^NewsAllowable Rent Increase Discussion

2024 Allowable Rent Increase

The allowable rent increase for 2024 for BC is set at 3.5%. Note that:

• Need to give proper notice, effective 3 whole months after received
• Need to give on specific form
• Cannot round up numbers

Compared to the previous inflation metric, the sum total of allowable rent increases since 2020 has lagged 6.9% below inflation. Compared to the inflation + 2% standard, since 2018 the cumulative simple sum of allowed rent increases has lagged 18.9%.

A Wicked Political Problem

The decision on the rent increase for 2024 was a wicked problem for the NDP government. If they simply adhered to the inflation linked formula, they would be seen as allowing a 5.6% rent increase which would be unpopular with renters in their political base. If they decided to set a specific number, especially one less than the formula based inflation figure, they’d obviously upset most of the property sector but also probably disappoint most economists considering they’d be venturing deeper into government price controls.

90%+ of polled economists responded negatively to the question that rent controls “…had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

https://www.kentclarkcenter.org/surveys/rent-control/

But it is political problem that will continue year after year and is somewhat of the NDP’s own making. In 2018 regulations by the NDP tied the allowable increase to inflation, as opposed to inflation + 2% as previously. However, in late 2020, amid the covid pandemic and a climate of dramatic government interventions, the government set 0% for the allowable increase. Following this, inflation by July 2021 came in at a modest 1.5% which led to the inflation linked 1.5% allowable increase. But by 2022 inflation was at 5.4%, this time the NDP surprisingly decided to pick an arbitrary 2%. Hence with inflation continuing to be high in 2023, and the NDP having set a precedent that they were the ones picking the number rather than adhering to a formula, they were left with a no-win political dilemma, as they will be again next year.

Rent Stabilization vs Intrusive Price Controls

While the inflation + 2% standard for allowable rent increase was an rent stabilization tool meant to prevent large changes in rent from year to year, it ultimately allowed rents to eventually reflect market dynamics. Previously, not every tenant would receive the maximum rent increase, as their rent would be compared to market rents, and if it were at market, no rent increase would be given. However, given the widening gap between in-place rents and market rents, existing tenants are increasingly receiving the maximum allowed rent increase. And given a large enough gap, incentives for individual unit owners to sell their units, renovate, rebuild, or move-into grow increasingly large, whereby instead of a gradual adjustment to market prices, tenants would be evicted.

Furthermore, as the established precedent for heavy rent control grows, property owners are likely forward pricing their rents at the same time that fewer rentals are coming to market due to lower turnover as tenants hang on to their rent controlled units. Hence amid an environment of increased demand and lowered supply, asking rents have grown unprecedently. You don’t need an excel model to understand that if harsher rent controls are expected in the future, the rational thing to do is to raise asking rents now to compensate for the lower future in-place growth – in 1973, on the eve of anticipated rent controls, property owners in Vancouver raised rents 10-25% pre-emptively (LandlordBC 30).

While a tight rental market would typically be a short to medium term problem as increased rents would push more development of rental housing into the market, whereby moderating upward price pressures, an uncertain inflation picture makes the forecasting of operational costs of rental development more challenging. And while traditionally rents could be assumed to keep pace with inflation, the policy actions of the current provincial government has challenged that assumption. Mathematically, if you have a project with a revenue growth rate lower than the cost growth rate, eventually at some point in the future you’ll have negative net income – try getting investors or financing for a project with a negative terminal value.

History of Rent control in BC

Heavy rent control is not new and the history of rent control in BC coincides with the history of inflation.

• 1950 to 1971, no rent control
• 1973-83, rent controls imposed during a period of high inflation with various adjustments over the years
• 1984 – 1994, no rent controls
• 1994 – Now, rent control
  • 2004-2018 set at CPI + 2%
  • 2019 – 2020 set at CPI
  • 2021-2024 government picked numbers

It was in the early 1970s, as inflation picked up, that an NDP government first brought in the first rent price controls since the second world war. Coincidentally, in 1975 another Trudeau was prime minister and as a testament to inflation’s grip on politics, “…announced a program of wage and price controls to deal with the spiraling inflation of the time. He encouraged the Provinces to implement rent control…” (LandlordBC 20)

Rent Control and Rental Housing Construction

In the 1960s, rental housing construction was on par with ownership housing. However changes in strata rules, taxes, and rent control in the 1970s changed that picture as building strata condos became much more profitable and rental housing construction dropped off a cliff. While we’re seeing the beginning of a resurgence in rental housing projects over the last 5 years due to actions from municipal governments like City of Vancouver allowing more density and height for rentals to and the federal government incentivizing rental construction through CMHC RCFI loans, heavy handed provincial government interference in the rental market during a period of high inflation may prove to a repeat of the 1970s and become a strong headwind for new rental housing construction.

References:

Understanding BC’s History of Rent Controls and Tax Policy To Improve Today’s Rental Housing Crisis – Landlord BC, 2019
https://landlordbc.ca/wp-content/uploads/2021/08/UNDERSTANDING-BCS-HISTORY-OF-RENT-CONTROLS-AND-TAX-POLICY-LR.pdf