The interaction between two public policies in Winnipeg – its own high property taxes and the Province of Manitoba’s rent control regime – has created a number of unexpected ripples, like low property values. Removing the rent laws would help lower the overall tax burden by increasing the value of investment in multiple housing, without many negative effects.
When Winnipeg homeowners have the misfortune to engage residents of other Canadian cities in a comparative discussion regarding the size of their houses, similarity of their neighbourhoods and ultimately the annual cost of property taxes, the conversation immediately reveals our relative disparity. When they hear about our extraordinarily high level of property taxes, people from other cities typically react with shock and disbelief. In Winnipeg, property taxes on a home range from 2.5% to 3% of assessed value. In other Canadian cities (and in many parts of the U.S.), the proportion is in the range of 1%. Consequently, a home in Winnipeg worth $100,000 faces taxes of between $2,500 and $3,000, while a similarly assessed house in Toronto would pay taxes of $1,000.
The apologists for our high tax regime might simply argue that typical values are higher in other places, so that taxes can easily be set at a lower level. This argument is specious. In reality, it works the other way around. In the real estate business, one of the first principles you learn is that value is a function of taxes. That is, the higher your taxes the lower the value of the real estate and vice-versa. Governments cannot control market values but they can control the level of taxation. Therefore, governments that pursue a high property tax policy are in effect reducing the value of all real estate, and by consequence, the wealth level of the general population.
In Manitoba, the provincial government has available to it a mechanism to reduce the level of taxation on single-family homes, by phasing out the rent control program. For over twenty years, successive provincial governments of different political stripes have set the annual guideline for the amount building owners can raise rents at levels below the rate of inflation. As a result, the ratio of expenses to revenues has gone from 45% in 1980 to over 55% today. Because apartment buildings are valued and assessed on their cash flow, the contribution to total taxes from apartment buildings has slowly declined over the years. The tax burden has therefore fallen to homeowners.
In effect, homeowners are subsidizing tenants. If rents were decontrolled and allowed to find their market level, the value and assessments of apartment buildings would go up and property tax receipts would follow the same direction. As taxes from apartments went up, taxes on homes would find their share of the burden fall.
What about the tenants? It is true that many rents would rise. However, thousands of people who are renters in Manitoba pay a very low percentage of their income towards their rent compared to other Canadians. Any property manager can relate examples of people paying less than 10% of what they make towards occupancy costs. Is it fair that an individual making $60,000 per year pays $500 per month on a suite that has a potential market rent of $750 while the beleaguered homeowner struggles with an exorbitantly high tax bill and low home value?
In many cases, rents would fall when decontrolled. As the provincial government announces its rent increase guideline for each year, it does not take in to account that some neighbourhoods are doing better than others. Winnipeg’s core area is struggling with the numerous social problems that have proliferated over the past twenty years and helped precipitate a shocking reduction in property values. During the same period, many of the suburbs, like Charleswood and St. Vital, have grown and prospered.
Yet the rent increase has been set at the same level each year for all areas. The perverse result is that our least fortunate citizens in the core area on less well maintained, older properties (the ones rent control was supposed to protect) are paying rents similar to people in better areas. If rent controls were phased out, the rents in many of these properties would fall.
Rent control negatively affects other areas of the economy. Since it artificially suppresses the value of all real estate, owners are less able to borrow against the asset to conduct needed capital improvements, both for homes and apartment buildings. Each year, the housing stock becomes older, and more things break and need to be replaced. Since the value is often not there to support these improvements, decisions are delayed. Consequently, profits are lower for suppliers and taxes, both corporate and sales, are lower for government. The population’s quality of housing is at a lower standard than it ought to be.
The apartment industry has suggested that the provincial government change the legislation so that voluntarily vacated suites could be set at market levels. People who rented their suites during the period of rent control would continue to have the protection of the program. However, once the suite becomes vacant, the building owner would be free to fix up the suite and put it out to rent at what the market will bear. This approach would allow for a gradual return to market dynamics without an immediate rent spike. It might even result in traditional apartment buildings being built for the first time in Winnipeg since 1990.
Rent control hurts all property values, and removing it would spur the kind of reinvestment that is crucial to reversing the decline of the inner city, while restoring equity.