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Critics argue that rent controls stifle the supply of new units.Jay Spooner/Getty Images/iStockphoto

The Ontario government is scrapping rent control for new housing units, a policy designed to boost the supply of rental options amid incredibly low vacancy rates and soaring housing costs.

As part of the provincial government’s fall economic update on Thursday, Premier Doug Ford amended the province’s housing policy, scrapping rent control for new units starting Nov. 15. Existing renters will continue to fall under rent-control rules, but new units that are not yet occupied will not be subject to them.

The Progressive Conservative government is also abolishing incentives proposed by the previous Liberal government for the development industry that were designed to encourage the construction of affordable housing units. The program, called the Development Charges Rebate Program, offered funds to help lower the cost per unit for builders.

Across Ontario, the rental vacancy rate has fallen to 1.6 per cent, the lowest level in nearly two decades, according to Canada Mortgage and Housing Corp. In Toronto, it is even lower, currently sitting at 1 per cent.

These rates, coupled with a hot economy, have sent rental costs soaring. The average rent for a one-bedroom condo in the Toronto region topped $2,000 a month for the first time in the third quarter, according to real estate consultancy Urbanation.

Under former premier Kathleen Wynne, Ontario introduced a policy in 2017 that imposed rent controls on all units, limiting annual rent increases to a maximum of 2.5 per cent. Previously, buildings constructed after 1991 had been exempt from controls.

The Ford government has decided to amend this policy, arguing that rent control discourages the development of new rental stock. “The No. 1 thing the government can do to bring in new supply is to open the market,” Ontario Finance Minister Vic Fedeli told a news conference.

The impact of rent controls has long been debated. Proponents believe limits on annual rent increases protect tenants in a market where average rental prices are rising rapidly, yet average wages are not jumping at nearly the same rate.

“Tenants deserve to have the security of knowing they won’t be evicted from their homes because they can’t afford an overnight doubling in their rent," Toronto City Councillor Josh Matlow said in an interview.

Opponents, however, argue that rent controls stifle the supply of new units – and new supply, they argue, is the most important driver of housing costs.

The development industry has long argued that returning to an exemption for new construction would see even more projects proceed. “Certainly, there are a lot of our members who want to build more purpose-built multiresidential buildings and this is very encouraging for them," said Tony Irwin, the president and chief executive of the Federation of Rental-housing Providers of Ontario.

The situation is even more complicated in Ontario at the moment. For one, there is still ample construction of new rental units, particularly in the Greater Toronto Area, despite the recent rent controls.

“If [the Conservatives] are saying this is about getting new units built, all they are going to do now is to lay claim to the 30,000 units that are already in the pipeline," said Geordie Dent, a tenant-rights activist who heads the Federation of Metro Tenants’ Associations.

However, development decisions and housing costs are affected by more than just government policy. For one, construction costs for new condominium buildings in the Toronto area, including labour and materials, climbed an estimated 6 per cent to 8 per cent last year and are expected to climb at least as much in 2018, according to real estate research firm Altus Group. The cost to buy land has also skyrocketed over the past five years.

Illustrating just how complicated the issue is, Toronto Mayor John Tory, a former leader of the Ontario Progressive Conservatives, voiced his opposition to Mr. Ford’s new housing policy on Thursday.

Mr. Tory believes the priority right now should be to build affordable housing, rather than wait for the market to settle things in the long run. “I believe any such initiatives must precede any change to rent controls,” he said in a statement.

With files from Janet McFarland