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Apartment developers say tight new rent controls would be a disincentive to build new apartment units in Toronto, where vacancy rates are already low.

Hemera Technologies/Getty Images

New rent-control rules are "the exact opposite" of what is needed to deal with housing affordability problems in Toronto, Canadian Imperial Bank of Commerce economist Benjamin Tal says.

In a new report Tuesday, Mr. Tal urges the Ontario government not to proceed with "alarming" plans to expand rent-control protections, saying the Greater Toronto Area needs a significant increase in rental units to help deal with the city's housing crisis, especially among young families.

"If history is a guide, such policy will mostly hurt the people it's trying to protect," Mr. Tal said. "Clearly efforts and funds should be devoted to affordable housing in the GTA, but rent control should be a non-starter."

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Read also: Apartment developers fear 'disaster' in Ontario's review of rent controls

The Ontario government announced in March that it is considering "substantive" changes to rent-control rules after hearing complaints from tenants who have faced double-digit rent increases as house prices have soared in Toronto over the past year, leaving more people seeking rental units as an alternative to buying.

Current rules allow owners to increase rents by up to 1.5 per cent annually but they can apply to the province to raise them further. However, the controls only apply to buildings constructed before 1991. Rents on new buildings, which are not covered by rent control, have climbed far faster than the rate of inflation.

Mr. Tal said calls for expanded rent controls are understandable because rents are rising quickly in Toronto, but "while the intentions are pure, the suggested remedy is wrong."

Under rent control, he said developers have less incentive to build new rental properties, which exacerbates a housing-price crunch. Many developers will build condos rather than purpose-built apartment buildings, he warned, while the turnover rate in apartment units will fall as tenants stay in units longer. Landlords "spend the bare minimum to maintain their units given that, in many cases, they do not need to attract other tenants," he added.

Ontario introduced rent controls in 1975, initially as a temporary measure, and the system was modified in 1986 to link rent increases to the rate of inflation. In 1992, the NDP government offered a five-year rent-control exemption to new units built after 1991 to try to encourage developers to build new apartment buildings after years of construction drought. The exemption later became permanent for all buildings constructed after 1991.

Mr. Tal said a University of Toronto study found the impacts of rent control in the province between 1975 and 1986 included a reduction in new construction, accelerated deterioration of buildings, conversion of rental properties into condos and a severe rental-housing shortage.

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He also cited the example of New York, calling it an "economic text book" example of a rent-control system that has "achieved the near opposite of its goals."

Mr. Tal said half of New York's apartment units are covered by rent control and the city is "constantly undersupplied," while prices are pushed higher on apartment units not covered by rent control. He said the share of New York's rent-controlled units that are in poor maintenance is four times higher than uncontrolled units.

The supply of new rental properties coming onto the market in Toronto has been growing as developers are responding to growing demand by building new apartment units after years of drought triggered by rent-control rules, Mr. Tal added.

He said the number of new units under construction in the city is now more than 5,000, representing 16-per-cent new supply. As of the fourth quarter of 2016, a further 28,000 units were proposed in new buildings that had not yet begun construction.

"And exactly at this crucial time, when the city is on the verge of an historic transition toward a more rent-oriented real estate market, the issue of rent control is again on the agenda," he said. "Even the very mention of rent control as an option is having a chilling effect on developers. From recent conversations with some developers, we know that it's already impacting decisions."

At a real estate conference last week in Toronto, several of the city's largest apartment-building developers warned they would halt development if rent-control rules were expanded to cover new buildings. Several called expanded rent control a potential "disaster" that would push housing prices higher as the supply of rental units fell.

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Mr. Tal said that rather than expand rent control, the province should increase its investments in affordable housing, fast track land-development processes and give developers more incentives to construct purpose-built apartment units.

Cherise Burda, executive director of Ryerson City Building Institute, and John Pasalis, president of Realosophy Realty Inc., discuss the merits of a foreign-buyers tax in Ontario

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