Alberta's Proposed Rent Controls - Solution?

Real Estate Investment Network™
(a division of Cutting Edge Research Inc.)
#1018 105-150 Crowfoot Cr. NW Calgary, AB T3G 3T2
Phone: (403) 208-2722 Fax: (403) 241-6685

April 30, 2007

Action Equals Results.

Congratulations to the many REIN™ Members who have been following our suggestions over the last 6 months by contacting their MLAs and the premier’s office regarding the critical housing issues that the province has faced. As we know, just like voting, if you don’t participate you can’t complain about the outcome.

That being said, we have been told that our efforts have had a major impact on the discussions and rulings regarding Secondary Suites as well as the defeat of direct rent controls. However, our work, as active investors, is never done.

As mentioned at the last two Real Estate Investment Network Meetings, we can make a difference by getting our collective voices heard. We’ve been told that, although petitions have a lot of flash to them, they do NOT have a major impact (as they can be quite easily manipulated or staged). The impact comes from individuals, like you, sending long or short notes with reasoned arguments to every political figure that represents you. This, combined with the current lobbying that is going on in the back-rooms, can and will make a difference. Raising your rents $400, as we witnessed in the newspapers, only fuels the public outcry for legislation.

Bill 34 can and will pass, let’s be realistic. However, a few reasoned thoughts of cause and effect, hopefully leading to amendments before it passes would be very helpful for all involved: renters, potential renters, new residents of the province, landlords, developers, building contractors, shareholders (of which many are renters) , current elected officials and the ripple goes on and on.

Let’s take the emotion out of the argument and look at a couple of clear economic points. According to Statistics Canada, we are in the middle of the largest migration of Canadians ever witnessed. This migration from the East to the West does not have any precedent and therefore any amount of planning could not have anticipated this growth in Alberta’s population or its economy. Economies are like pendulums and they will swing back and forth, some times in favor of one party (renters), then in other times in favor of another party (property owners). For the last many years, property owners have witnessed dramatically increasing operating and building costs with little or no increase in revenues (rents). There was no outcry during this time, even as some landlords went bankrupt or had to sell their properties to survive.

But now that the pendulum has started to swing a little bit the other way, suddenly it is politically expedient to turn against the property owners who have been providing quality housing for the growing population of our province. Let’s look at what this will do when considered from two vantage points a. Cause & Effect. b. Basic Supply & Demand economics:

Imagine a province, growing by 50,000+ people per year, (which Alberta is doing) with nowhere for these new residents to live. They can’t qualify for a mortgage, as they haven’t had enough time in their new job and their new province, so they must rent to establish new credit. We are already at next to record low vacancies, which means that basic supply and demand dictates that when we have a fixed supply but increasing demand – values go up. We see it in labour costs, gasoline prices, concrete prices, salaries, Natural Gas prices, rents, property values, in other words everywhere in the economy.

Now, imagine a province growing by 50,000+ people per year, with record low vacancy rates where no one can afford to build rental properties even if they wanted to. There are many developers out there who would be happy to build rental accommodations to help solve the current housing shortage in our province. However, with the skyrocketing costs of building and operating rental properties, current rents could not even come close to paying for these costs, therefore no new rental units are getting built. According to CMHC, only 250 rental units were built in Edmonton in 2006 and this pattern is the same across the province. No new supply, but continued increasing demand inevitably leads to increased rents. The only way to keep rents at an affordable level is to have more supply of rental properties. So this leads inevitably to government intervention in the marketplace, meaning financial incentives will have to eventually be given to developers to build rental properties. This of course will also be considered a ‘bad’ thing by the general populous. In other words, Bill 34 legislation, even though it has good “optics”, is opening a Pandora’s Box of future government intervention and subsidies. Which is taking us farther from the Alberta economic model and leading us more closely to Ontario’s obviously flawed government model.

Other key points to consider:
Politically, this Bill hands political opposition more fuel to their fire for years to come. They can claim victory when the current government passes a bill that has many of the key recommendations they have been asking for during the last 4 years, PLUS it hands them further fuel down the road when the inevitable building incentives are brought into effect a few years down the line. The rental housing market is not going to sort itself out before the next election, so why add strength to a weak argument?

If we feel that government intervention into our economy is what is needed, where is the legislation that caps property owners’ and developers’ costs? Over the last few years we have seen dramatic increases in operating expenses due to Alberta’s hot economy. These include but are not limited to: natural gas prices (heat for renters), labour to fix buildings (keeping properties safe and clean for renters), concrete & lumber (to build or renovate properties), insurance costs. Even if rental increases are limited to once per year, a property owner will have to consider giving a massive rental increase (instead of two smaller ones that would be easier to digest for renters) trying to anticipate (guess) what their costs will be a year from now. This legislation will lead to higher rents, with these increases being handed out more quickly and with a larger negative impact on renters’ budgets. For instance, if a property owner was planning on increasing their rents by $150 this year, (two $75 increases), they will now be issuing $150 notices once, meaning that the renters will be paying the extra $75/month for an extra six months – costing the renter an additional $450 per year. When a market can adjust more often, as it has in the Alberta market for decades, the pendulum swings are not nearly as dramatic and both parties eventually win on compromise.

If the vacancy rates go up substantially in future years and rents have to be decreased (once again based on free market economics) or incentives have to be given by property owners to renters, as local landlords were doing just a couple of years ago, what will the government legislate? That tenants must pay higher rents than market because there is a ‘Landlord Crisis’ I think we all know the answer to this question, that legislation will never even be considered.

Let’s have a reasoned and non-knee-jerk reaction to the market. It is an unprecedented economy that we are currently experiencing, and using old-world ideas and legislation will just lead us to even more difficult problems in the future.

If the government feels pressured (politically or economically) into taking action, then let’s address the underlying problem. We have a large migration of people moving to our province because we have the jobs and the strong diverse economy that is not being enjoyed anywhere else in North America. We also have the fastest growing average incomes and fastest growing retail sales ever witnessed. If either of these numbers weren’t at such high levels, then maybe an all encompassing legislation would need to be considered, however these numbers prove that money is out there in people’s pockets.

Those who need our help are those who are on fixed or low incomes, these are the people that the government can help directly. A major all-encompassing legislation, like Bill-34, could actually hurt low or fixed income Albertans (see #4 above) while giving high-income renters a disincentive to become home-owners.

The answer, if the government wants to intervene, is to provide those who truly do need our help (low income Albertans who are renters) with a direct monthly rent supplement that will allow them to find a safe and clean place to live, pay market value rents to the property owners while not negatively affecting the province’s potential for new rental housing.

This will keep the market performing, it will help those who need assistance in this booming market, it will also make it more economically feasible for developers to build rental properties, without giving them a government hand-out as the market will dictate the rents (revenues) they can receive. Those who really need the assistance will receive it (the lower-income renters), the market will continue on, and the pendulum will continue to swing back and forth, as it has done in free markets around the world for centuries. The government will have taken a reasoned, non-knee-jerk reaction – thus making it both a political as well as an optics win. And then we can all continue on enjoying one of the world’s best economies.