Updates: film fest and rent controls

Once again my spongee game has been post-poned, this time because of blowing snow, so I have a chance to follow-up on a couple of subjects:

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Reminder, the 2nd Annual Afghan Film Festival & Mini Market is this Saturday.

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I really wasn't planning on writing anything more about rent controls, because it's really not a subject I'm all that passionate about. I haven't rented for over 5 years, and the last time I rented I had the laziest landlord in the city who never bothered to increase my rent by any amount.

But, alas, I am compelled to give an update on the rent control issue because fellow blogger and media insider Miss Martin made me aware of a new position paper released by the Winnipeg Realtors org. You can find the paper here.

I do not have time to go into the kind of detail that I did with my previous posts, but you probably won't be surprised to find out that it arrives at different conclusions than the government comissioned paper by Prof. Hugh Grant did. In fact, it points to rent controls and what it calls a "cumbersome and unbalanced Residential Tenancies Act" as the main culprits behind the low vacancy rate.

What became abundantly clear in meeting a number of the REIN (Real Estate Investment Network) members was how reluctant they are to consider Winnipeg as an investment opportunity, knowing that their private capital will fall under a rent control regime.

There's an idea. Want to know why developers aren't building apartments? Talk to the people holding the chequebooks!

The paper does not recommend getting rid of rent controls entirely (perhaps knowing it would be politically unfeasible) but it does recommend implementing "softer" rent controls, as can be found in some other provinces.

The Ontario experience of softening rent controls in 1998 has resulted in steadily growing new rental construction. ... CMHC has reported that Toronto vacancy rates went from .8 per cent under a system of rent controls similar to Manitoba’s in 1997 to 3.8 per cent in 2003. They still remain much higher than Winnipeg’s at 3.1 per cent in 2009 and 2.1 per cent in 2010.

It also recommends reforming the Residential Tenancies Act and other regulations, implemeting portable shelter allowances to assist low income renters, and jump-starting construction with development incentives.

Keeping in mind that Winnipeg Realtors may not be an unbiased organization, there is a lot of common sense in there. Not much in the way of number crunching though. I still wouldn't mind finding something unbiased with more statistical analysis, but for now I might just put this puppy hibernation.

Rent Controls: Part II

You didn't know there was a part II, did you? Surprise!!

Sorry .. I know how you hate surprises. I have to warn you though: this is going to be boring. Dry whole-wheat toast boring. If you wish to flee to another blog I will not hold it against you, and I might suggest any of the fine choices in my right sidebar.

Okay. Last week's post on rent controls was not so much a critique of the government's commissioned study on the subject, so much as it was a contrast of what they were saying publicly versus what the numbers seemed to imply. This time, I will delve into the actual study. You know, many people might see that the study was written by a professor of economics, and therefore assume that it is full of wise insight, truthful, and incontrovertible. However, there are plenty of academics out there who publish crap from time to time so all work needs to be scrutinized. That's what the peer review process is for. Government commissioned studies are not subject to peer review, therefore I will do my best to fill a little bit of that gap, if I may be so bold. Just let me grab my pipe and put on my glasses here so I look all perfesserly. Alright, I've got my tweed jacket on .. I'm all set to go ..

An Analysis of Manitoba's Rent Regulation Program and the Impact on the Rental Housing Market, by Hugh Grant

Let me start by saying that Hugh does not come to any conclusions through a quantitative analysis of the data. The data is inadequate to do an econometric analysis, he says. Therefore, when he states that "there is no evidence that ..." he is really giving an opinion based on his observation of the data and what he believes is the theoretical effect of the rent control policies.

Some of those conclusions are suspect.

Conclusion 1: "there is no evidence that rent regulations have restricted rents below what would prevail in a perfectly competitive market under equilibrium conditions."

Okay, well first of all, there is no such thing as a perfectly competitive market. The point he's trying to make here is that through the rent control regulation itself and the mechanisms that allow a landlord to apply for increases in various circumstances, the net effect should be that rents increase at the long-run supply price. Not only that, but the author actually claims that by regulating rents, and putting in place additional regulations and controls to negate the original regulations, that this actually improves market efficiency. It's a stunning claim to make.

So this is essentially the goal: to ensure that a landlord doesn't lose money, but also doesn't make a profit. The author refers numerous times to "gouging" and "unwarranted price increases" when talking about rental prices higher that the cost of supplying a unit. I don't know too many people who would go into business to break even. If this is the objective of the program, than it's little wonder that developers stopped building new units.

But let's assume that he's right, and that prices are increasing as they would with the market. What's the point of spending $1.7M on regulating rent prices? The answer: stability. To remove those periods of profits and losses so that rents follow the long term trend without the short term fluctuations. Does it work?

Let's have a look at rental price fluctuations in comparison with a city that does not have rent controls, like Edmonton:

The standard deviation of rent growth in Edmonton is indeed larger than in Winnipeg, but if you exclude a 6-quarter period from 4Q 2001 to 1Q 2003, it's actually less volatile than Winnipeg. But that's a boom and bust economy. Since we are so proud of our stable economy here in Manitoba, perhaps a better comparison is a city like Halifax:

One has rent control, and one does not. At no point does Halifax have a higher rent increase than Manitoba, percentage wise, and its standard deviation is almost identical. So what's the point of all this regulation, red tape and financial cost for administering this program?

Further, there was a period of 6 consecutive years (2001-2006) where the rent guideline was lower than previous year’s rate of inflation. The following years the guideline was increased somewhat, leading the author to say 'see: prices are adjusting just as they would in a real market!'. It is a ridiculous statement to make. The only thing you can conclude is that prices went up because the government adjusted them up. There is no basis to say they are following the market when they are being manually set.

Conclusion numero dos: "There is no evidence that Manitoba’s rent regulation program has a negative impact on the supply of rental accommodation."

Mr. Grant quotes some general numbers for the country as a whole, refutes CMHC's measurement of "rental stock", and then pulls this conclusion out of the ether. Perhaps if he had actually looked at apartment construction in Winnipeg he would have come to a slightly different conclusion:


In the 1990's a pitiful number of rental units were being built each year. This only began to change after the government implemented a 15 year exemption for new construction in 2001, and increased it to 20 years in 2005. It clearly shows that the exemption was an incentive for new construction, which means therefore that the rent cap itself was an impediment to new construction.

Even still, construction lagged far behind what it once was, and failed to close the demand gap. In fact the vacancy rate continued to hover around 1% throughout the 00's. This static vacancy rate, in spite of the exemption on new construction, suggests that either a 20 year exemption is not enough, given the long-term nature of the capital investment, or that there are other barriers to building new apartments. Construction costs are sometimes sited as a factor, but these have not prevented condos and houses from being built. Perhaps the depressed prices in the existing base spill over into new construction.

Perhaps the author should have looked into these things a little more carefully. Instead he writes it off as disequilibrium, resulting from a sudden influx of immigrants:

The supply response has been slow relative to the increase in demand because of the time lag involved in the planning-to-completion of new rental projects and uncertainty regarding the likelihood that the relatively high rates of population growth in the province will persist.

However, immigration has grown steadily since 1998. That must be one heck of a lag. Further, if immigration is supported by a successful provincial program, then how much uncertainty is there really about that trend continuing?

Conclusion:

My conclusion is that Hugh Grant's conclusions were pre-determined based on the wishes of his client. It is also possibly that the author simply has a distorted view of the world. This latter option is corroborated by an absolutely astonishing statement that he makes on page 10 of his report:

In the long-run, the high profitability of existing rental units encourages the construction of new rental units with similar features which will eventually bid down rents to the long-run supply price consistent with a perfectly-competitive market. Rent regulations, therefore, play an important role in countervailing the market power exercised by landlords in the short-run by preventing them from advancing monthly rents above the marginal cost of supplying the unit.

The first part: "profitability of existing rental units encourages the construction of new rental units which will eventually bid down rents" is basic intro economics. That's how markets are supposed to work.

However, in the view of the author this is bad and must be stopped: "Rent regulations, therefore, play an important role in countervailing the market power exercised by landlords in the short-run by preventing them from advancing monthly rents above the marginal cost of supplying the unit." What he is saying is precisely: Rent regulations play an important role in preventing landlords from making a profit and in discouraging new construction.

In two simple sentences the author manages to summarize the root of the problem with rent controls, only what is a problem to most economists is actually a solution to Professor Grant.

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.