A Summary Discussion of Fiscal Issues Surrounding Rent Control

By Avrom Charach, BA, CGA, Director of Finance, Kay Four Properties-PPMA Vice President

Executive Summary:
The Minister of Finance is responsible for the Residential Tenancies Act and its associated bureaucracy. As such not only do rent controls fall under his purview as the fiscal manager of the government they are also his ministerial responsibility.

Rent controls are an ineffective fiscal policy. They

• reduce the value of rental real estate in the province.
• are a disincentive to the development and reinvestment in rental properties.
• shift the burden of realty and income taxes from renters and owners to other members of society.
• impede the growth of the economy.
• reduce the amount of income taxes received by the Federal and Provincial governments

While this paper focuses on the fiscal issues relating to rent controls it also has been shown that they create housing shortages, helping the middle and upper middle class and negatively impacting the lowest socio-economic classes, those that they are purportedly meant to help.

Introduction:
The Professional Property Managers Association (PPMA) plans to shortly embark on a formal study of the economic impact of the rental industry on the province.

A quick Google search of “Rent Control” yields much information on the problems associated with Rent Controls. Two excellent resources which reflect Canadian data are: www.fpro.org—Fair Rental-housing Providers of Ontario—A number of research articles are hypertext clickable on their home page including:
“Rent Controls are Working” - Prepared by FRPO; and “Increased Costs Attributable to Returning to Pre-1998 System of Rent Controls in Ontario.” Prepared by Clayton Research Associates Limited, September 2, 2004.”

And the Frontier Center for Public Policy. Their articles on Rent control may be found at: www.fcpp.org/issue_pub_type.php?IssueID=16

Personal knowledge of our properties reiterates to PPMA members what outside research in other jurisdictions has confirmed. There is a reduction in the values of our properties (using an income approach) and in the realty tax base. This is due to the fact that the government’s annual allowable Guideline increase is consistently lower than cost increases faced by owners. The Guideline is decided, in camera, by the Minister and dictates the maximum rent increase allowed without filing a formal Application for Rent Increase Above the Guideline (hereafter referred to as an Application). The number of Applications has grown to the point where it is the norm, not the exception that properties see an Application on a regular basis. One can also see that Rehabilitations have ballooned. These are another form of application where a landlord shows significant improvements are being made to every unit in a building. After a long process which includes at least two government hearings with tenants and landlord invited the property is exempted from rent controls for a period of two to five years.

Data
Chart A (below) shows the rental universe is contracting and a large percentage of the universe is receiving permission to raise rent by more than the Guideline in any given year.

Chart B  shows changes in CPI as compared to the allowable rent guideline increase for the last ten years.
 

Chart C  Shows average rents in Manitoba (2002 and 2003 – Per CMHC).
 

Summary of fiscal Impacts of Rent Control
Reduced Provincial and Federal Taxation

Imagine a scenario where the rent Guideline was equal to CPI and where one half of every dollar of increased rent became profit that was taxed at Manitoba’s high tax rate (46.4%). The majority of suites in Manitoba are 1BR and 2BR with the average rent for an apartment being approximately $600 in 2003. Chart B shows that CPI typically exceeds the Guideline by 1%. Making the Guideline equal to CPI translates to $4.0 million ($600*1%*12 months* 55,362 units) in increased rental revenue per year. This becomes $1.86 million in additional income tax revenues in the one year alone, approximately half of which becomes provincial revenue. This compounds over time such that one can see the provincial government has foregone approximately $10 million in tax revenues over the past ten years. Project that out further and the impact become greater.

Reduced Capital Investment
A more realistic view, one that has been borne out in every economic study of the relaxation or removal of rent controls is that investment in real estate and maintenance will increase by 20% or more. That translates into hundreds of job and millions of dollars of GST and PST as well as a more modest increase in direct income taxes from property owners. Overall, the impact is in the (tens of) millions of dollars per year.

The Manhattan Institute’s Civic Report #36 published in May 2003 contains a benchmark study conducted on Cambridge, Massachusetts. They set up numerous economic analyses and models to show the percentage of post-deregulation investment (in repairs and capital upgrades) in formerly rent controlled buildings that can be directly attributed to deregulation. These models showed between 16-24% in increased investment.

Recent Canadian evidence can be found in FRPOs studies which showed an explosion from $400/unit to $1200/unit in capital reinvestment in Ontario between 1998 and 2000. This time frame reflects the period immediately following a relaxation of rent controls in Ontario.

Value of multi family residential Real Estate and its impact on the City
Apartment buildings are taxed based on their market value. This value is generally determined on an income basis. They face inflationary cost increases but are limited on top line growth. The value of real estate, especially multi family dwellings tends to drop as their cost increases outstrip the rent increases. Even with the large numbers of Applications being granted, rental properties are losing value based on the income approach. While a large number of properties are affected, less than ½ of the rental units are receiving Above Guideline Increases each year so the majority of units lose ground in any given year. As a result municipal governments lose hundreds of thousands of dollars of tax base per year.

The most recent civic re-assessment is proof of this fact. Homes went up an average of 23%, apartments went up an average of 12.65%. Both types of properties currently face the same apportionment and mill rate. Bob Hansen, a Winnipeg Real Estate Broker and researcher, passed away shortly after writing a study for the Frontier Center For Public Policy in 1996. This study showed that by 1996 $673 of the average single family homeowner’s property tax bill in Winnipeg could be attributed to the reduction in the value of multi-family dwellings due to rent control. The current re-assessment shows a continuation of shifting the property tax burden from renters to homeowners. The continuation of current rent controls will only starve municipalities of much needed property tax revenue.

The cost of Rent Control to the Manitoba economy
Additional Bureaucratic Costs

The RTB has numerous staff dedicated to the collection of rent control related paperwork. The owner or manager of every single rental unit must submit their rent increase information to the government which then has staff enter and verify data. As the costs of utilities and other operating expenses began to spiral upwards ever faster in the last five years the number of Applications for Rent Increase Above the Guideline has mushroomed. Each one of these Applications takes staff time and can costs thousands of dollars to review. This is doubly true if the rent increase is appealed to the Residential Tenancies Commission who have their staff review the application for a second time and then bring in a panel of three government appointees who are each paid hundreds of dollars to sit at an appeal hearing.

The number of Applications used to average 100 per year, with approximately 7,000 apartment units affected. This has seen a huge increase to 276, 364 and 328 applications respectively in the years 2002-2004 affecting an average of 17,400 units, or more than 30% of units per year. The RTB has reported that the average allowed increase from an Application exceeds 4%. They have also stated that between 2000 and 2003 approximately 70% of rent controlled apartment units underwent at least one Application. Add this to the thousands of units which are currently exempt due to Rehabilitation. This shows that the system has an acceptable process of review for exceptions. The problems is that the exception has become the rule.

The Winnipeg Free Press reported that the RTB had a $4 million budget in 2001. Much of this budget is invested in keeping track of the rent for every single registered rental unit in the province and in processing Applications and Rehabilitations. By simply relaxing the regulations to the point where only complaints would require the submission of paperwork the RTB could reduce its staff complement or re-assign the staff to other areas. There is a potential savings of hundreds of thousands of dollars. Tying the guideline to CPI would help to achieve this goal.

In addition, the application process is not similar to the Public Utilities Board where a utility is granted an increase based on projected cost increases balanced against real results from the previous quarter. A landlord is granted an increase based on their losses in the previous year. They begin to collect their higher rent anywhere from 3-14 months after the period in which they lost ground. This is somewhat mitigated by formulas used in the process but there is currently no mechanism for the pass-through of unexpected real spikes in utilities costs, taxes, or operating costs. Rents can only be raised once a year by the guideline or by an applied for amount.

A policy paper was recently released by FRPO looking at the impact of Ontario’s proposed shift back to full rent control. It is on their web page and is titled “Increased Costs Attributable to Return To Pre-1998 Rent Controls”. The executive summary notes that the government of
Ontario stands to face increased costs and lost tax revenues totalling $560.8 million a year if full rent controls are put back in place. I have given evidence that the cost of keeping rent control in Manitoba is in the millions of dollars per year. This study leads me to believe that a Manitoba study will find the actual cost to be in the tens of millions of dollars.

Lost development and lost interest in the city
CMHC figures show that Saskatchewan and Ontario, our two neighbours have seen rapid expansion in new construction of multi-family residential rental properties in the past five years. Winnipeg saw NO new apartment construction between 1985 and 2002. There were less than 500 new units built in 2003 and there appear to be less than 500 unit starts in 2004. CMHC also informed me that in 2002 there were 69 apartment units removed due to conversion to condo or another form of living and 145 units were removed because they were boarded up (condemned). The 2003 figures show 369 apartment units removed due to conversion and 117 units were boarded up. All of the new construction in 2003 was used up by the losses in that year.

Regina and Saskatoon have each seen more than 600 new units in 2004. The combined population of these two cities is approximately 70% of Winnipeg’s population yet they have built more rental units in each city in the past year alone. What is the economic impact? Imagine the boon to the economy if 1,000 or more new rental units were constructed per year. The cost of new concrete construction is approximately $130/sq ft with average suite sizes being 750 sq ft (1 BR) and 900 sq ft (2 BR). Land costs are from $10,000-$30,000 /suite. Ignoring land transfer taxes and real estate commissions, the average cost of a new suite (based on an equal mix of 1BR and 2 BR) is $107,250. Hundreds of millions of dollars of investment and the economic multipliers from this are being foregone in Manitoba in favour of development in other provinces each year.

Reports in the local media indicate that many young people do not feel that there is a vibrant and growing atmosphere in Winnipeg. Some have attributed this to the lack of availability of affordable and attractive rental housing. The current economic rent for new concrete construction exceeds $1000/month. Chart C shows market rents at less than $650/suite. Only by allowing the current rental stock to be repaired/renewed and rents to increase will developers be encouraged to build new, quality rental stock. Each new apartment building is an annuity for the municipality in which it is built and for the provincial economy.

While not specifically a rent control issue, a shift to a more progressive form of taxation for education will benefit both the province and municipalities. Shifting the education levy component of realty taxes from civic tax bills to individual tax-payers will eliminate this burden from low income earners, most of whom are renters because they can not afford home ownership. A further benefit to municipalities, low income earners and many homeowners would be the elimination of school division taxes by having education taxed with income taxes.

Conclusion
There are very real reasons that Rent Control is an issue which every resident of Manitoba should be concerned with. The perfunctory review above shows the severe negative impact that rent controls in their current form have on the Civic, Provincial, and Federal Government. You also see some of the impact on private homeowners. The Province and municipalities all stand to gain (hundreds of) millions of dollars by making positive changes to rent controls.
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Postscript
CMHC released its 2004 figures after this report was completed. The 2004 figures show further proof of the effects of rent controls discussed herein. Winnipeg’s vacancy rates once again declined to 1.1%, lower than anywhere in Canada except rent controlled Sherbrooke, Quebec, and Victoria, BC. Rents for 2 Bedroom suites went up 2.9% or almost double the provincial guideline of 1.5% and a greater increase than any other Western Canadian market.

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