Tuesday 15 February 2011

Rent controls and graphs. Lots of graphs ...

My spongee game tonight was cancelled due to melting ice, so I guess I'll blog. Lucky you.

I had bought into the idea that the lack of apartments in Winnipeg are an unintended consequence of rent controls. Artificial restrictions on profitability will prevent people from building units, right? Makes sense to me. If you take away the upside then all you're left with is the risk.

Now the Free Press is telling me I'm wrong. My beliefs have been shattered into a million pieces, like the mold spores on the ceiling of my last apartment. Apparently some guy did some report for the government that say that rents controls have nothing to do with it:

The 39-page study, authored by University of Winnipeg economics professor Hugh Grant, also concludes "there is no evidence" that caps on rent have slowed the pace of new apartment construction or spurred a recent spike in condo conversions. Furthermore, the provincial government-commissioned report says there is no proof rent regulations have "unduly restricted" rent rises in Manitoba.
Damn you, Hugh Grant! As if all those boring chick flicks weren't painful enough. Now this!!

What do we know about Hugh? Well, he's an economics prof for the U of W. He has written about immigration, he seems to be a well liked teacher, and much like the other Hugh Grant, he gets a chili pepper for hotness:

That's something, I guess.

But still .. should we believe him? The article says that rent controls came into place permanently in 1982. Our vacancy rate looks like this:

Our vacancy rate actually sky-rocketed after rent controls came in. The problems really seemed to begin around 2000. Conclusion: it's all Doer's fault!! There, that was easy.

Or ... we could look into it a little more ...

One of the things that Hugh concludes is that "the rental shortage is largely due to a rapid increase in demand sparked by an aggressive immigration policy". Okay, let's look at immigration:

Manitoba was still losing people to other provinces (pink line), but there was indeed an increase in immigration (deep thought of the day: why do they call it "immigration" instead of "inmigration?") around 2000. I suppose that when people move out of the province, they are generally moving out of their parents' basements, but when people immigrate in, they generally move into apartments instead of parents' basements. Unfortunately I couldn't find any CANSIM data on parents' basements vacancy rates to confirm.

So it looks like immigration may be the culprit, but maybe we should do some statistical analysis just to make sure. Okay .. let's see if I can remember how to do this. Open the crunch-o-matic number cruncher ... put the data here ... feed the thread around the post ... put the bobbin in the hole ... ah, screw it. Here's another graph:

Looks like a smiley face. See, what happened was that vacancy rates actually dropped in the 1990s as immigration dropped. Maybe there is something else at work. What we do know is that apartment construction dropped off the map in the 90s:

... possibly because they began to realize that more often than not rent increases were not keeping up with inflation:

... and eventually our lack of apartments caught up with us as immigration picked up and now we have a vacancy rate of nothing.

If rent controls weren't a factor, then why would the government implement a 20 year exemption on rent controls to encourage new development? I remain unconvinced that rent controls are not the problem. The exemption should help, but as per usual when government regulations meddle in the functioning of a market, the market gets all fucked up and can't reach equilibrium. Hugh Grant should know something about equilibrium. He's an economics prof.


RM said...

Perhaps Mr. Grant is an NDP economics professor. They use different methods to come to conclusions than a "regular" economics professors do. Like the east side economics, the balanced budget economics, and so on.

cherenkov said...

Perhaps. The Department of Economics at the U of M is known as being left-leaning. The economics department at the U of W is probably even more so.

Gustav Nelson said...

I think there is some truth in that story of immigration, however not enough to be the cause of the problem.

I agree rent controls in addition to increased zoning restrictions have been the cause for such a low vacancy rate.

After all, increased demand is supposed to signal an increase in supply? No?

John Dobbin said...

The one thing the professor mentioned was not keeping rent control so tight as to affect a return on the investment. To that end, many of the increases allowed have not kept up win inflation.

Moreover, condo conversions are accelerating and unlike other provinces there are no controls for that. Landlords who don't like their prospects on rent will covert units.

Other landlords will do the renovation that will exempt them from rent control for a period. The problem is that affordable units are off the market.

In the end the province has failed for more than 10 years on this file. Manitoba Housing is known to be poor, lower income units are hard to find and other rent control measures make it difficult for landlords to see a return on investment as the professor's paper indicates.

cherenkov said...

@ Gustav: immigration is definitely a factor, but like you said ordinarily supply would increase to meet demand ... unless there was something artificially suppressing supply, like rent controls, zoning, or other regulation. If the Government says it's not rent controls, then what it is? It's been a problem for a decade now.

@ John: is the government mischaracterizing the conclusion of the paper? Are rent controls categorically not to blame as Gord Mackintosh says, or are they to blame because they are too tight?

Condo conversions are another thing ... Toronto has rent controls, but they also have controls on conversions. If you're going to regulate one, I guess you have to regulate the other to try to strike a balance.

John Dobbin said...

Cherenkov: I would argue that the paper indicates that there might be problems with the level of rent increases that are being allowed each year.

If they fail to allow for a fair rate of return, landlords look elsewhere to increase the revenue of the property. In many cases, they have taken the property to condos. The numbers of apartment units available confirms that.

Anonymous said...

rather than insult the author, read the report: http://www.manitoba.ca/fs/cca/pubs/rental_report.pdf

cherenkov said...

I didn't really intend to insult the author. In fact I even point out that he gets a chili pepper. I just wanted to contrast the portrayal of the results with the stats that are out there. However, I have printed off the paper and will read through it in more detail when I have time. I may post a follow-up on it.

Melissa Martin said...

First, I'll be honest that I only glanced at that report when it came out -- kept forgetting to read it closely.

"Artificial restrictions on profitability will prevent people from building units, right?"

I think the issue isn't (or wasn't) straight profitability, since it's perfectly easy to build new rentals with a large profit margin, but competition for tenants.

What is often forgotten (or not mentioned) is that new-construction rentals are exempt from rent-control guidelines for 20 years, and buildings with high rents are always exempt from rent increase guidelines.

In other words, if you want to build something new, you can start at any rent you want, and increase it by any amount you want for 20 years -- more than enough time to tweak as you want. If you want to build something catering to a higher-rent tenant, you can and never have to worry about rent controls at all.

The issue is that there's still stock that is tied to rent guidelines, so theoretically the competition pressure is on downward prices.

But I'm not sure I buy that as an excuse for a lack of new construction anymore -- the market is so incredibly tight, and so much existing stock is getting around rent guidelines by either entering a "rehabilitation scheme" (which frees them from rent controls after renovation) or condo conversion.

At this point any new construction that's priced competitively to what people can afford should have no problems finding tenants -- I have a tough time believing that competition from rent-controlled stock is strong enough anymore due to all of those factors to make people turn away from non-rent controlled new construction.

I also find it interesting that rent controls are more publicly blamed, and sometimes solely blamed, for the lack of new construction, when numerous articles have referenced high construction cost as being a factor in the last five years.

Perhaps seeing it as a conflation of high construction costs AND lingering downward competition pressure from existing rent-controlled stock would be a more balanced assessment of the troubles with Winnipeg's rental universe.

Melissa Martin said...

Ugh, look, see I'm so bad that not only did I not read the report yet, I didn't read the last paragraph of your blog. All the pretty graphs dazzled my eyes.

cherenkov said...

lol .. that's alright. Good comments. I'll be doing a follow-up post right away, having read through the report and made some notes.

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