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Increase Supply to Make Housing More Affordable

11/19/2014 12:52 EST | Updated 01/19/2015 05:59 EST

When I first came to Alberta a quarter-century ago, vacancy rates in Calgary and Edmonton exceeded 10 per cent. In Edmonton, where I lived in 1988, landlords often gave one month free on an already cheap 12-month lease. Sometimes utilities and cable were included.

The rental deals sprang from the dramatic drop in the price of oil in 1985 and 1986, which punctured Alberta's resource-dependent economy. Subsequently, enough Albertans left for the then greener economic pastures in Ontario and British Columbia that renters gained the upper hand since supply markedly exceeded demand. Add to that trend the build-up of the housing stock during the earlier boom (the late 1970s until 1981) and tenants and home buyers in Alberta had the advantage in the later 1980s and early 1990s.

Jump to 2014 and the still-hot Alberta economy and low vacancy rates have flipped the advantage to landlords. Rental vacancy rates for a two-bedroom apartment respectively are 1.7 per cent (Edmonton) and 1.2 per cent (Calgary).

With low vacancy rates and the advantage to owners--they obviously are in the stronger position on rents-- cue the attempts from those looking to "remedy" the market. For example, Calgary Mayor Naheed Nenshi recently tried the moralizing approach when he urged landlords to stop "gouging" tenants.

Isolated examples can always be trotted out. But in Alberta, where no rent controls exist, leases will necessarily reflect the market rate. Anyone who tries to charge above what markets will bear, be it an investment fund with multiple apartment buildings or a nurse who rents out an apartment as a long-term investment, will soon own an empty apartment and zero rental income.

Speaking of rent control, that's one option floated by some to counter the landlord edge in the marketplace. Alberta ended rent controls in 1980 and Premier Jim Prentice recently said he won't bring them back (while the Calgary mayor won't take a position).

The premier was correct and in line with the best work on rent control. Late Nobel laureates F. A. Hayek and Milton Friedman argued rent control was counter-productive policy. As did another Nobel Prize winner, Gunnar Myrdal, active and instrumental in left-wing political parties in Sweden in the 20th century.

Another economist, Walter Block, once summarized the view among most economists: "There is no case for rent control." It leads to artificially induced housing shortages, an incentive not to fix up existing rental properties, under-maintenance, a smaller tax base (fewer than optimal rental properties equals less property tax revenue), and more expensive taxpayer-financed social housing (with fewer private rentals, demands for social housing increase), among other ills.

An absence of rent controls does not alone guarantee more rental units will be built. Investment there depends on whether other investments offer a better return and less hassle. But rent control certainly does discourage investment which reduces the available housing stock.

For example, Ontario imposed rent control in 1975 and that had predictable effects over time--low vacancy rates in good and in bad economic times. In the early 1990s, even during Ontario's then depressed economy, rental vacancy rates barely budged above two per cent. In Alberta, absent rent controls, vacancy rates soared into double digits when its economy faltered.

Point: If supply is discouraged when the economy is strong (and when demand for rental accommodation rises due to in-migration among other factors), no one should be surprised the rental market is still tight even when economies become weak--as was the case in Ontario.

Lastly, remember, the rental market doesn't exist in isolation.

If cities artificially restrict land development, (current Edmonton and Calgary strategy), land prices spike, followed by increases in housing and rental costs.

Also, if cities pile on ever-higher, above-inflation tax increases on property as Calgary has done with annual increases ranging from 4.5 to 13.2 per cent between 2008 and 2013, or dramatically hike development fees, as is policy in Edmonton and Calgary, that also increases costs to everyone down the housing food chain.

Canadians are rightly concerned over housing costs. But ill-advised government policy--rent control, hefty fee and tax increases, artificial constriction on supply--is part of the problem.

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