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Rent, under control?

Mark Milke: Rent control can sound like a great idea – but it’s a short-sighted policy that has been shown to make the problem even worse.

When governments impose price controls on good and services with the ostensible aim of helping consumers, they almost invariably harm them. And that’s because the market reaction is severe; to stop producing as much of that good or service.

If a widget costs you five bucks to make, but governments limit your sale price to $5.05, a five-cent margin will soon force you to put your money elsewhere. After all, why take the risk? The cost of labour, property taxes, or raw materials may rise. Then, “poof”—there goes your already slim margin. And “double-poof”, there goes the formerly plentiful supply.

Something exactly like this is occurring in British Columbia’s rental market. The provincial government is acting in loco parentis, except between property owners and tenants and on rent. The province already banned any rent increases earlier this year. It was about to allow them later in 2021 but with a meager 1.4% rent rise. It has now extended its rent freeze for all of 2021.

Some tenants will be understandably happy about this. “Renters of British Columbia unite! You have nothing to lose but your rent increase!”

Governments to property owner: Costs are skyrocketing but tough luck

Utopian promises aside, freezing rent is a poor idea for tenants, cities, and even governments, but before going there, consider what the province has just said to property owners, or prospective property owners. It’s a variation of the following:

  • We know that insurance costs on your condominium complexes have doubled or tripled in recent years, and your own insurance and condo fees have soared along with such extra costs. Tough luck.
  • We know that repairs need to be made to rental properties and that costs for lumber, for example, have risen by 300% from about US$250 last April to $1,000 per thousand board feet now. Tough luck again.
  • We know that city governments are jacking up property taxes (5% in Vancouver, as one example), in 2021. But no, you cannot adjust your rent upwards to pay for our sister governments’ tax hikes.
  • We know that some cities (see Penticton and area) are raising various fees by double-digits this year. That includes non-refundable application fees up as much as 17% (to $175 from $150); temporary use permits by 50% ($200 a of April 1 versus $100 before); and a plumbing permit fee increase of 75% (to $175 from $100). But no, whether you own one rental unit or 100, you cannot increase rents this year. Just pay us and pay up regardless.

It’s true that the province allows for the occasional exception. Property owners can ask their tenants for a rent increase beyond what’s allowed, presumably to deal with some of the above costs. But tenants can say “no”, forcing a landlord to apply to the residential tenancy branch.

Of course, the government charges $300 for such an application, per unit, with no guarantee the extra, asked-for increase will be approved.

It’s clear that banishing rent increases is costly for the property owner. And that’s true whether the owner be a faceless corporation with thousands of units, or a one-property owner trying to carve out retirement income now or in the future.

But it doesn’t matter which scenario is in play, because economic laws are not subject to repeal: little or negative return eventually dampens investment and risk-taking in the rental sector, as in any negative-return sector.

One size doesn’t fit all

One response to this might be what’s the alternative? Answer: The ones underway for a century or more: private ownership where feasible (less so in BC these days); cooperatives; non-profits; and direct taxpayer subsidies to those in need—which already, properly, occurs.

All of those are preferable to a one-size-fits-all “solution” of rent control which benefits some tenants who don’t need it. (There’s a famous story about actress Mia Farrow benefitting from decades of rent control in New York City). Such remedies are also preferable to how rent control reduces supply, and defers maintenance and modernization, among other ill effects.

Reduced supply eventually works against tenants. When new units are built, owners will price the initial rent as high as possible, knowing rent increases will be sparse in the future. Of critical importance: because government policy discourages a plentiful supply of rental units, that means there is no natural counter-balance to ever-higher rents.  Meanwhile, deferred maintenance and modernization, produces slums or the individual version (apartments) of the same. Talk about a lose-lose scenario.

Meet the left-wing Swedes who opposed rent control: As effective as bombing a city

None of the wrongheaded effects of rent control are unknown. It’s why the 20th century left-wing economist and Nobel Prize winner Gunnar Myrdal, pointed out that rent control was counter-productive.

Myrdal did so because rent control was (and is) lousy policy because of its predictable effects once imposed: artificially induced housing shortages; an incentive to not fix up existing rental properties, under-maintenance. It’s why another left-wing Swede, Assar Lindbeck, once remarked that “rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

There’s also this irony about a government-created problem: a smaller tax base than would otherwise be the case, for governments. After all, run-down rental properties and fewer rental properties than otherwise would be the case results in less property tax for governments.

Rent control is a lousy idea for property owners, tenants, neighbourhoods, cities, and even governments. Let’s not humour the provincial government in BC by pretending otherwise.

Mark Milke wears many hats and one is that of an author. His most recent book is The Victim Cult: How the culture of blame hurts everyone and wrecks civilizations.