For politicians seeking votes and others concerned about the effect of higher rents on Alberta’s poorest folk, there’s a smart way to respond to the province’s tight rental market and counterproductive responses. There are a number of ways municipal and provincial governments can make rent more affordable, not only this month and this year but well into the future, but none of these has made it into the provincial election campaign.
First, keep development fees to a minimum. It’s reasonable to ask developers to pay for the urban infrastructure associated with new housing. But “developers pay” is a bit of a misnomer. It’s the occupants, whether buyers or tenants, who ultimately pay the increased development fees in their purchase price.
Second, abandon any notion of rent control, even temporarily. Alberta Liberal leader Kevin Taft has proposed a 10 per cent cap on any rent increase for two years. But rent controls create perverse consequences. New York City began “temporary” rent control in 1947 and still has it 61 years later.
Rent control always produces similar unwanted outcomes: fewer rental units are built, the quality of existing rental stock declines as owners refuse to make upgrades (given their returns will be minuscule or negative) and apartments begin to be subleased. In that scenario, the tenant and not the owner reaps the benefit of actual market rents.
Even where legal distinctions are made between existing rental stock (subject to rent controls) and new stock (initially exempt), the new rentals are less likely to be built. If the provincial government decrees that units built before Dec. 31, 2007 are subject to rent control, an investor will reasonably conclude his or her investment in 2008 or 2009 might one day be the next batch subject to controls.
Another lousy consequence of rent control is that it subsidizes both poor and rich renters.
In New York, a 2005 New York Sun investigation found that retiree Howard Shapiro owned a West Palm Beach property assessed at around $1 million US but lived in a two-bedroom rent-stabilized apartment overlooking Manhattan’s Central Park. Two doctors owned a lovely home in Connecticut worth $1.6 million; they also had a rent-stabilized apartment in New York. Another New Yorker, Andreas Scott-Hansen, lived in a rentcontrolled apartment but owned a $1-million property in Geneva, Switzerland. Or consider the case of actor Mia Farrow, who paid $2,500 a month — for an 11-room apartment. Rent control for the rich? It’s inevitable under any rent control regime.
Third, instead of buying buildings and acting as landlords, which means additional public expenses for government budgets such as maintenance, upkeep, and management, governments should subsidize more low-income renters, including those currently homeless.
For example, the city of Calgary recently bought a redeveloped 46-unit condominium complex for $10.3 million. It plans to rent half the units out at market cost and install subsidized tenants in the other 23 units.
But consider the opportunity cost of Calgary’s approach compared to an alternative and optimal way to use such money. The city has tied up more than $10 million for just 23 tenants. If that money were deposited in an interest-bearing account at four per cent annually, the interest income alone would be $412,000 annually or $34,333 monthly.
So instead of 23 low-income tenants getting a break, Calgary could instead reduce the rents for 85 Calgarians by $400 a month. Thus, a $1,000 apartment becomes a more affordable $600. Or if the rent subsidy were increased to $600, 57 renters could have a $1,100 unit reduced to $500. That’s a better and more immediate approach to getting poorer and homeless Albertans into decent housing.
Lastly, Alberta’s cities should remove the ban on secondary suites. In many municipalities, most homeowners can’t add for-rent suites in single-family homes.
In Calgary, only homes built in 1950sand 1960s-era neighbourhoods have city allowed secondary suites. Almost nothing has been legally permitted in the halfcentury since.
This further constricts the rental market supply (and also prevents homeowners from garnering extra income). City councils across Alberta should free up homeowners to install secondary suites in existing or in planned homes so long as minimum code standards are met.
Alberta is behind the rest of the country here. North Vancouver legalized secondary suites for all homes by 1995 regardless of previous zoning. Vancouver changed its bylaws in 2004 to permit secondary suites city-wide. Toronto, after amalgamation, allowed new homes to rough in secondary suites and add them five years later.
The common thread among all four proposals is this: When you increase supply, the cost of rent will moderate or, depending on the economy, even decline. When you restrict supply, tenants have fewer choices, poorer quality housing and higher rents, and everyone works the system to their advantage, including celebrities and other wealthier tenants who can afford market rents. That’s a lose-lose scenario for everyone.
If Alberta’s cities don’t move on such items, the province — which has ultimate authority over municipal matters — should.
The combination of using public money for more rental subsidies instead of apartment purchases, increased supply through more secondary suites and eased development fees, is a win-win situation for everyone, especially the urban poor.