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The Immediate Effects of Rent Control Are Being Felt Already

It's been exactly three month's since the implementation of rent control in Ontario and the results are not pretty.

It feels like yesterday when the Liberal government unveiled their 16-point plan to cool the housing market in the GTA. I remember that day. Sitting on my couch, cereal in hand (probably Lucky Charms because that's just how I roll), watching the press conference, and hearing my phone ding with emails and text messages from clients asking what the heck is going on. You kinda knew major changes were coming, but I somehow hoped that logic would prevail and nothing major or damaging would actually be implemented. I was wrong.

In case you missed it, rent control is now in place for all buildings in Ontario. This includes all condo buildings, regardless of when they were built. So what does that mean? It means that for 2017, landlords can only raise the rent on existing tenants by the government-set 1.5%. For 2018, that number is 1.8%. Many people were confused because the headline number in the media pegged the increases at 2.5%. But that is the maximum increase, should the government choose to allow it. For 2017 and 2018, they feel that the max should not be hit.

So what has happened since?

Well, I have several renter clients who are thrilled. In fact, I've had a number of them contact me over the past couple months (and as recently as today) asking me if their landlords are allowed to raise their rents to "market rates" and what "market rates" are today. A lot of my clients scored some serious deals by renting in newly completed buildings where there is typically a glut of rental units to start and prices are well below market for a short period of time. These buildings are usually not totally complete (amenities are not done, still some construction going on, etc) but it's still worth it. The understanding had always been that the rents would rise to market rates after the initial 1-year lease when the building was done and full. And I always warned my clients about this - expect a decent increase in your rent after the initial year. But now, that concern is gone. Even though they are paying well below market rates, their increase in rent is now capped at a very low amount, as long as they stay in the unit.

So what's going to happen? They will probably never leave.

And herein lies the issue.

1 - There are many, many tenants in the city who are paying below market rents and these tenants are now protected from major rent increases. And of course, this is a good thing for these folks. And given that they may never find another comparable rental in another location for the same price, they will stay put. But this immediately removes supply from an extremely tight rental market. Less supply is not a good thing for Toronto. You need mobility to create supply and rent control severely restricts renter mobility. That's a fact.

2 - Owners in new buildings where you typically find below market rents right off the bat are no longer offering those bargains. Why would a landlord knowingly offer a 1-bed unit in a brand new building for $1600/mo when the market rate for a completed building is $1850/mo? If the tenant stays longer than a year (or even worse, several years), the landlord will never catch up to the market. So the landlord is going to build that into their initial rental rate. It's just common business sense.

3 - All rental rates for newly available units have and will continue to go up as long as rent control is in place. Period.

According to TREB, rents year over year have increased on average 8% for both 1 and 2-bed units. This trend is based on simple supply and demand. Demand for rentals in the Toronto core has been exceptionally strong for years and all things point to this strength continuing.

But I don't typically like looking at averages so I'm going to speak from personal experience with an apples-to-apples comparison, as I'm in the rental market every day:

Last spring, my sister-in-law was looking for a studio apartment to rent in the downtown core, reasonably close to a subway. With a $1400/mo budget, I had a least half a dozen options to choose from.

This past March I was sent a referral looking for a studio apartment in the core with a budget of $1500/mo. I had maybe 3 options I could find for him. That's a decent increase in price from a year ago, but nothing outlandish.

Last week I was sent another referral looking for a studio apartment, a reasonable walking distance to the financial district. I found 4 options. And nothing under $1700/mo. And by the time we had booked appointments and gone to visit them the next day, two were leased. There was exactly one unit listed for $1600/mo and it received 3 offers immediately, which is a strong indicator that $1600/mo for a studio unit is a clear bargain these days.

That's an increase in almost $200/mo for studio units in the core from March to July of this year alone. There has been no fundamental change in the economy in those three months that would cause a sudden influx of people looking for studios. In fact, there have been a number of newly completed buildings in that time that should have actually increased supply of units on the market. And yet rents still went up??

And that's what rent control does. If supply is tight and demand is strong AND you restrict a landlord's ability to control their cash flow, you get the situation we are in today. And this is exactly what every single economist in Canada and the US said would happen. And yet the powers that be think rent control will actually help renters? Maybe they should come spend a week with me and you'll see how these policies are affecting everyday people looking to find a place to rent in Toronto.

Rent control does not work to create more affordable housing and we're seeing that immediately. And it's only going to get worse.

If you have a comment, feel free to leave it below. And remember, if you haven't already, please "like" my Facebook page and check back regularly!

Your Toronto condo lover, Adil Dharssi

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