Addressing housing affordability is critical for Canada. Owning a home has become so expensive in some cities that renting has become the only viable option for many. Over recent years we’ve had low vacancy rates, and tenants moving to new units see sharp rent increases. We need a substantial and sustained increase in the supply of rental units over the long term.
Many, however, express misgivings about private-sector involvement. They are concerned that private landlords may charge higher rents or take advantage of their tenants. Government-supplied rental units or rent control are seen as solutions. Are these concerns valid and are solutions appropriate? What can be learned from research on increasing private-sector rental supply while protecting tenants?
Our research found no firm evidence that private-sector ownership led to undue increases in rents. In addition, the international literature suggests that rent control risks lowering housing supply in the long term. Based on recent surveys, the annual eviction rate for renters in Canada is estimated at between 1% and 3%. Having effective tenant protection is important, balanced with harnessing private-sector investment in the rental sector.
How has the rental sector changed over time?
Over the past few years, rental construction increased to reach levels last seen in the 1970s. Construction had been badly lagging for several decades. However, when we adjust this pace of construction for population (see graph below), the current rate of rental construction is still only half the rate of the 1970s. The scale of this supply shortage is too large for governments to address on their own. More private investment is needed in rental housing.
Historically, lower rental construction was driven by the absence of large investors. This meant expensive Canadian cities came to rely on small investors to supply rental units. CMHC’s data suggests the share of condo apartments that were rented out roughly doubled over the last decade and a half. But, because of a boom in condo construction during the pandemic, there is now a short-term risk of oversupply of rental units.
This oversupply might help affordability in the short term, but over the long term it will also curtail incentives to build rental units (and more affordable condominium apartments for homeownership). In turn, a decline in new construction risks leading to housing costs rising again when economic and population growth recovers. This boom-and-bust pattern is characteristic of cities with unresponsive housing supply systems. Deeper pools of capital with long term horizons will be needed to sustain an increased supply of rental housing and condominium apartments.
Some voice concerns with the private rental system
Because of concerns over higher rents, many advocate for rent controls to improve affordability and protect tenants. In addition, some argue against the financialization of housing, suggesting that private investors take advantage of tenants by evicting them. Although there is no standard definition, financialization of housing reflects concern about the private ownership of rental buildings. Limited supply of rental housing increases the incentive for landlords to take advantage of their tenants, with the less scrupulous under-investing and evicting tenants to further benefit from higher rents resulting from the shortage.
Key tenant concerns include:
- Affordability: Tenants need to have other affordable units available if their income or family-size grow, as well as keeping rent increases on their own unit in check.
- Stability: Getting an apartment that’s affordable this month is of no use if they are evicted next month.
- Quality: Housing needs to be in a good state of repair.
What can we learn from experiences around the world on striking an appropriate balance? Some nuance can be found in the observation that Sweden has tight rent controls and long waitlists for rental apartments, while Tokyo has limited rent control, strong tenant protection and plentiful rental supply.
What is the evidence on the impacts of rent control and financialization?
There are legitimate concerns about the private rental housing system but addressing them requires evidence-based and appropriate policy tools. Without these, we run the risk of unnecessarily undermining incentives for investors to build more rental housing.
Rent controls have historically been introduced to address what were considered excessive rent increases. Recent research found that rent control policies in San Francisco led to a decrease in supply of rental units by 15%, and that in turn led to a 5% increase in city-wide rents. Rent controls also increased the likelihood that tenants stayed in their units by 20% in the medium term. This is a double-edged sword: on the positive side, low-income households were not displaced, but on the negative side, some would have benefitted from moving to units better suited to their needs or closer to their place of work.
At CMHC, we undertook a broad review of the literature on the impact of rent control. The conclusion of dozens of papers around the world is that there are significant costs to rent controls, including:
- reduced housing quality
- decreased supply
- poor maintenance
- more benefits to higher income than to lower income households
There were exceptions when rent regulation was well designed to preserve incentives for supporting a well-functioning rental market. In Canada, this balance appears to be struck traditionally in Quebec, which achieved balance between increasing rental supply with tenant protection, matching affordability outcomes of Edmonton where there is no rent control.
Some of the concerns about financialization also appear misplaced. We dug into the details on whether REIT-owned rental structures charge higher rents than other rental buildings, a common concern of those opposed to private investment. The short answer is that they don’t. While the rents charged are higher, there tend to be sound financial reasons for this: they are newer buildings, larger units, include electricity fees, etc. Furthermore, these structures tend to be in neighborhoods with greater growth potential or more amenities.
Based on recent Canadian Housing Survey and Canadian Social Survey data, the annual rate of evictions in Canada is estimated at between 1% and 3%. While these figures may slightly underestimate the full number of evictions and recognizing that evictions merit attention, the number may not be as high as some suggest.
Differences within the rental system may have different risks
When evaluating the performance of the rental system, it is important to consider differences within the system. The rental system is made up of “primary” and “secondary” rental structures. Primary (or purpose-built) rental buildings are built with the intent that units be rented out and are generally financed and owned by large investors. The secondary rental system covers rented-out condominium apartments owned by individual investors.
Those small investors help finance construction of condominium apartments. Condos, with their relatively more affordable prices, are often the first step for renters to get into homeownership, freeing up space for new tenants to rent more affordable units. Together these structures add density in our cities to economize on land and infrastructure cost. Condominium apartments may not be adequate to accommodate larger families, however.
Unfortunately, tenants likely have less tenure stability in the secondary system. The 2021 Canadian Housing Survey found that nearly two thirds of those who were evicted reported that it was either because the landlord wanted the unit for their own use or was selling the property. Neither explanation pertains to the primary rental sector. So, concerns about evictions may be greater in the secondary rather than the primary rental sector.
Again, a balance must be struck between protecting tenants from eviction that is too easy in the secondary rental system, and a landlord’s right to evict tenants without too much difficulty or delay if they willfully fail to pay their rent.
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