Lee Friday – May 5, 2017
The Ontario government has announced its intention to expand rent control laws in order to include rental units built after 1991, which are currently excluded. “New rules would see all private rental units fall under annual rent increase guidelines. Those have averaged two per cent in the last 10 years and this year it is 1.5 per cent.”[1]
Rent control laws are ‘price control laws’, and government legislated price control laws are always a bad idea. These laws end up harming more people than they help.
IT STARTED IN 1975
The Ontario government imposed rent control rules in 1975, as a temporary measure. I guess ‘temporary’ means 42 years, and counting. As is customary, the government pretended to help people with a problem without admitting it was the source of the problem. The government was (and is) in bed with the banks. That is the source of the problem. The government grants the banking system monopoly powers over money and banking (I have written a series of essays about this here). The monopoly is supported by all levels of government.
These monopoly privileges are utilized by banks to further their own interests – they inflate the money supply by making loans. This monetary inflation begets price inflation, including rents. This had been going on for a long time, but in the 70s it became quite pronounced. The inflation rate was 4.8% in 1972 – 7.8% in 1973 – 11.0% in 1974 – 10.7% in 1975.[2]
In response to this government-facilitated price inflation, rent control was actively promoted by the NDP during the 1975 Ontario election campaign. This resonated with economically ignorant voters, and the NDP doubled its representation in the legislature. The PCs won, but lost their majority, forcing them to agree to rent control.[3] The important point is that neither party identified, or confessed to, the real source of the problem, which was monetary inflation, not evil landlords.
When you get causation wrong, you often get the solution wrong. The government did not respond by addressing the issue of monetary inflation by the monopolized banking system, which is not a product of the free market. Instead, the government interfered with the free market by forcing landlords to restrict their rent increases to a price below the level which the market would bear. This resulted in ‘cheap rent’, which increased the demand for these rental units. However, entrepreneurs would not build many new units because ‘rent control’ made it unprofitable to do so. Therefore, the result was an insufficient supply of rental units, which eventually became undeniable, even by the government.
When the province faced a rental shortage in 1992, the NDP government tried to encourage the building of more rental units by offering a five-year rent control exemption on new units. The exemption later became permanent.
“The fact that an NDP government (in 1992) had to ease rent control requirements is a clear indication that something went very wrong,” Tal [Economist Benjamin Tal] wrote.
Wynne disagrees and says the lifting of rent controls failed to spur the construction of new rental units. [4]
Premier Kathleen Wynne’s comment is both deceptive and noteworthy. Rent controls were not lifted, as she claims. These controls remained in place for units built before November, 1991. The NDP government simply decided not to impose rent control on newly constructed units. Big difference. Clearly, the 1992 NDP government, and all subsequent governments from the other two major parties, were still committed to some form of rent control. If all rent controls had in fact been repealed, it is likely that more construction would have ensued. This is an important point – the government was sending mixed messages, which increases the risk for developers, for entrepreneurs. Investing in new construction is a long-term commitment for them. The government’s confusing stance on rent control created a significant element of uncertainty about the direction of future regulation, thus discouraging new construction. As Henry Hazlitt wrote in Economics In One Lesson,
Builders or owners of pre-existing apartment houses, finding themselves with restricted profits or perhaps even losses on their old apartments, will have little or no capital to put into new construction. In addition, they, or those with capital from other sources, may fear that the government may at any time find an excuse for imposing rent controls even on the new buildings. And it often does.[5]
Indeed, it often does, as we are now seeing in Ontario. Kathleen Wynne’s dismissive response to economist Benjamin Tal’s observation is unlikely to raise eyebrows. Most tenants are unaware of the destructive economic consequences of the government’s intervention. The shortage of rental units will intensify as new rent control laws are implemented.
RENTAL UNITS BUILT BEFORE 1991
These are the units currently subject to rent control laws. It is no coincidence that these are also the units with most of the maintenance problems. Government mandated rents eventually fall below the market level, which increases the demand for these ‘cheap’ units. In an unregulated market, higher demand would incentivize entrepreneurs to build new units. However, ‘rent control’ makes widespread construction unprofitable. Thus, as we have seen, fewer new units are built. Additionally, landlords of the old units earn lower profits because rents have fallen below the level where the market would have established the price.
It is true that tenants are short term beneficiaries of rent control, but they suffer the long-term effects. Landlords of the old units are not faced with the competitive pressure of new units because few new units are built. This makes it easier for these landlords to compensate for lower profits (maybe losses) by reducing their expenditures on maintenance.
A true free market forces landlords to satisfy tenants, or lose them to the competition. However, because government forbids the market to operate, landlords do not need to keep their tenants happy. If a tenant moves away from a poorly maintained rental unit, the landlord can quickly fill the vacancy because of the high demand for these cheap units.
As tenants suffer the effects of poor maintenance, the landlord/tenant relationship becomes strained. Government laws are supposed to promote conflict resolution, not create conflict. As Hazlitt notes:
The rent-control laws, among their other effects, create ill feeling between landlords who are forced to take minimum returns or even losses, and tenants who resent the landlord’s failure to make adequate repairs.[6]
DISCRIMINATION
When the government forbids rents to rise above an arbitrary level, it favours current tenants and discriminates against would-be tenants who would willingly bid a higher price. The government also discriminates against landlords.
There is nothing unique about this. The government interferes with the free market economy in a thousand different ways. I have written about this here and here. Every single intervention, without exception, favours one group, while discriminating against other groups. Every act by government must, by definition, favour some at the expense of others. This is because the government acts coercively, as politicians impose their will on the citizenry. This stands in direct contrast to the voluntary nature of the free market.
For all its pontification about the immorality of discrimination, we see that the government itself is the most discriminatory institution on the face of the planet.
CONCLUSION
The lack of a sufficient supply of affordable, well maintained residential rental properties is a direct result of past Ontario government policies. New policies will only make the problem worse.
Rent control removes the incentive of entrepreneurs to construct new rental units – and it removes the incentive of landlords to adequately maintain their units. New rent control legislation guarantees a continuing, and intensifying, shortage of new units – and it will likely result in a gradual decline in the quality of all units.
All rent control legislation should be repealed. Of equal importance, the government must also remove all restrictions and conditions on where, and what, developers can build. This is not a complex economic issue. As economist Thomas Sowell wrote:
. . . A century ago, virtually any economist could have explained why preventing housing from being built would lead to higher rents, and why rent control would further widen the gap between the amount of housing supplied and the amount demanded. Not to mention such other consequences as a faster deterioration of existing housing, since upkeep gets neglected when there is a housing shortage. . . .
You don’t get more housing with rent control.[7]
The free market, if allowed to operate, would produce the best possible economic outcome. Developers know what they are doing. These entrepreneurs – speculators – unlike the government, have skin in the game. If they do not build the right type of accommodation in the right location, they will not attract tenants, and they will lose money. Genuine competition guarantees a sufficient supply to match the demand – and it guarantees the best possible price for the consumer, the tenant.
The government professes genuine concern for tenants, but their response is always the same. They never admit their own culpability. Instead, they forcefully impose conditions on landlords and tenants, forbidding these groups from making voluntary exchanges. These bleeding-heart politicians always stop short of committing their own money to the construction of rental units at what they consider to be affordable prices. If you think the government cares about the welfare of tenants, read this.
Politicians are adept at trolling for votes, and tenants are an easy mark. Most tenants do not perceive the discriminatory effects of rent control, or they simply don’t care. They also do not realize that rent control is not in their long-term interest. This is because most people are economically ignorant, and present oriented, as they focus only on short term events. This serves the interests of politicians, who also focus on short term events – the next election. Current tenants are short term beneficiaries of rent control, and politicians know that tenants have more votes than landlords.
Politicians do not care about the long term economic consequences of their policies. They will either be out of office when these consequences arise, or they will deny any connection between these consequences and their previous policies.
When economic activities are increasingly directed by those with political skills, instead of those with business skills, overall prosperity declines. Individuals wishing to build rental units must first seek permission from politicians and bureaucrats who produce nothing. Those receiving the green light must then bear the risk of future regulations which may force them out of business, thereby sacrificing their considerable investment of time and money. When entrepreneurs must bear the consequences not only of their own decisions, but also the decisions of politicians, there will be fewer entrepreneurs, fewer jobs, and fewer rental units.
[1] http://www.bnn.ca/ontario-unveils-16-new-housing-measures-including-15-non-resident-speculation-tax-1.729268
[2] http://inflationcalculator.ca/historical-rates-canada/
[3] https://en.wikipedia.org/wiki/Ontario_general_election,_1975
[4] http://www.bnn.ca/rent-control-is-wrong-medicine-for-toronto-housing-market-crisis-cibc-1.714754
[5] Henry Hazlitt Economics In One Lesson (Fiftieth Anniversary Edition published by Laissez Faire Books. Published by arrangement with Crown Publishers, Inc.) p 112 – 13
[6] Ibid., p 113
[7] https://www.creators.com/read/thomas-sowell/11/16/has-economics-failed
Perfectly true!