Will Dunning is a consulting economist, based in Toronto. He specializes in housing market analysis
During the past three decades, most new rental supply in Canada has been in the form of rented condominiums that are owned by individual investors, rather than in purpose-built rentals that are provided by companies and investment funds.
There has been a very good reason for that. In considering potential investments, companies need to give a lot of attention to the short term, and the cash flows that they can generate. But, individuals can have very different criteria, and they can give much more consideration to long-term factors, most importantly how much the value of their investment might grow, through repayment of mortgage principal, growth of property value, and rising rents.
The consequence of this long-term perspective is that individuals can decide to invest at lower rent levels than can companies, and that’s why most investment in new rentals has come from condominiums owned by individuals.
So, this investment provides real social benefits.
But, there is a downside for tenants within condominium buildings – that the owner might evict them so that they (or a member of their family) can move into it.
“Security-of-tenure” might be the most important reason we want to see more purpose-built rentals.
To encourage more purpose-built rentals would require that rent levels be higher, or that viability of investments be improved in other ways, such as the recently announced waiving of the harmonized sales tax for new rentals. To get that investment will have costs, in the form of higher rents, or through reduced tax revenue for the federal and provincial (and possibly municipal) governments.
We should explore how we can continue to harness the self-interest of individuals, and at the same time improve security-of-tenure.
I see three options that might do that.
The first is to revive an investment option that created a lot of new rentals during the 1970s and 1980s: Individuals bought fractional shares in apartment buildings, rather than individual dwelling units. (As you look around Toronto, most of the high-rise red brick rental buildings were built during that period, using that form of ownership.) This ownership structure means that the owners can’t evict the tenants for personal use. But, it also results in an investment that is very hard to exit – it is much harder to sell a fractional interest in a building than to sell an actual dwelling unit. This illiquidity factor will limit how much new housing could be created using this approach.
A second option is to create standard leases in which the tenant may not be evicted for personal use. But, it will be difficult to get the property owners to accept that condition, and tenants would need to be aware of the option and then feel confident enough to insist upon it. In a very tight marketplace, adoption of that lease condition would probably be rare.
A third option is regulation: The provincial governments could alter their laws and regulations to make it much more difficult to evict for personal use. It would still be possible for landlords and tenants to agree on terms that encourage tenants to leave (payouts). But, I fear that the provincial government we have today will put the interests of owners ahead of tenants and won’t make that change.
Investment in rental condominiums has financially benefited tenants because rents are lower than they would be otherwise. That might be hard to believe, given the rents that are now being charged for new leases. But, without those supplies, rents for new leases would be even higher.
We need to carefully take advantage of the self-interest of those investors, and find ways to encourage even more of it. Ignoring them and focusing on investment by companies will have social and economic costs.
And now, we have another problem. The Bank of Canada’s interest rate policies have obliterated the financial viability of new rentals. We are going to see very few construction starts of new rental housing next year, as either rental condos or as purpose-built rentals.
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