It was both predictable and predicted. The Liberal-NDP alliance’s rent control regulations have had painful unintended consequences, as anyone flipping one of the millions of Economics 100 textbooks sitting on bookshelves around the planet would have guessed.
Far from solving the problems renters faced, the quotes in the newspapers suggest the new policy has made them worse. Some landlords have been accused of taking their rental homes off the rental market and selling them into the surging house market, further reducing the rental supply. Other landlords have been accused of the practice, fully legal today, of evicting tenants without cause so they can rent at a higher price to new tenants.
The Liberal-NDP rental policy has so many micro-economic flaws, it would make a good case study.
First is the failure to consider that making owning a rental unit less attractive to investors was not likely to encourage people to build or convert more rental units to fix the rental shortage. Landlords have other options for their capital, and watch their return on capital closely (full disclosure: I own a rental house).
The numerator of the return-on-capital formula is rental income minus costs. So policies such as the new inflation cap on rent increases will affect it. Meanwhile, the denominator is the real estate. As house and condo prices have rocketed upwards in Whitehorse, the resale value of the rental units has been rising too. Imposing rent caps in a period of surging house prices is a double whammy, negatively affecting the numerator while the denominator grows.
Second, they chose to use the Consumer Price Index as the measure of inflation. This is a basket of goods purchased by the typical household. But landlords don’t care about the prices of socks and booze when calculating whether to invest in a rental unit.
More relevant are the property taxes, insurance costs, the prices contractors charge for maintenance and — for landlords who include heat or power in the rent — energy prices. Most of these have grown much faster than the Consumer Price Index. So the cap’s allowed rent increases don’t keep up.
Third, they chose a single point in time — May 15, 2021 — to measure inflation. At the time, the Consumer Price Index had gone up one per cent. This is the maximum rent increase allowed until May 14 next year. But now the financial papers are full of stories about swelling inflation, which has risen to its highest levels in a generation. In November, the Index had gone up 4.7 per cent compared to a year earlier, almost five times more than the capped rate.
The numerator and denominator problem is only going to get worse. Few economists think inflation will slow down soon, and I have not heard Whitehorse real estate agents telling any clients they expect house prices to go down in the next year.
All of this adds up to a major problem for Yukon renters, who will find it harder to find a place to rent. New renters will be particularly squeezed since there is no cap on what you can charge new tenants. A painful lesson in supply and demand is on the class agenda for 2022.
Politicians regularly enact populist measures everyone knows will have painful economic consequences. Argentinian politicians have made such moves part of their brand. Often, the consequences are hard to measure or in the distant future, so the short-term political fallout is minimal.
This time, however, there may be consequences for the Liberal and NDP MLAs who voted for the rent policy. It affects housing, which was already in crisis, and is having visibly negative short-term effects. Yukoners may notice this time.
The classic knee-jerk reaction at this point would be to layer on new regulations. The government could ban evictions unless the landlord is moving into the house. But then you’ll need to hire inspectors, and landlords could just sell the unit to a homeowner. At that point, the government could ban landlords from selling their rental units unless the tenant agreed. But that would just cause a total freeze on people creating new rental units. Then the government could make a massive increase in Yukon Housing’s budget to build hundreds of new rental units. And so on.
A better approach would be to cancel the current rent cap, and instead, give money to renters. The government could give renters a refundable income tax credit, and scale it for income so well-off renters don’t benefit. This would sustain high rental prices, which are a signal of scarcity and which we need to lure more units onto the market. In effect, the government would be using market signals to encourage the private sector to build more rental units, while making up for it with targeted payments to renters.
This is a particular opportunity for the NDP. They have demonstrated their progressive credentials by cajoling the Liberals into agreeing to the rent cap as part of their political alliance. To win the next election, they should ask themselves whether they should stick to their Argentinian guns or show they understand how to work pragmatically with markets to achieve their social goals.
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 is a Ma Murray award-winner for best columnist.