Thank you for your kind invitation to speak here today. My topic is rent control, and I feel that I am the proverbial preacher giving a sermon to the choir. I think I might fairly guess that everyone in this room agrees with me that rent control is bad public policy. But it¡¦s a policy that is still very much in effect in Manitoba. Why is that so? If it¡¦s as bad as we think it is ¡V and I have no doubt about that ¡V why did we adopt it in the first place?
When I first moved to Winnipeg, in 1965, I was on the cusp of what is known as the "baby boomers." A huge generational bubble caused by high birth rates after World War II, it has been one of the curses of my life. This demographic phenomenon intensified the level of competition in most respects. We endured staggered hours in elementary school, we scrapped for part-time jobs as teenagers and for scholarships to go to university. In the years 1965-70, tens of thousands of us arrived in Winnipeg, or moved out of our parents¡¦ homes in Winnipeg and began to establish our own households.
Given our numbers, the rental market we encountered in this city should have been as tight as every other situation. I was pleasantly surprised to find that, at least in Winnipeg, that was not the case. There was an abundance of affordable units available, and, even though it paid as always to shop around, most of them were in excellent condition. Our sheer numbers dictated that we would have an effect on vacancy rates, and things did tighten up in that period. Rents began to rise accordingly, although I can speak from personal experience ¡V I came from a working class family with 15 children, and money was always scarce ¡V when I say that I never had a problem finding premises that fit my budget.
Why was the rental market so hospitable? Precisely because throughout Winnipeg¡¦s history, that market had been allowed to function. Throughout the 50¡¦s and 60¡¦s, thousands of new low-rent units had been built, you still see them scattered throughout the city, they typically were three-story walk-ups, with 30-40 apartments each. This new supply added to the diverse range of rental units that already existed, built over the city¡¦s history, the older blocks that we thought of as ¡§character¡¨ apartments. This ample supply cushioned the shock of our market impact, and, although we did experience price increases, they were for the most part modest and, at least to my mind, understandable.
That¡¦s when a political wave hit your industry. It had been building, as legal precedents tend to do, in rental markets in Europe, the United States and eastern Canada. Rent control regimes had been established in larger cities, most notably Paris, New York and Boston. Tenants associations in other cities were lobbying for similar legal protection for renters, and in most provinces, these demands were accomodated.
Two factors, I believe, were the primary drivers that led us to widespread rent controls. The first was the demonization of landlords. In 1991, a book called The Landlord as Scapegoat was published by the Fraser Institute. Written by a Toronto sociologist, Keith Lehrer, it analyzes the power relationships between landlords and tenants and the effect of rent controls on that dynamic. Lehrer shows that these relationships, typical of those in free markets, were not the top-down stereotype used to great demagogic effect by rent control advocates who liked to demonize landlords. In fact they were characterized by mutual self-interest, and tenants had as much power in that process as those whose premises they sought to occupy.
That¡¦s the second driver, a profound ignorance of markets. Let me give you one example, off topic but valuable for its revelation of the depth of that ignorance. The Frontier Centre publishes a Swedish newsletter, where we highlight pro-market reforms in Stockholm¡¦s health care system. The writer of that newsletter, Johan Hjertqvist, was in Winnipeg in 2000, and chaired a seminar in which he described how and why the Swedes had been able to reduce waiting lists by 73%.
One local health policy specialist was there, and stuck up her hand during the question period, and said ¡V I paraphrase here ¡V ¡§I don¡¦t get it. You say you have reduced waiting lists. You have also raised wages, lowered the cost of service and increased its quality, all at the same time. It sounds too good to be true.¡¨ Johan, who is a kinder man than me, gave her a short primer on markets. He explained that competition spurred the search for excellence and better practices, and that the Swedes, by allowing private providers and encouraging them to bid into the publicly funded system, had created a virtuous cycle whose benefits were being reaped by all parties, the purchasers, the providers and the sick.
Although that anecdote has nothing to do with the market you people live and work in, it does reveal the profound ignorance of markets in general in the local policy community. They have little room in their world view for the efficacy and value of markets, and they have little compunction in using the power of government to override them.
The single best way to destroy a city¡¦s housing stock is the imposition of a rent control regime. Every jurisdiction that has tried it has experienced the same consequences: the curtailment of new private investment in housing, especially multiple housing, the deterioration of the existing stock and a collapse in its value, and a decrease in the availability of affordable, decent housing for the poor. The stricter they are, and the longer they remain in place, the more intense the negative effects. Yet few governments have the courage to remove them, because they have political appeal.
Rent control is a form of price control, and price control causes shortages. In his book on the subject, author William Tucker outlines how they change behaviour in the housing market:
- „h Builders stop putting up new housing because rent control captures their potential profit.
- „h Landlords withhold existing housing from the market, for use by themselves or friends and relatives.
- „h Tenants stay much longer in controlled rentals, so the remaining stock has declining vacancy rates.
Tucker outlines how city after rent-controlled city experienced these outcomes. He identifies the group most harmed and most ignored by rent control, the people technically described as ¡§unfulfilled demand.¡¨ It consists of those who either bid up to more expensive housing in the unregulated market and, in the other direction, those who can¡¦t find shelter at all, the homeless. Tucker also suggests why, despite their consistent failings, rent control ordinances are so difficult to remove once in place:
¡§Under rent control, most of the tenant population receives a bonus of lower-than-market rents. Only a small percentage of tenants is entirely excluded from the market. That small group must bear all the adverse consequences. Those people will be forced out of the market and may even end up homeless. The people who benefit from rent control will always remain the overwhelming majority. That is why rent control may persist ¡V even when housing shortages and increased homelessness are the result.¡¨
The Province of Manitoba adopted rent controls in 1970, a policy similarly adopted in many other jurisdictions during the high inflation rates of that period. The first two effects forecast by Tucker happened in Winnipeg ¡V private market investment in multiple housing stopped dead and many landlords retired units from the market ¡V but the third one did not. Vacancy rates have bounced back and forth, but a severe housing crunch, especially at the bottom end of the market, never occurred.
Why did Winnipeg escape the predicted shortage? As with Regina and Saskatoon, it had a substantial existing housing stock in generally good condition at the onset of rent control. The City¡¦s habitually slow economic growth reduced the pressure of demand as younger workers emigrated to cities that were creating jobs at a faster pace. Moreover, declining property values from high property tax rates meant that the gap between the controlled price of housing and the underlying market price did not become as wide as it did in other cities. The rent control agency also allowed landlords nominal, if below cost increases in rents over time.
Instead of a shortage in the amount of housing, Winnipeg has experienced a sharp decline in its quality. Landlords tend not to invest in improvements or even basic upkeep. ¡§Winnipeg’s apartments come complete with antique plumbing and electrical wiring,¡¨ one writer puts it. The media have graphically documented the accelerating cycle of urban housing collapse: more and more properties boarded up, abandoned and acquired by the City for defaulted taxes, spikes in the rate of juvenile arson as the derelict properties are torched.
I experienced this phenomenon personally. In 1979, I moved into a one-bedroom apartment in Winnipeg¡¦s core area. It was a steal. The rent was low, the apartment in excellent condition and the landlord was willing to allow tenants to alter and improve the premises pretty well as we wanted. I stayed there for nearly twenty years.
I wish things had been as pleasant for the owners. The period of my tenancy coincided with two major cost increases for them, rapidly rising property taxes and a series of spikes in the price of heating fuel. I recall one winter in particular when, within the space of a week, the Public Utility Board allowed a double-digit raise in the price of natural gas and Manitoba¡¦s rentalsman declared that landlords were allowed to raise rents that year by only one percent. On top of that, the landlord had been hit that year with upgrades to the building¡¦s fire systems. At a cost of thousands of dollars, new interior walls and ugly fire cables were installed, ruining the character of the building and imposing unrecoverable costs on the owners.
They were great landlords, but you could see the gradual effect of the squeeze they were in. The caretaker¡¦s constant remodelling efforts diminished and nearly disappeared. Careful screening of tenants was abandoned in a panicky effort to keep the building, now a white elephant, as full as possible. I was not surprised when the owners eventually bowed to reality and sold the building. I was also not surprised to learn that the person they sold it to was literally as crazy as a bedbug. Who else would have bought it? What had once been the vehicle for a successful, mutually beneficial and voluntary exchange of value had become an impossible trap, for landlord and tenant alike. I moved out.
I am sure that my experience was shared by many others. But the effects of rent control are not restricted to landlords and tenants. A policy study published in 1999 by the Frontier Centre looks into the unexpected tax consequences of Manitoba¡¦s rent control policy. The research, conducted by the late property specialist Robert Hanson, documents how rent controls have collapsed the assessment value of Winnipeg apartment buildings, thereby transferring a large portion of their property tax load to owner-occupied homes. In other words home-owners are subsidizing the damage caused by rent control with higher than necessary property taxes. High property taxes correlate to some degree with lower property values. One might therefore draw the conclusion that rent control in Winnipeg is another reason the city has the lowest property values in Canada.
Hanson¡¦s figures shows that rent control has depressed the quality and market value of Winnipeg¡¦s housing stock Over time, he looks at its market value as a percentage of replacement cost ¡V that is, the present sale price compared to the cost of building a new apartment. In 1976, the average replacement cost for a housing unit in Winnipeg was 85% of the market value. By 1993, it had sunk to 43%. Rental properties were collapsing in value.
This loss of wealth was reflected in a long parade of rental property owners who successfully challenged the City of Winnipeg¡¦s assessments of value. In case after case, the owners of rental housing were able to show that the market values of their properties had fallen far below the official assessments. The subsequent reduction of their property tax bills moved part of the responsibility for meeting the cost of city services to home-owners. Hanson calculated that the average Winnipeg homeowner had to pay $673 more in property taxes in 1996 because rent control was devastating the tax receipts from rental properties. He estimated the total extra cost per household at about $13,000 in total over 25 years of rent control.
The effects of rent control are usually so severe that many governments have reconsidered the policy. ¡§During the ’80s and ’90s, 31 states prohibited this type of price-fixing by law or constitutional amendment,¡¨ writes Winnipeg-born author, David Gratzer. ¡§On this side of the border, one of the first major decisions of Roy Romanow’s government was to end Saskatchewan’s rent controls. And for those governments without the intestinal fortitude to fully scrap controls, there is a partial relaxation of the government regulation: allowing rents to rise when tenants move.¡¨
A simple cancellation is the best solution. But as we have seen, the political constituency for retaining them in some form has more clout than the almost unanimous opinions of economists on the matter. The Ontario government, for instance, allowed landlords a window of opportunity to raise prices in the event of a vacancy, although it capped the amount of the increase allowed. This sort of tinkering, and other measures recommended below, might help to mitigate the destructive effects of rent controls, but they are no substitute for outright abolition. Hanson recommended a graduated return to a free market in rents:
- „h Allow realistic annual price increases to stop the confiscation of landlord capital. Remove the guidelines from the realm of political whimsy by moving their determination to a technically competent, independent arbiter, akin to the Public Utilities Board.
- „h Create certainty for landlords by making rent increase guidelines uniform across the industry. Eliminate the overhead costs associated with posting and communicating individual price allowances, discounts and the record-keeping they entail.
- „h Permit landlords to bring the rental rates for vacant suites back to market value. Create the conditions for an orderly return to a market-driven industry where rent controls can be removed without any real or perceived displacement for tenants.
- „h As the market stabilizes and consumer confidence improves, select a target date, even years in advance, for a final phase-out of controls. Give tenants a long period to adjust to any impending increase and investors a predictable recovery date.
- „h Compile more accurate information, preferably from an independent party, about the size and characteristics of the rental housing markets. Take this function away from the Canadian Mortgage and Housing Corporation, which uses dubious methods to assemble data and which has a vested interest in maximizing its involvement in the market by altering reported data. Require the new provider to compile reliable information about the supply and nature of rental housing.
Ultimately, Hanson came to the same conclusion now shared by Winnipeg¡¦s Mayor Glenn Murray. The best solution to the problems of rent control is to dump it, immediately. It worked 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 and rents did not skyrocket. On average, they held flat. British Columbia got rid of the worst features of its rent control regime in the 1980¡¦s.
The Province of Alberta also abolished rent control, 20 years ago. The measure has been a critical factor in the construction of many new rental units in Edmonton and the refurbishment of existing residential buildings. Others that might have been converted into condominiums to escape controls remained in the rental market.
It¡¦s Manitoba¡¦s turn. I encourage you to keep up the fight. Learn about free markets, and spread that message as far and wide as you can. I¡¦ve always been an optimist, someone who believes that in the open market of ideas, eventually the best ones will rise to the top. There is no economic defense for rent control. It is a policy that cannot stand up to close examination. Sooner or later, we will be rid of it, and the sooner the better.