There are many negative effects with rental caps. They include deteriorating housing, skyrocketing rental prices, and fewer units available for rent. No doubt, the rent increase cap is good news for tenants currently in their dream home. But in the future, it could lead to reduced supply, and higher asking prices. Below we’ve compiled the negative effects of rent increase caps.

On April 20th, 2017, Premier Kathleen Wynne announced measures to protect renters. The pressure to intervene in the rental market has been very strong from tenants who’ve seen their rent increase drastically to reflect current market rates. While Wynne announced a multi-faceted plan that included incentives to increase rental supply, the simple act of capping rent increases on units built after 1991 might have more immediate adverse effects. Especially since AirBnB has been gaining traction in recent years.

Rent control has always been a hot topic

Historically speaking, capping rent increases leads to supply shortage and deteriorating housing stock. Tenants in affordable homes feel pressure to remain in deteriorating homes because they cannot afford to move. Also, fewer landlords enter the market because of the uncertainty of the rent covering the carrying costs. The result is fewer units available, and higher asking prices. Wynne has announced measures to counteract supply drying up, but will they come soon enough? and will they also counteract AirBnB’s draw?

It works both ways

I definitely relate to tenants looking to rent a home, set roots in a community, and have a healthy budget for living expenses and savings. I also work with landlords who are looking to invest in rentals, and are often lucky to find a home that breaks even with the rent they charge. Sometimes landlords have to put down up to 40% downpayment to bring the carrying costs in line with market rents. That’s money that could easily be invested in a diversified portfolio. It also takes landlords around 5 years worth of mortgage payments to break even if they sell, because of the purchase and resale costs. There’s also the risk of the market adjusting downward, carrying costs increasing, appliances breaking down, and vacancies. Landlords are often not horrible money-hungry vampires, they are usually trying to make their investment worth while.

Here comes Air BnB

Air BnB operates as a license instead of a lease, meaning landlords can evict a vacationer easily. So there is no risk of squatters. AirBnB also brings in significantly more than a standard lease, however, it requires more time invested. AirBnB also offers landlords a sizable insurance policy against any damages and loss of income from damages. A top real estate lawyer in the city recently told me that AirBnB is a battle that is going to be drawn out for many years. Airbnb is here to stay. Some condo buildings banned AirBnB, but unless it is written into the declaration it is only a rule. Rules in condos can easily be changed. In a standard condo, it’s normal for rules to be changed with as few as 30% of the vote of a single meeting, and votes can be in person, or by proxy. The only way to ensure Airbnb will not happen in your building, is if it’s written into the declaration. It takes 90% of the vote to change the declaration.

 

conclusion

Renting is comparable to being employed at a company, you’re not guaranteed a position for your whole life. If you’re looking for maximum stability, then homeownership should be one of your long-term goals. In a rapidly growing city, with appreciating prices, rents are becoming out of reach of many city dwellers. Without drastically increasing supply, any measures to protect tenants might end up hurting them in the long run.