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Globe editorial: Hands up if you believe rent control will pop Toronto’s housing bubble

Ontario's Liberal government is grappling with three challenges.

Issue One: Home prices in the Greater Toronto Area, which have long looked overheated, have been exploding. The market is bubbly, and the bubbles are propagating across Southern Ontario.

Issue Two: There's an election next year, and Ontario's Liberals are running a distant second in the opinion polls.

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Issue Three: Say, would there be a way to recruit the first issue into providing cover for handling the second?

On Thursday, Queen's Park rolled out its long-awaited housing plan. The 16-point agenda includes some measures that should help to normalize the housing market – plus others having nothing to do with pricking the housing bubble. They will be economically harmful, but politically beneficial for the Liberals.

Let's start with the positive: Some of what's being introduced is exactly what this page and many economists and policy analysts have called for. There's a new 15-per-cent tax on foreign buyers; any purchaser of a home or condo who isn't a citizen or permanent resident will be hit with the levy.

The idea is borrowed from British Columbia, and it's worth trying. Last July, non-residents made up 15 per cent of Vancouver residential real estate transactions, according to RBC Economics. The following month, as the tax came into effect, the percentage of foreign buyers fell below 1 per cent. It since appears to have stabilized around 4 per cent. Vancouver housing prices similarly moderated in the months after the tax was introduced, though they've now started moving back up (and B.C. has started watering down the tax).

There isn't great data on the degree to which foreign investors are pumping up Ontario's housing market, but the Vancouver experience suggests it's not insignificant, and that it affects the psychology of the entire market.

Ontario will also pass legislation allowing Toronto to hit vacant homes with a special tax. Once again, that's an idea borrowed from the West Coast. It's about discouraging speculation, and encouraging anyone who buys a house or condo as an investment to put it on the rental market, thereby increasing the rental housing supply. The larger the supply of rental housing, the more of a safety valve there is to relieve the pressure of speculative excess in the purchase market.

And this is where Ontario's plan, which was supposed to be about tackling the economic danger of a residential-housing price bubble, ditches the whole subject and suddenly starts talking about rent control – an economically counterproductive idea, but one that could be very politically effective for the Liberals.

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Earlier this week, Ontario Finance Minister Charles Sousa, his federal counterpart Bill Morneau and Toronto Mayor John Tory met and promised, given that the Southern Ontario problem is an excess of housing demand, they would at least have the good sense to not further pump it up. If that seems like an odd pledge – we swear, we won't make things worse – remember that Ontario's Liberals have a powerful political incentive, in the form of an upcoming election, to do the wrong thing.

In B.C., a Liberal government with the same housing bubble, and the same pre-election interests, last year responded by giving free money to first-time homebuyers. Their polling surely said that making homes more "affordable" would be a vote-winner; simple arithmetic says its chief contribution will be to give home prices an extra push skyward.

And though Ontario at least isn't further pumping up exploding housing demand, with the expansion of rent control it's taking a step to reduce supply. Different equation, same result.

The province currently imposes rent control only on properties built before 1991. It will henceforth cover all.

Swedish economist Assar Lindbeck once famously described rent control as "next to bombing, the most efficient technique known for destroying cities." He was exaggerating, slightly.

Rent control's political upside is obvious, but its economic fallout is well documented. In the 1960s, new apartment towers sprouted across the city of Toronto. Then rent control was introduced, and new private investment virtually stopped. For a generation, very little new rental housing was built.

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Rent control always gets pitched as fairness for middle-class tenants and a poverty-alleviation strategy for the poor. In the long run, however, the more stringent the controls (Ontario's rules are modestly firm – hey, they could be worse), the less new private construction there will be. It's basically a recipe for making rental housing more scarce – in a region where the vacancy rate is already close to zero.

For years, one of Toronto's most important sources of rental supply has been new condo construction. Investors buy individual units, then rent them out. Putting those condos under rent control could hit both investors and developers, discouraging condos-for-rental.

So, to try to buy its way out of the damage caused by expanding rent control, the Liberals will spend $125-million reducing development charges on some new rental buildings, while promising lower municipal property taxes on rental construction. Possibly coming soon: More taxpayer money for social housing. It feels more than a little bit like the province's electricity fiasco: We broke it, but don't worry, we can use your money to sort of fix it.

The purchase housing market is getting some of the medicine it needs. The rental market, meanwhile, is being made sick. Ah, politics.

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