When embarrassed by facts, people in the public policy business often resort to “spin”, trying to put a happy face on an ugly situation. A personal favourite is the annual discussion of the “Manitoba advantage” in the provincial budget. Sure, taxes are high and we aren’t growing very fast. But you have to look at the “big picture”. We have, we’re told, lower overall living costs than other provinces. In particular, we have lots of affordable housing.
This “cheap housing” spin creatively glosses over decades of relative economic decline. A more sobering analysis would be that fewer people want or have reason to live in Manitoba. Weak demand simply means weak prices.
This alternative view holds that Manitoba has applied a unique mix of policies to push its housing prices to the lowest in Canada. Taxes have drifted higher than those in competing jurisdictions, a straightforward recipe for exporting our entrepreneurial class. Then there was the 1972 amalgamation of thirteen Winnipeg-area municipalities into Unicity, an organizational structure that — as if guided by an invisible hand — has incentives to find expensive ways to do everything. Another has been the continuing financing of the public school monopoly through open-ended property taxation.
Slow population growth combined with the country’s second-highest property taxes have predictably led to Canada’s most depressed housing prices. Fact is, they would be even lower were it not for external wealth transfers — better known as federal equalization payments — that artificially stimulate housing demand.
Ignoring the policy drivers that have depressed prices, our governments have made a bad situation worse by succumbing to the allure of tax-credit programs to subsidize new home construction. All these efforts accomplish, at best, is to produce a slight distortion in the marketplace: the sellers of nearly new houses which are unsubsidized (in economics jargon, close substitutes for new homes), have to deduct the value of the subsidy from their selling price to stay competitive with new home offerings. Finance Minister Greg Selinger deserves praise for not renewing the province’s sales-tax rebate program for new homebuyers.
Similar programs at the city level face the same problem. While a small vocal constituency will support them, the City would be well advised to follow Selinger’s example. Why not address the root causes of low property values instead of resorting to gimmicks to artificially pep up the market? It is unlikely that an NDP government will break up the provider monopolies at city hall or in the public school system (parts of its power base), whose higher delivery costs are principal sources of Winnipeg’s high property taxes. However, there is a critical area where the Doer government can make productive changes.
The crumbling facades and otherwise obvious genteel decay of many Winnipeg apartment blocks speak to the most destructive aspect of Manitoba housing policy — rent control. Recently voted as one of the worst ideas of the 20th century by a group of prominent economists, the practice of removing profits from rental markets has been around too long for its long-term effects to remain hidden from all but the most reality-challenged: zero availability of decent, affordable rental accommodation, especially for lower income families; unnecessary and expensive expenditures on public housing; and more superfluous bureaucracy. It has devastated cities from Hanoi to Paris to New York to Winnipeg.
But what is the connection between rent control, high property taxes, and the poorest real estate market in Canada?
Under rent control, the capital value of Winnipeg’s apartment blocks has deteriorated as shockingly as the buildings themselves. The falling values have translated into falling assessments on the properties. Since the city government, as now structured, has severe difficulty trimming operating costs, the falling property-tax yield from the rental sector has been made up by increasing levies on homeowners and businesses. In a fascinating study of the financial carnage the controls have wreaked on average home-owners, the late property specialist Bob Hanson estimated the hidden transfer from homeowners in the form of higher property taxes per home at $673 per year in 1996.
Hanson’s analysis is provocative and persuasive. While in government, the Tories did precisely nothing about the damage caused by rent control. As the parent of rent control, however, the NDP has more leeway to stop the cancer. They can look to their NDP brethren in Saskatchewan. In 1992, Roy Romanow’s government quietly passed amendments to the province’s Residential Tenancies Act that ended rent control. The sky never fell; the attached chart shows that rents did not skyrocket. It’s been a dead issue for years.
Average rents held flat after Saskatchewan’s NDP government removed rent controls in 1992.
The dubious distinction of having created the lowest-valued real estate market in Canada offers Manitobans little “advantage” at all, except to spin artists. We need to move forward. Axing rent control would expand the supply of affordable rental accommodation and eliminate unnecessary regulatory overheads. It would also be an easy first step in climbing out of the property-market basement by raising the assessment value and the assessment base (as supply expands) of apartments and creating room for property tax cuts.