Yahoo Finance Rent regulation in Ontario turns off builders
Major developers and real estate analysts are warning that Ontario’s new rent controls could deter builders, squeeze supply and lead to less affordable rent further down the road.
Prior to Ontario’s recently announced Fair Housing Plan, which extends rent control to new units in line with inflation up to a cap of 2.5 per cent, Urbanation, a market research and consultation firm, was tracking 29,360 units across 92 projects proposed for development as purpose-built rentals in the GTA.
But less than 10,000 of those proposed projects were approved, says Shaun Hildebrand, senior vice president at Urbanation.
“Given that most of the approved projects are being planned by large institutional investors or developers with a long history of building and managing rental buildings, I suspect these approved rental projects will proceed,” he says. “However, having some knowledge of the remaining 20,000 units planned and not yet approved, I would say more than half are at risk of not proceeding as rentals.”
He also says it’s likely the boom in purpose built-rental proposals – which have tripled over the past two years – will “slow considerably” as a result of the new control measures, but it will take a few years for the supply gap to appear as the already green-lit purpose-built rentals work through the construction process.
“Larger developers and institutional investors will likely maintain their interest in building rentals in the GTA, and for good reason: Rental demand is at multi-decade highs, and is expected to continue growing as the population expands and ownership affordability remains a serious challenge,” he says.
Hildebrand points out that a quick lease-up and full occupancy are almost assured, and initial rents and turnover rents (vacancy decontrol remains in place) will face upward pressure, providing some offsetting factors.
“This should also continue to encourage condo investors to remain active in the market, although their holding periods will likely shorten, potentially further reducing the available supply of rentals in the marketplace,” he adds.
Condos remain a more tempting build
Tarik Gidamy, broker of record and founder of online brokerage TheRedPin, says he suspects condos will continue to be more attractive than purpose-built rentals.
“The emergence of companies like RioCan, Diamond Corp and (real estate agent/developer) Brad Lamb who’ve put around 28,000 units into the pipeline to be built as purpose-built rentals are now obviously rethinking their strategy,” he says.
As Gidamy explains, the new rent controls, which prevent landlords and property managers from increasing rent for existing tenants by more than 2.5 per cent unless upgrades are made to a property, also limit the return on investment for landlords when residents stick around.
“Unless prices go up where they can reap the benefit of gaining equity, the idea and concept of rentals for landlord aren’t as shiny as it was,” he says adding that the rent control creates too much risk for an already low-yielding investment.
David Hanick, vice president of legal and corporate development at Starlight Investments, which holds 24,000 multi-family units in its portfolio between 400 properties across Canada – more than a quarter of which are in the GTA – says while there is apt to be an impact on supply, it won’t have much of an effect on Starlight.
“Our business works off a guideline-increase model, an above guideline capital expenditure model and a new construction model – from that perspective nothing has particularly changed,” he says.
However, he points out that landlord-friendly environments in the U.S. – where Starlight has 10,000 multi-family units in its portfolio – do create a certain efficiency when it comes to supply and demand.
“Essentially every time a tenant’s lease comes due, they’re treated as a new tenant and charged at the market rent,” he says. “(This market) has led to a substantial amount of new build construction.”
More than regulating rent
Dr. David Hulchanski, an expert on housing and a community planning professor at the University of Toronto, says that focusing in on rent regulation misses the whole issue.
“Why isn’t anybody talking about the lack of effective market demand? There’s a very small, high-end of the rental market… renters interested in renting and able to afford high rent and that is largely being met by condos,” he says.
Hulchanski points out that renters have always earned less than their home-owning counterparts but the gap continues to grow. While it was close to 20 per cent in the 1960s and 1970s it is now over 100 per cent.
He points out that only 9,000 rentals were built in Toronto since 2005 compared to over 180,000 condo units in that same period.
“That sort of tells you the story,” he says. “If people were able to make money from rentals they’d be making money from rentals and they’re not.”
Hulchanski says he’s in favour of a subsidy – an incentive program whether it’s through the tax system or direct to private builders who construct purpose-built rentals.
“And in exchange for the subsidy, the rents will be a little more modest than they would be,” he says. “they won’t be cheap (but) the regulations aren’t in the way,” he says.
Hulchanski comes at it from a social need angle pointing out that rental housing demand in the category far exceeds supply creating conditions where “lucky owners of existing rental properties can charge whatever they want as long as the high demand is not met.”
He points out that for the past two decades – and as recent as last week in front of the Ontario Legislature – he’s been arguing that there is no functioning supply and demand mechanism in Ontario’s rental housing marketplace and regulation has failed to fix that.
Consumer protection is required when markets fail, says the housing expert. “Rent regulation is a consumer protection… it’s always been.”
