Let’s Not Bring Rent Control Back to Saskatchewan

Commentary, Daniel Huang, Housing Affordability, Saskatchewan, Uncategorized

Saskatchewan does not need rent control.  People often think that rent control can help low income people secure housing tenure, maintain a stable rent, and achieve a good income distribution effect but it often does the opposite. Rent control is governmental regulation limiting landlords’ ability to set and increase rents on residential properties freely. These controls often coincide with many other regulations concerning landlords’ responsibilities and tenants’ rights.

There are plenty of good, textbook economic reasons as to why the opposite of the desired effect is achieved.  Rent control artificially suppresses the value of all real estate making owners less able to borrow against the asset to conduct needed capital improvements.

Costs related to information search, housing damage due to lack of maintenance, legal fees, and government program management bring higher expenses under rent control. All these have wider effects as profits drop for suppliers, corporate and sales tax revenue drop for government. Lastly, when government controls rental housing, it interferes with the right to revenue, and also changes a private good into a semi-public good, making the housing market reflect some features of the public sector.

In what the academic literature on rent control calls the second-generation rent regulations, the effect on income distribution is anything but straightforward, and it is generally conceived that rent regulations are not an efficient means of redistributing income. If affordable rental housing is the primary objective, this can best be achieved through other policy initiatives, such as rent subsidies. World Bank experts have noticed that rent control harms short-term tenants while long-term tenants benefit, which discourages new immigrants from abroad and new talents form other provinces.

And here is one of the least-known undesirable outcomes. Rents in Canadian cities where there is rent control can be even higher than in cities without it. One other assumed important benefit of rent regulation is that a landlord cannot otherwise evict a tenant simply by proposing an unjustified rent increase. This is what some call an economic eviction. An efficient market requires rents differentiated according to quality of tenants. Lacking perfect information about the quality of a new tenant, landlords must choose an initial rent and adjust the rent (which can be higher) later as they gain experience with the tenant. For example, quiet, clean, and respectful tenants are different from those who are not.

Between 2007 and 2009, new rental unit construction in Winnipeg was 5 times that of Regina and Saskatoon combined. However, this has nothing to do with rent control as new rental construction is exempted for 20 years. Actually, in Winnipeg, the average rent increase in buildings with 3 or more units from 2001 to 2010 is 50% to 100% higher than the guideline, which shows a surprising disparity. Also, the population and other demographical factors there are quite different. Therefore the greater increase in new rental unit construction does not mean rent control won’t deter increase in rental units’ supply, which is evident in Ontario.

Two conditions are said to be necessary for implementation of rent control: a high renter-to-owner ratio and a low vacancy rate.  McMaster economist Andrew Muller`s data support the idea that rent control has reduced vacancy rates, which is the reverse of the aim. As put by legal scholar Defeng Xu from Peking University, empirical evidence shows that in Germany, New York City, and New Jersey State, tenants are more than 50% of the population, which justifies the strong rental regulation in these places. More than 70% of residents in Regina are owners in 2011.

Put simply, rent control, which was terminated in 1992 by Roy Romanow's government, should not be brought back to Saskatchewan. The words of Swedish economist Carl Lindbeck are worth keeping in mind: “In many cases rent control appears to be the most efficient technique presently known to destroy a city – except for bombing.”