Rent Controls Are Profit Controls: Stay Away, Landlords!

Older Toronto Apartment photo by © Alan Ritchie is licensed under all rights reserved.
An older rent-controlled Toronto Apartment building. Still going strong!

A useful, if flawed, article in Forbes  (introduced below) enumerates the disadvantages of rent controls for investors. Written for real estate investors, it is against rent controls. (Full disclosure: the author has lived in a rent-controlled apartment and reaped some of its particular advantages for the past 12 years and knows how much the landlord would love to substantially jack up the rent.)

In the Forbes article, the author has completely overlooked the fact that the author of this post is also an investor in real estate. I have invested monthly rent for the past 13 years. I do not expect my investment to ‘pay off’ in currency. The return on my investment is shelter, security, and hot and cold running water. (I’d love it to include heat and electricity as well, but these were not included in my investment contract).

Rent controls, according to the author of the Forbes article, interfere with the laws of supply and demand, which work their magic to ensure ‘fair’ profits. I take this to be a code that means hefty profits for those investors expecting cash returns.

However, being an investor myself, rent controls somewhat restrict the magical give and take of free market supply and demand. They are greatly helping my annual profit taken daily in non-cash tangibles. Rent controls also mean I can afford heat and food.

Having convinced all readers that tenants and landlords are merely different investors seeking to profit from housing (dream on!), let’s move briefly to the issue of tenant and landlord investors in affordable housing. The tenant is being reassured by evidence that the investment available for housing (a.k.a salary) is not rising with the cost of living, and furthermore, may never go up before the tenant is laid off permanently, replaced by a robot. The tenant’s investment portfolio is not likely to be much greater than it is today, and will quite probably shrink, even if there is no temporary or permanent work layoff.

By contrast, the landlord investor can reasonably expect the land and housing free market to generate healthy profits on a yearly basis.

The tenant investor expects shelter security in return for a steady, or shrinking cash outlay. The landlord investor expects that same sum of money to cover expenses, and, thanks to a free market that allows rent increases, to extract extra cash to make a profit, year by year. Really? How? Via default, eviction, and some new and impoverished tenant stepping up to the plate?

Was there ever a better argument that affordable housing investment opportunities for both tenant and landlord can only exist in a free market with rent controls?

A better argument might be that affordable housing cannot exist in a free market, even with rent controls, and is best delivered as public or social housing?

But anyway, on to the Forbes article: Rent Control: What It Means For The Real Estate Marketplace

A final note: The author of the Forbes article rushes to conclusions based on an ‘either-or’ absolute of ‘rent controls or no rent controls’. In real life, it’s not usually that clear cut.

The author of this post lives in Toronto where rents have been controlled with a two-tiered system. Housing stock available on the market before 1991 was controlled. Rental housing stock added from 1991 on were not controlled as an incentive to property owners. Rents in new buildings could be set by the free market and maximize the landlord’s need for profit. The all or nothing rent controls concern raised in the Forbes article does not apply here.

The two-tier system does not seem to have been an incentive after all. Very little purpose-built rental housing was added to the rental market in Toronto. In 2017, rent controls on the newer housing stock were added. This has been explained as a measure to cool the rising cost of condominiums, which in turn was linked to absentee owners have been renting out the new units.

Furthermore, rent controls in Toronto do apply when a unit is vacated, regardless of the age of the building. Rents revert to the free market until new tenants, choking on the higher prices, hold their noses and move in. Whereupon rent controls resume.

Just a few wrinkles to offer up in contrast to the Forbes investor view.