While it gets more and more expensive to own a home in the city of Toronto with rapidly rising property prices, should renters fear the same fate? By the same token, as a property investor, if it costs so much more year-to-year to buy a property, shouldn’t rents be escalating in the same market too?
Property is property, right?
In this Urbaneer post, we explore some of the rent control complexities facing landlords and tenants in Ontario, Canada.
While market demand does drive the rental market too, how much of landlord can charge – and how much a tenant is willing to pay – hinges on both the that tried and true real estate mantra of location, location, location – including proximity to green space, amenities and public transportation – as well as the mechanics of supply and demand. However, once a tenant is in place, there are checks and balances surrounding the increase of rents which vary depending on the age and condition of the property, as well as the tenant's tenure.
For owners, the Canadian property market is full of regulation and legislation that act to pull the strings in an effort to introduce a reasonable balance to the marketplace. In the lending market, there are government-imposed rules around mortgages, property types and high-ratio borrowers through agencies like the Canada Mortgage and Housing Corporation. In the same sort of vein, for example, landlords in the province of Ontario are subject to governmental regulation controlling both the rate of speed and amount that rent increases can be applied.
Every year, the Ontario government sets out a Rent Increase Guideline. They derive the upper limits for rent increase from data gathered from Stats Can on inflation and the Ontario Consumer Price Index (CPI), which is another measure of affordability (how much does it cost you to live your life i.e. put gas in your car or fill your car with groceries?). For the 2014 calendar year, the increase is 0.8%. Of note, this is the lowest rent cap since 1975. According to the Ontario Minister of Municipal Affairs and Housing, this is a concrete act to make housing affordable.
Digging deeper, in a centre like Toronto, is this the product of a city that is beleaguered by hot property market that hampers affordability, or is it an aggressive stance from the property powers that be?
In their Rent Increase Guideline, they say, “The guideline is the maximum amount that most landlords can increase a tenant’s rent during the year without making an application to the Landlord and Tenant Board. It is based on the CPI, which is regarded as an objective, reliable measure of inflation, charting the change in the price all goods and services in the provincial economy.”
“In most cases, the rent for a unit can be increased if at least 12 months have passed since the tenant first moved in, or since his or her last rent increase. The tenant must be given proper written notice of the rental increase at least 90 days before the rent increase takes effect.”
However, many landlords in Toronto disagree with this math, citing that the rental increase doesn’t take into full account the cost property management, especially if rental funds are split between paying owner financing and upkeep of property.
In fact, some landlords say that upkeep costs become prohibitive, because they don’t accurately reflect increases for expenses like property taxes and all other labour for repairs. They do have a point. In most other business, rising costs of supply are passed on to the consumer. There is an argument as well from landlords who say that these rent controls discourage “good” landlords who are committed to the upkeep of their property, simply because of the margins get squeezed too tight. Some even discuss moving towards commercial rental over residential, or to different provinces like B.C. or Alberta because the rules are different.
The Ontario Landlords Association says, “The number of rental units in Toronto has been decreasing dramatically even though new units are being built – a situation that could lead to a housing crisis in the near future. It is estimated that 25% of rental units in Toronto are provided by small landlords who rent out homes, duplexes, second suites and condominium units. With 49% of all Torontonians being renters this means over 300,000 people in the city, and approximately 674,000 in the GTA, rely on small landlords to provide them with a place to call home.” And these smaller landlords are more vulnerable to the caps and the impacts on their costs.
Typically, landlords are permitted to increase their rents once a calendar year, with advance notice in writing to a tenant (90 days). Landlords promoting a vacant property are free to set the rents as they wish, according to the open market. While this rental cap assists tenants with some peace of mind that they will able to maintain their rental in the longer term (i.e. avoiding sudden, sharp increases that their income likely would not support in such a short period of time) it does present a bit of a dilemma for landlords who seek to build long-term tenancies, while maintaining their properties. Looking ahead to next year, the Ontario Government has projected a rental increase cap of 1.6%. HERE is an article on that.
There are exceptions to rental increases, and some landlords (and property types) can be exempt from certain conditions and criteria, but the process of filing can be cumbersome, and considered by some landlords to be detrimental to the process. Click HERE for a great article with facts about rental increase, property exceptions and some challenges faced.
For instance, did you know newer buildings – constructed after 1991 – are not subject to the same rent increase guidelines as older ones? An article in Toronto Landlords cites a few different reasons behind this policy, including the objective that new rental stock continues to enter the market and creates a positive economic spinoff for the housing industry, which comprises a significant portion of our economy. Also, it was meant as an enticement for developers to invest money in the creation of new property. After all, why would they sink capital into an investment that limits their return on investment?
While the logic behind these exceptions makes business sense at the outset, complications invariably evolve.
Consider this scenario. When you combine the vast number of condominiums that have been built in downtown Toronto since 1991 (and condos are a very popular rental choice given there is limited incentive by the government to build rental housing stock), along with the shifting demographics, with young professionals and baby boomers flocking towards urban cores, it comes right back down to supply and demand. Except in this case, the mechanics of supply and demand result in a rise in rents (mirroring in many ways the pressures of low supply and high demand in the Toronto property market), so affordability becomes an issue – which is the very thing that rent control is meant to combat. An article in MoneySense called the End Of Rent Control describes some of these implications.
As everything in the market becomes more expensive, some condo owners are hiking rents to soften the impact of their escalating maintenance and other fees. An article in The Toronto Star called Rent Control Loophole Blamed For Rising Condo Rents addresses this.
While it is true that landlords can be arbitrary with their rent increases in these scenarios, there is a dollar value to be placed on a good, long-term, reliable tenant. Savvy landlords recognize this, and prudent tenants are using this dynamic to their advantage when it comes to negotiating rent, sometimes in response to hefty rent increases. While a landlord must let tenants know in writing how much they can legally increase the rent each year (even if they don't increase it), we consider it prudent to keep the rent a little under market value to retain good tenants. After all, if a tenant moves out a landlord may have a period of time with a vacancy which means lost income – plus they may have to invest capital to refresh the space including paint, carpeting, cleaning, appliance upgrading etc. If an investor's vacancy rate is too high – and the units sit vacant for a month or longer – a landlord may ultimate fail to recover the income losses and upgrade expenses for some time, even when the unit ultimately achieves a higher rent.
The truth of the matter is that affordability is a crucial, crucial component both for the support of the property market – and for the lives that unfold within it. This is something that Urbaneer has addressed in numerous posts. Click Our Real Estate Fall 2014 Forecast: Part One, this newsletter on Interest Rates, Affordability and the Toronto Housing Boom or our blog on the Affordability Crunch for a sampling. While supply and demand controls prices in the shorter term, it is the measure of affordability that holds the power in the long term – because of the far-reaching effects through the various rungs of the property ladder. It even can extend itself to push demographic shifts that can be substantial and long-lasting.
As a property investor, can you expect to snag a long-term tenant and contribute cash flow to the upkeep and growth of your rental property? A big part of that success comes with making a prudent, well-researched purchase that will support both of those goals.
With thorough knowledge of the market, past and present, Urbaneer works hard to position Toronto real estate property investors in the market for future success. Are you considering life as a landlord? With a multi-disciplinary education in housing and decades of experience in the Toronto housing market, we’re here to help!
~ Steven and the urbaneer team
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