresses, the owner’s names are available at the land titles office for cost to us of $5 each, making a $150,000 a mailing list out of reach. Direct Communication The Securities Commission, Real Estate Section, periodically sends notices to brokers, regarding problems or act changes that impact on the industry. Neither the Residential Tenancies Branch (RTB) not the City of Winnipeg assessment, zoning, fire protections, or inspections departments send any information Statistical Problems Stats Can provides information that indicates large discrepancies in published information sources. For example, if CMHC vacancy rate for 1991 is representative of the whole market in Winnipeg, then there are 102,575 rental units in Winnipeg. Since the CMHC Vacancy Report involves 56,394 units, that leaves 46,181 units which have not been publicly recognized or evaluated. Out of these, according to StatsCan, there are 13,544 single-family houses leaving 32,637 units about which we know very little. How many owners are there and who are they? What is the vacancy rate within this group? What types of units are there? Is this type of accommodation preferred over apartments? Maybe we are not building the right type of buildings? We need more accurate information. The rental housing industry, government and the public have a right to know where tax dollars were spent and the results or impact of previous policies and programs. These stakeholders need to have an accurate inventory and vacancy report to gauge the health of the industry and to be able to develop information systems from this base so that analysis is possible. Analysis is at best a guess but in reality this lack of information has contributed to enormous economic errors that have caused major disruption for the industry, for government and for the property taxpayer. Inventory The impact of public policy can not be determined without knowing some basic information about numbers of units of various age, type, rental rates, discounts and vacancy changes in areas within the city or areas throughout the province. Government should maintain an inventory list of buildings containing rudimentary information about all the rental units and whether funds were provided directly or indirectly by any government for construction, for rent or operating expenses and made available to the industry and the public. There is no available list of addresses of all the rental properties in Winnipeg or Manitoba. In Winnipeg, for example, using a City of Winnipeg report from 1987 and Statscan 1991 report we have made, what we think, is a reasonable estimation of how the breakdown might be. (See Table number 1). There are missing property codes in this report, therefore, this table does not represent the complete picture. Also missing is the complete inventory for properties outside of Winnipeg. The Winnipeg information is available to the province from the assessment department of the City of Winnipeg and from the province for the balance of Manitoba. Our repeated requests for such information have been turned down. Understanding the impact of government policies since rent controls have been imposed on this province, depends on obtaining this basic information. In addition to this information, a complete report about the public stock and information about the performance of all its components is essential. Table 1 – Estimating the Number of Winnipeg Rental Units
Subsidized Private Rental Housing There were several programs offered to the housing industry such as MURB’s, ARP’s, RRAP, CRSP etc. that were classified by CMHC as “privately initiated.” According to CMHC, such units did not have any “direct government funding” and therefore, they were classified as “privately initiated.” Tax shelters, grants, rent subsidies and preferred low interest rate loans are a form of public funding. Certainly this is misleading since it did not distinguish between those units funded only with private funds. This practice hid the true magnitude of publicly funded housing during this period and caused massive over building at great public expense. Hidden from the public and statistically not even counted separately from try privately initiated units, the policy’s impact goes unnoticed and, worse, the structure remains in place to permit this again. The number of units, with an address, number of different size suites and type of public funds involved, should be public knowledge not withheld, as is the case now. Vacancy Reporting Because vacancy information is not available for the 46,181 units outside the CMHC reporting, there is no way with certainty, to know what the total private vacancy rate might be throughout the system. For example, even observing CMHC reports, the vacancy in the 3 to 5 unit category ranges higher then the other categories. Best efforts to estimate the vacancy in this group would place the rate near 10% . First, using the CMHC rate, of 5.4% there would be 5,539 units vacant in October 1995 plus about 2,000 publicly owned units for a total of 7,540 vacant units. If on the other hand the vacancy for the 46,181 units, is closer to 10% that would make the total 9,663. To visualize the problem’s magnitude, imagine a 100-suite high-rise apartment block at each intersection along Portage Avenue from Main Street to 8 intersections past the perimeter, all vacant! Discounting Since discounting is so critical to understanding what is happening within the market in Manitoba, it is essential that some sampling be done to determine the extent and its impact. It is common for CMHC for example, to make comments publicly that rents are increasing when in fact taking account of discounts offered, rents have decreased. How can public policy be assessed if it is reported that revenue for the industry is increasing while in fact it is decreasing? CMHC dodges this issue by saying that their methodology is the same across Canada and cannot be changed just for Manitoba. Since laws differ across Canada, it reduces the value of information provided if idiosyncratic differences cannot at the very least, be noted and a warning issued to the reader. In Manitoba, the CMHC reports have during the last ten years mislead policy makers because discounting has had a profound impact on rental revenue even though governments have believed that rents have continued to gradually rise. Since the formula for guideline increases is based on subjective material, this belief has tainted the attitudes of cabinet members to such an extent as to alter the formula approach in favour of the subjective approach. Regulated Cost Pass Through A principle acknowledged by both tenants and landlords, when rent controls were introduced in Manitoba, was to allow “regulated cost pass through”. Landlords were appeased with this concession while the tenants accepted the idea as fair and equitable. However, the regulations governing this principle does not allow cost pass through. The act was written in such a way as to circumvent the principle of pass through in many seemingly small but cumulatively devastating ways: 1.Pre 1992
The majority of owners did not know that they could pay rent on behalf of a tenant but they could not discount their rent without decreasing their ability to pay costs. Effectively, they lost their right to pass through their costs to the tenant. It was a trick unfairly administered and very detrimental to landlords and municipal governments. The gradual accumulation of these losses resulted in massive property tax appeals, which caused huge revenue losses for municipalities. 2.Confiscation of Capital After 1992
3.Wandering Anniversary dates
4.Improper Application of Guideline Increases to “Rent” and the inability of the Residential Tenancies Branch (RTB) to correct such errors.
5.Residential Tenancy Board officers misinforming landlords about the proper application of free rent
6.Improper Reporting of Rents.
7.Extra Ordinary Cost Occurrence
8.Management Costs
9.Recovery Procedure
In order to provide services, our municipalities depend on property values as the basis for taxes. When these are eroded, so is the local government’s ability to maintain services. An increase in tax rate is one solution but the homeowner and businesses do not understand such an increase, to be a direct subsidy to tenants. It is argued that the housing market is largely influenced by supply and demand. However, when rent controls artificially reduce rental rates below even the cost to operate such premises, this interference with demand reduces the market forces that affect house prices. Reducing rental house prices erodes savings as well as increases property taxes.
Over the years, as operating costs gradually increased due to the legal inability to recover from tenants and as maintenance costs rise with age, the market value of many buildings has dropped sharply. This accumulation builds until owners realize that the assessed value has advanced beyond the market value to such an extent as to warrant an appeal. The evidence of the extra ordinary number of successful appeals is further proof of the damage that rent controls have had on municipal revenues. The impact of Rent Controls on residential rental property values can be shown in the drop in market value compared to replacement cost from 1976 to 1993. Table 2 – Impact on Assessments
If the average value of the 102,575 units is $30,000 today but market value remained the same percentage of replacement cost as houses or the 1976 percentage, the market value would be about double what it is today. This increase in Market value would be $3,077,250,000 and after a 57% portioning, the taxable portion of this increase in assessment would be $1,754,032,500 or approximately $105,000,000 increase in revenue. If this were applied to the 156,350 Winnipeg homeowners, it would amount to an average reduction in 1996 taxes of $673 per homeowner. Since 1976, the accumulated property taxes paid by each homeowner would have amounted to an average of approximately $13,000 per homeowner!
The portioning rules have changed. (Portioning is the practice of taking some portion of the assessed value of a property towards which the rate of taxation is applied). This portion was 48% for residences and 72% for rental property. However after a court decision, the city was forced to equalize these rates so that by 2001 the portioning rate for these two property classes will be 48% of the assessed value. This means that the homeowner will be paying a larger share of the total tax bill while tenants will be paying less. The principle of both tenants and homeowners paying according to market value and at the same rate is equitable and fair as long as government does not manipulate the market value of property to artificially favor one group. It is a political question as to why a homeowner is expected to pay their operating costs while a landlord is not able to pass on the costs associated with operating a rental property, to a tenant? At least homeowners and businesses should be clearly aware that they are subsidizing tenants, have been for many years and whether it is the intention of the government to continue this practice. Like apple pie and motherhood, no one questions the need to make living accommodations safe. How safe is the question? Should every home be equipped with a sprinkler system and a direct electronic connection to a fire station? Perhaps but could be afford that level of protection? The City and Province control the amount of money that welfare is prepared to pay on behalf of a recipient, who then tries to find a place to live for the allocated amount. When bylaws are enacted to prove safety, this cost cannot be passed on to a tenant even if the RTB permitted an increase above guideline, because neither the tenant’s benefactor nor the tenant is able to pay the increase. Who is punished here? The city? The Province? Or the Landlord? The city has enforced upgrading bylaws such as 4304/86 while decreasing the allowance to welfare recipients and now is closing down buildings because they do not comply under zoning regulations. The question is why were they allowed to get permits and improve buildings that would late be closed because they did not comply with zoning use regulations? Owners who relied on the Zoning Department’s advice were mislead into spending money on upgrading, not knowing that they would be shut down after completing the work. Why were purchasers not made aware when they bought these properties that they could not be used for their contemplated use? Is this expropriation without compensation or more confiscated capital? The Fire Department has prepared forms for landlords to inspect premises to ensure that smoke detectors are operating and to have their operation confirmed by a tenant. This is another cost that is part of the accumulation of expenses that owners or their managers must bear since it is not possible to recover these costs from the tenant.
Since the early 1970’s CMHC has been the conduit through which many subsidized programs have been implemented. Many of these programs have not been labeled as public housing although the private sector would not have invested without the incentives associated with these programs. It is time to have a public accounting of these programs where the numbers, costs and the results are reported. How many of them have repaid their obligations contemplated by the original contracts? How many were foreclosed and taken over and resold? How many were reworked where loans were forgiven, reduced or additional subsidies increased? What has been the cost to the investors? What was the lost equity or amount of the cash calls? How much capital was lost because of calls on covenants? For example, there have been 105 ARP programs in Manitoba, 3 are paying their obligations, 2 more might, but all the rest have been forgiven, foreclosed or modified. If accurate information had been available at the time North Portage was being contemplated, it never would have happened and the losses associated with this project would not have occurred. The impact on our economy today due to over building in the 70’s and 80’s is tragic. This information must be made public and safe guards put in place to prevent a repeat of such decisions. After receiving funds from the public purse to deal with specific housing problems that either never materialized or were over stated, resulted in an over supply, hence, units are being rented to other users not contemplated by the original agreements. Seniors were supplied with matchbox units that they refused to rent. This chronic problem was addressed by providing units to many other sectors of society, which created unfair competition for the private sector using tax dollars to subsidize rents.
Rent controls have devastated approximately 25,000 investors with holdings of less than 5 units. With dropping values, changes to City bylaws and newly applied zoning regulations, substantial financial troubles have been the result for these investors. These actions have locked their capital in a fiscal jail. They are unable to find investors who will take them out at a profit. In most cases, even at a loss, they have not been able to find take-out buyers. With no new investors entering the market place, the primary principal of growth has been delegated to an abeyance file. This results in stagnation. No buyers for the entry-level stock means no buyers for the entry-level apartment block and so on… and so on… This further depresses values since and ever-increasing capitalization rate is required to attract new investors. This increases the perception of risk and again puts a downward pressure on market prices. Once a guideline has been established and the period allowed for a tenant to provide evidence of a valid objection, the rate must become certain in law. As it is now, to allow a tenant, twenty years from now, to object to a rate charged in 1982, is insane. Even if there was an error, the cost of keeping records for both the RTB and the landlords is astronomical and such a scenario is unjust for the landlord. Since this and other problems, cause an impending liability, it creates uncertainty at the time of a sale or when refinancing. In a sale, the only way to appease a purchaser is to reduce that price or establish a contingency fund. Both of which results in a capital loss for the owner. Uncertainty where none may actually exist imposes an unfair burden of proof for a vendor/investor.
For several years we have been recommending a myriad of changes to the Act to bring down administration costs and produce fair treatment on issues that are significantly biased against landlords. These recommendations have been ignored unless regulation changes alone remedied a problem. Any changes that in the slightest way altered the mean spirited intention of the original Act have not been changed.
This amount should not be a political football, kicked around the cabinet table to be doled out like candy to a baby. We are talking here about a number that makes the difference between confiscation of capital and regulated cost pass through. The utilities companies have their rates set by the Public Utilities Board. A similar arms length, technically competent body should be appointed to assess the validity of claims advanced by the industry and any special interest group that would have a stake. To arbitrarily set this rate is further proof of legislation that results in the confiscation of capital. If the annual guideline increase is a given after the tenant’s 60 day appeal period has passed, then all the staff currently required to post, file and control rents could be eliminated. All the staff cost associated with creating notices or rent increase and renewal, recording discounts and archiving records could be eliminated. The controlled rental rate would be a calculation and as long as it did not exceed the maximum then the legal rate would be known with certainty. Upon gaining legal possession of a suite, an owner should be allowed to bring the rent to market. This would permit an orderly return to cost pass through and eventually to a market driven industry where rent controls can be removed without any real or perceived displacement for tenants.
Eventually, as the market corrects itself and with turn-over rates stabilizing as consumer confidence improves, the perceived need for controls will evaporate. If market rates can be achieved on move-outs, a target date can be selected years in advance for the final phase out of controls. This would give tenants a long period to adjust to any impending increase and investors a predictable recovery date.
CMHC currently compiles information for their report but this report excludes the 46,000 units making up the whole inventory. They have demonstrated their resistance to changing any of their methodology so it is unlikely that they will be unwilling to include these unites in their survey. Perhaps Statscan should have this responsibility. There is evidence that reporting was altered to drive up the number of units allocated to this area. If it was an offense to falsify information, the participants in such a scheme may think twice before taking such a risk again. However, obtaining information from Statscan is difficult and not upgraded every year like CMHC. If either of these providers can not be persuaded to make provision in their methodology for the idiosyncrasies of the Manitoba market, then some other third party Provider should be selected. Ideally, an inventory list, rental rates and vacancy rates should be maintained and provided in an annual report. Some advertising should be attempted, to encourage owners to provide accurate reporting. This should be done for the owners of the 46,000 group as well as for apartment owners and in the areas outside Winnipeg as well. A complete address list of all rental properties should be maintained by government and made public. This list should include the number of units, suite types with quantity, Year built and number of stories. Until a list of owners is developed, there is no way of communicating major aspects of the act and regulations with which investor/landlords are not complying. Direct mail for some material would be preferable but advertising could promote publications, act changes, bylaw changes, public information sessions and specific “Information Bulletins.” If this act is to become fairly administered, an education fund will be required both for the Rent Controls and for the fair administration of Parts 1 through 8 of the Act.
It is time to change the spirit of the Act to produce fairness and unbiased treatment for investor/landlords. There is no question that there has been improvement but this does not justify the status quo. The government must decide if the spirit of this legislation reflects this government’s policies. It cannot depend on the very people who formulated the legislation under a different political party to be able to reflect the attitudes and policies of this government. If the Landlord and Tenant Advisory Committee had been activated when it was first appointed, there could have been 2 years of work already prepared for early implementation in 1997. Because this or any other satisfactory method was not put into place, some new ad hoc committee should be formed comprised of technically competent individuals and representation with government policy people to balance the prevalent attitudes in administration.
Different levels of government have been making laws without the benefit of knowing the impact on various stakeholders in the industry. It is necessary to put and end to the yo-yo economics that have been dominating the industry for decades.
Political representation as well as administrative personnel should be present.
CMHC and a political representative
A political representative or policy person plus the director of the RTB.
The representative must be from finance and able to draw on knowledge from all the departments effecting housing.
Other municipal jurisdictions will have concerns peculiar to their own location.
The PPMA (Professional Property Managers Association) represents a group from industry that manage or own about 38% of the rental housing stock in Winnipeg.
Representation from Industry that has a large stake and represents a substantial number of investors, such as representation from the independent owner/operators and the 46,000 units not represented by any other group.
The policies of this department impact on many landlords and the budget of this department is affected by events in the industry. Coordinating changes will help everyone.
Tenant concerns may have to be obtained by polling or direct surveys. The key component in this equation is knowing the impact on tenants. Without this knowledge, it would be like designing a duck without ever seeing or experiencing water.
A permanent position that permits continuity and maintains records, disseminates information and provides resources for the board. When the city enacts a bylaws such as 4304/86 or where there are existing zoning restrictions, it should provide a means of verifying compliance that run with the land so that an unsuspecting purchaser can get confirmation of use free from work orders prior to registering a title change. Land titles could request such a certificate from the city to be filed with the land transfer. This would prevent the sale of buildings that are illegally represented for use as multi-family buildings and the illegal conversion of buildings into more units than are allowed in that area or in that building without adhering to zoning safety and upgrading regulations.
Allowing the market to make the corrections is the most efficient solution. Although the political fall out makes this solution difficult for government, some phasing in would be acceptable and desirable. Sending this signal for some target date in the future would send positive signals to the investment community and allow an adjustment period if the market dictated that there would be one. There is a tendency for government to get bogged down in reporting instead of taking effective and timely action. There is an immediate need for action on some of the steps such as rental rate certainty problems. Because of the critical conditions of our industry, it is essential that an attitude of improvement become evident very soon. Besides relieving the uncertainty among the current owners and the first time buyers, much investment in the housing industry from outside the province is possible if this negative atmosphere is altered or seen to be changing. This should be classified as urgent. i. Page 6 of the Oct. 1995 Rental Market Report published by CMHC |
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