OPINION - The case against vacancy controls - The Tyee February 22, 2023

I have known Jean Swanson since 1974 when as CMHC's Assistant Architect/Planner I was involved with the construction of new and renovated social housing buildings in Vancouver' Downtown Eastside

Introduction. On February 13, I read an opinion column by Jean Swanson urging the provincial government to impose vacancy controls on BC landlords so that they couldn't raise the rent after a tenant moves out. While I am not actively involved in the ownership or development of rental housing, based on my 5 decades of experience in the public and private housing sectors, I strongly believe this would do more harm than good. I therefore cheekily posted a tweet to the effect that someone needs to explain the economics of rental housing to Ms. Swanson.

The Tyee saw my tweet and invited me to write a response to Ms. Swanson's proposal. It is reprinted below. My key points are rents are increasing when a tenant moves out because for political reasons, allowable rent increases set by the provincial government are unrealistically low. Yes, they protect in-situ renters and that's a good thing. But they discourage new rental housing construction. That's a bad thing. Especially for those looking for rental housing.

There are many better solutions other than imposition of a vacancy control. One way is to subsidize tenants, rather than developers of rental housing. Yes, this puts more money in landlords' pockets but if we don't, over time the shortage of rental housing will further increase. Other ways include encouraging more private sector investment in both non-market and rental housing.

Unfortunately, if you review the comments posted following my column online at the Tyee, most readers don't want to see more money go to landlords. While I understand this sentiment, this attitude is partially responsible for the crisis we're in. I welcome your comments.

The Case Against Vacancy Controls for Vancouver

Better to increase payments for rent costs to people with low incomes. Latest in a series on housing advice to leaders.

Michael Geller YesterdayTheTyee.ca

Michael Geller is a Vancouver-based planner, real estate consultant, retired architect and adjunct professor at SFU’s school of resource and environmental management. Read his blog or find him on Twitter @michaelgeller.

Planner and real estate consultant Michael Geller responds to a Tyee piece urging vacancy controls by former city councillor Jean Swanson. Photo submitted.

Recently, the Tyee published a column by long-time community activist and former city councillor Jean Swanson on why Vancouver needs vacancy controls.

While I have known and respected Jean Swanson’s community activism for five decades, I fear vacancy controls will not result in more affordable rental housing. On the contrary, they could do much harm. Before explaining why, I would like to share some background.

I first met Jean Swanson in 1974. At the time she was a Downtown Eastside community activist. I had recently moved from the Canada Mortgage and Housing Corp.’s head office in Ottawa to become CMHC’s assistant architect/planner for British Columbia.

Thirty-five years later, Jean Swanson and I met up again when the late Milton Wong invited me to join Building Community Society, a non-profit organization hoping to improve living conditions in the DTES community.

I was surprised to discover that despite repeated requests to the provincial government, the shelter component of welfare had not increased in 14 years. I proposed that Swanson and I jointly write a Vancouver Sun opinion piece urging the government to increase the allowance.

Unfortunately, others in the community opposed this initiative, arguing increasing the welfare shelter component would simply put more money in landlords’ pockets.

This was precisely what I wanted to do, to encourage and assist them to fix up their buildings.

Which brings me to Jean Swanson’s vacancy control proposal that would prevent landlords from raising an apartment’s rent after a tenant moves out. To understand my concerns, I would offer this additional background.

Between 1958 and 1972, the federal government provided tax incentives to developers and investors to build “purpose-built” rental buildings. At the time, there was no rent control and no capital gains tax.

These incentives allowed doctors, dentists, lawyers and other professionals to write off capital cost allowance, or CCA, against other income.

These buildings were not always financially viable when finished. As the late Morris Wosk once told me, who along with his brother Ben built many Vancouver apartment buildings, the coins from the washing machines and dryers were often the difference between positive and negative cash flow.

During this period, approximately 35,000 rental units were built throughout the city, including most of the low-rise walk-ups found in the West End, Kitsilano, Kerrisdale and Marpole.

In 1973, the NDP provincial government introduced rent controls. The allowable annual increase varied, but in 1975 it was 10.6 per cent and new construction was exempt for five years.

Unfortunately, once rent controls were introduced, developers stopped building rental buildings since condominium development was more attractive. Purpose-built rental construction plummeted.

In 1977, to encourage new rental supply, new buildings were totally exempt from rent control.

During this period, the federal government implemented a succession of rental housing programs. They included the Limited Dividend program, which offered high-ratio mortgages in return for reduced profits. The additional Assisted Rental program and Canada Rental Supply program both offered preferential financing to developers.

And then came MURBs. Between 1974 and 1981, the Multiple Unit Residential Building program resulted in thousands of additional rental housing units in Vancouver.

Like the Capital Cost Appreciation program, it offered investors attractive tax incentives which provided “write-offs” against other income. However, unlike previous programs, MURB units could be strata-titled and sold later, provided they were rented for a prescribed period. Four decades later, many MURB apartments continue as rentals.

Notwithstanding all these programs, rental supply did not keep up with demand. Then, something unexpected happened.

In the 1980s, financial institutions increasingly required condominium developers to presell a percentage of the units in a building before approving financing. Since it was easier to presell to investors, buildings were designed with a high percentage of small suites appealing to investors. Over time, approximately 45 per cent of Vancouver’s new condominiums were purchased by investors and rented out.

While rents did not always cover costs in the initial years, over time investors earned a profit and tenants helped pay off their mortgages. In 2022 42.5 per cent of all new rental units built in Vancouver were condominiums.

Now back to Jean Swanson’s proposal for vacancy controls. In her Tyee article, she writes:

“Over half of Vancouver’s population rents. With more than 60,000 purpose-built apartment units in the city and a turnover rate of 10.8 per cent last year, 6,000 rental units could be kept affordable each year after the current tenant leaves.

“Instead of rents rising on average 43 per cent, these units would rise the allowable annual increase — two per cent this year, for example — even if their tenant dies or leaves. This would free up more apartments at lower rates for folks who need them.

“Instead of billions of dollars flowing into the hands of landlords — which are, increasingly, multinational investment vehicles — vacancy controls would keep that money in renter hands, reducing inflation, and letting tenants spend their savings at local businesses and on things that they need.”

This seems like a convincing argument. However, some of the information is incorrect and misleading.

According to the CMHC report referenced by Swanson, the average rent increase in Vancouver after tenants vacated a unit was 23.9 per cent not 43 per cent (see page 9 of the report). CMHC also reported:

“This reflects the fact that… landlords can also take the opportunity to renovate between tenants. In doing so, they raise unit quality and can then ask for higher rents from new tenants.”

Also, while “multinational investment vehicles” own rental buildings in Vancouver, most rental suites are owned by families, small companies and individuals renting out condominium apartments and basements.

The key reason why landlords raise rents when tenants move out is because under rent controls, the annual allowable increase is no longer 10.6 per cent as it was in 1975. It was 2.6 per cent in 2020, 0 per cent in 2021, and 1.5 per cent in 2022. However, property taxes, mortgage rates, energy, building maintenance and operation costs increased significantly more. (The allowable increase in 2023 is 2.6 per cent, well below the rate of inflation.)

If a vacancy tax was imposed, several things would happen.

Landlords would likely think twice about upgrading a suite after a tenant moves out.

Tens of thousands of condominium owners would sell their suites, most likely to owner-occupiers, significantly reducing the rental housing stock.

Developers would be further deterred from building new rental apartment buildings. As it is, many buildings with development approvals are not proceeding because of higher interest rates and construction costs. A vacancy tax would be the final nail in the coffin.

As an alternative to vacancy controls there are several actions that governments could take to prevent substantial rental increases whenever a tenant moves out while also increasing the supply of rental housing.

The first is to impose more realistic annual rental increases that reflect the rate of inflation. As noted, in 1975 the allowable rental increase was 10.5 per cent. This corresponded with the inflation rate that year of 10.7 per cent.

While it may be politically attractive for governments to restrict rent increases below the rate of inflation, this short-term gain becomes long term pain.

Governments should again exclude new apartments from rent controls. This has worked in the past and if introduced would most certainly spur more rental housing construction.

While federal, provincial and municipal governments have implemented programs to encourage new rental construction, consideration should also be given to bringing back programs like MURBs that encourage more private investment in rental housing. This time, they could help fund both private and non-profit projects.

Finally, governments should recognize that sometimes it is better to subsidize the tenant rather than developers and landlords. Rent supplement programs such as Shelter Assistance for Elderly Renters, or SAFER, should be expanded and the shelter component of welfare should most definitely be increased.

Sadly, the rental housing crisis is going to be with us for some time. But there is much that can be done. There just must be the political will.

Note: you can find comments from Tyee readers here: https://thetyee.ca/Opinion/2023/02/21/Case-Against-Vacancy-Controls-Vancouver/

Read the full CMHC Rental Market Report.