It’s time to stop digging – Yukon News

They say if you want to get out of a hole the first thing to do is stop digging.

The real estate version of this is that if you want to remedy a rental housing shortage, you have to stop discouraging investment in rental housing.

In 100 economics textbooks, rent control is typically included as case studies of well-intentioned but economically damaging policies. If you cap the price of something below its market equilibrium, the texts say, you will get reduced supply and increased demand.

This equates to a shortage.

Nobel Laureate economist Paul Krugman, who also writes a column left of center in the New York Times, wrote that “rent control is one of the best understood issues in the entire economy, and – among economists, anyway – one of the least controversial. The Brookings Institute has summarized recent research as follows: “While rent control appears to help current tenants in the short term, in the long term it decreases affordability, fuels gentrification, and creates negative spillover effects on the surrounding neighborhood. . “

Many articles in the media describe rent control as a detriment to landlords and to the benefit of tenants. The reality is more complicated. The owners are concerned, of course. But if you live in a city where house prices are skyrocketing like we do, they can easily sell their unit for a profit and invest their money in something else if the rent control weighs too much on the bottom line. Existing tenants benefit from capped rents. The people who really pay are the future tenants, who find it more difficult to find housing and more expensive when they do.

This means, as is so common, that the cost is borne by young people and newcomers. Rental shortages also hurt people with difficult life situations who have to move unexpectedly.

Nonetheless, skyrocketing house prices around the world have rekindled interest in rent control. Paris has brought back rent control. Berlin introduced a five-year rent cap for apartments built before 2014. Bernie Sanders campaigned for rent control in the US presidential primaries. He called for rent increases to be capped at 3%, or 1.5 times inflation, whichever is greater.

Indeed, the new Liberal-NDP rent control plan for the Yukon – a 1% cap on rent increases – is more to the left than Sanders’ proposal.

The Economist reports that Berlin’s new rent control policy has effectively led to lower rents. But he also saw the supply drop. The number of rental listings has decreased by more than 50%.

If your goal is to support a larger supply of more affordable rental housing over the long term, you need to look at the whole business model. It means looking at it from the investor’s point of view. And remember many of these investors are regular Yukoners (full disclosure: I own a rental unit and raised the rent based on the rate of inflation last year).

Take this example. Suppose, in 2019, a teacher with 10 years of experience and in the over $ 97,000 tax bracket gets a mortgage and buys a house for $ 400,000 to rent. From now on, rent increases are capped at 1%. But the city of Whitehorse’s insurance and utilities will likely grow faster. Prices for lumber and contractors for repairs have skyrocketed. While rent includes utilities, electricity costs have also risen faster than inflation. Interest rates are falling thanks to the pandemic, but if the teacher was conservative in 2019 and locked up for five years, that doesn’t help.

It also pays rental income taxes at its highest marginal rate, 36.9% in 2020. Note that capital gains and dividends from stock ownership are taxed at much lower rates.

Meanwhile, due to the general housing shortage, suppose the home’s value has increased by $ 50,000 or more.

Here we have a situation where our teacher-investor is still making money, but less than expected. Costs rise faster than rent, which means she will likely make less money in each future year of rent control. She knows that the new rent control policy between the Liberals and the NDP is supposed to last until 2023, but she does not know if it will end then or if it will become permanent. Maybe some future election will even see someone campaigning on freezing or cutting rents.

Keeping the rental property is an option, but selling it to a landlord and transferring the cash to the stock market may be more appealing. She would pay no tax at all if she transferred her equity into a tax-free savings account. Plus, stock certificates don’t get frozen pipes or call for repairs on long weekends.

Investors with older properties that require more maintenance will be more likely to sell, especially if they have an aging roof or oil tank.

The key point is that not all investors have to sell their homes for there to be a problem. With 780 applications for the 250 lot lottery last January, there is clearly a strong demand for houses. If even a tenth of investors decide to sell their rental properties to new owners, it unleashes a wave of former tenants looking for rentals in a city where supply has suddenly plummeted.

In the long term, the best solution is to increase the overall supply of housing. For example, around 170 lots have been released per year on average over the past three years. The current plan is to obtain up to 250 lots per year. Even that may not be enough. The population of the Government of Yukon projects that 750 people will move here each year until 2025.

A better strategy for the government would be to support low income tenants with direct subsidies and to encourage rather than discourage investment in rental properties. The Liberal-NDP alliance goes in a different direction and is widely criticized by generations of economics textbook writers. Hope I am wrong about the long term consequences. But if you are having trouble finding rental accommodation over the next two years, you may want to let your MP know.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon Historical Children’s Adventure Series. He won the Ma Murray Award for Best Columnist and received the Bronze Medal for Outstanding Columnist at the 2019 Canadian Community Newspaper Awards.


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