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Home » Archives » March 2011 » Rent Control, part 1

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03/16/2011: "Rent Control, part 1"

The idea of rent control has been in the news a lot recently. I think some questionable assumptions have been left unquestioned, and I want to put at least the biggest one of them to rest.

If I understand it right, the whole basis of the idea is that owners of rental property (apartments in particular) are being greedy by charging rents that are too high. To combat this, we need laws to prevent them from charging so much in rent. This will make it more affordable to rent property.

I will grant you that the owners are being greedy, however I would argue that we all are, to some point of view, I see that point as of no relevance.

Let's assume, for the sake of argument, that the owners are in fact charging rents that are too high, and generating a nice large profit from doing so.

Given this, if another owner or developer were to enter the rental market, they could do so at reduced prices. This would lead to generally reduced market prices as well as additional choice for renters. So it seems the best hope for improving the rental market is for more owners or developers to enter the market with additional rental units.

What then is stopping them from entering the market, renting out a additional property, but charging a lower rate? If the profit from renting is really so large, greedy developers would be rather foolish to avoid entering the market.

Yes, building a new rental property is a large project, which would take years to complete. However, greedy businesses undertake even larger projects on a regular basis, if they are convinced the profit they will make from the project is more than the expense of the project.

So why aren't developers entering the rental market? It can't be because of a lack of demand from renters, given that the vacancy rate is relatively low at 2.6% (as of Fall 2010, according to CMHC), and is projected to drop. It can't be because rents aren't high enough, since Saskatoon's average rent (for some categories at least) is the second highest in the province. It could possibly be that developers aren't greedy enough, leaving profit on the table, but that's a pretty absurd notion. Since new developments are happening (albeit slowly), it is obviously not the case that developers are being absolutely barred from providing at least some new units. It can't be that the large profit is a secret, since people are arguing for this notion.

You could possibly argue that all of the owners in Saskatoon are all colluding to keep rental prices high. That too is quite implausible for the same reason as any such cartel is usually short lived. Simply put, it would take very few "renegade" owners to break away from a cartel for the entire market drop to a lower price. The dramatic differences in rent costs in different regions of Saskatoon would argue against that as well.

So, in short, if the expected profit from renting was high, more owners would enter the market. They aren't, so the margin must not be high. As such, trying to depress the rental price through government controls will not work, and will likely even cause existing rental units to leave the market (typically through conversion to condo units, currently).

Since I do agree that rent is expensive (average rent for a two-bedroom unit is larger than my mortgage payment), this leaves us with a completely unsatisfactory conclusion. It leaves completely unanswered the question of why rent is so high. I hope to answer that in another article, as this one is long enough already and made the point I was hoping to get across.

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