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Yukonomist: Rent control - the 2023 edition

Writing a weekly Yukon economics column requires one to come up with 52 hopefully interesting ideas per year. That’s not easy in a profession known as the “dismal science.”

Writing a weekly Yukon economics column requires one to come up with 52 hopefully interesting ideas per year. That’s not easy in a profession known as the “dismal science.”

Fortunately, the Yukon Liberals and NDP have provided an evergreen topic: rent control.

In my last column on the topic, I wondered how the Yukon government would respond to the entirely predictable phenomenon of landlords evicting tenants so they could charge higher rents to new tenants.

“The classic knee-jerk reaction at this point would be to layer on new regulations,” I wrote. “The government could ban evictions unless the landlord is moving into the house. But then you’ll need to hire inspectors.”

Which brings us to 2023. The new rent control regulations, promulgated on January 31 this year as part of the updated Liberal-NDP political deal, ban evictions “without cause” unless the landlord or a family member occupy the unit. And, in good news for local lawyers, there is no legal definition of “immediate family.” Landlord and tenant will need to argue their case in front of a government official, who will review your Christmas dinner posts on Instagram and decide if your great aunt is a close-enough relative.

The updated rent control regulations also cap rent increases at five per cent, even if inflation is higher. The example given is for 2022, when inflation as measured by the Consumer Price Index was 6.8 percent. Which means the government has given existing renters a 1.8 percent reduction in inflation-adjusted rent. Which is nice for existing renters, but not for landlords looking at surging insurance, property tax, interest-rate and repair costs..

Most media articles on rent control frame it as a simple zero-sum game. If you are a renter, it’s good. If you are a landlord, it’s bad.

Reality is more complicated than that, which is why economics profs love to use rent control as micro-economic case studies of unintended consequences. Two rent control columns ago, I summed up how economists think of the issue: “Nobel-prize winning economist Paul Krugman, who writes a left-of-centre column in the New York Times, wrote that ‘rent control is among the best-understood issues in all of economics, and — among economists, anyway — one of the least controversial.’ The Brookings Institute summarized recent research as follows: ‘While rent control appears to help current tenants in the short run, in the long run it decreases affordability, fuels gentrification, and creates negative spillovers on the surrounding neighbourhood.’

To analyze Yukon rent control more deeply, let’s look at different kinds of renters and different kinds of landlords. And, in each case, let’s look at how rent control affects them.

For existing renters, rent control is good news. They have a legal protection they did not have before. For existing landlords, it is indeed bad news. They used to have an option to evict at will. Now they don’t. Such options in the business world have value, and the ownership of that value has switched.

This is probably particularly unwelcome for small-time landlords. If you own an apartment building with fifty units, you may have a building manager to deal with problematic tenants. If you own just one unit, you now have the risk that you could be stuck with a tenant you can’t get rid of. All landlords must also factor in the political risk to which they are exposed. Will the next election see another, even harsher, form of rent control?

Now consider future tenants. Small-time landlords always have the option to sell their unit to a homeowner. They may need to ask a relative to move in for a few months, but given the amount of money at stake I predict considerable landlord creativity on this front. Remember, the latest Whitehorse statistics had house prices at record highs.

If they are to keep the unit in the rental market, the laws of economics suggest landlords will be looking for higher returns to compensate for the increased risk and hassle of being a landlord. Remember also that rental units are often owned by higher-income Yukoners in higher tax brackets, and that rental income is taxed at a higher rate than capital gains or dividends from stock-market investments.

Some landlords may decide to sell their unit, reducing the supply of rental units. Others may decide to raise rental rates considerably for new tenants, taking advantage of tighter supply.

Note that it is not necessary for all or even most landlords to sell their units to cause rents to go up substantially. Even a small reduction of supply in a tight market for a product such as housing, which everyone needs, can cause large price spikes.

There are lots of things our ruling parties could do to encourage rather than discourage the supply of rental housing. But since they have decided to double down on rent control, it’s more useful to think about how the different types of tenants and landlords will react to the new rules. Tenants should think carefully before they give up a rent-controlled unit. Landlords will be thinking about whether they want to continue being landlords or how much they will increase the rent on their next tenants. Young people and new Yukoners entering the rental market should prepare themselves to pay more. And all those great aunts out there should make sure they get a cut of the real estate profits of their great nieces and nephews.

Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He won the 2022 Canadian Community Newspaper Award for Outstanding Columnist.