Rent controls work: They don’t reduce housing supply but they do limit profit

In recent years, new studies have demonstrated that rent controls work. They stabilize rent increases without negative effects. Provincial governments could put an end to skyrocketing rents right now — if they were really interested in doing so.

Critics of rent controls claim that they reduce the incentive to build more rental housing supply. These claims are based on studies of rent freezes enacted in war times. Modern rent controls are not rent freezes, and the current economic context is very different. And recent research tells a different story.

In 2020, the Canada Mortgage and Housing Corporation (CMHC) analyzed the impact of rent controls on construction. The study compared Canadian cities with and without rent controls. Since the CMHC has a wealth of data, it used a time series going all the back to 1971 — almost 50 years of data at the time. The key finding of the study was that “There was no significant evidence that rental starts were lower in rent control markets than in no rent control markets.”

This analysis supported the findings of another national-level study the CMHC commissioned in 1994. Authored by five economists, the study found no evidence that rent control changes how markets respond to vacancy rates. The study also found no evidence that rent controls lead landlords to let rental units fall into disrepair.

In 2023, the prestigious International Journal of Housing Policy published an econometric analysis based on a large data set covering 16 countries over a period of more than 100 years. The study found no significant correlation between modern rent controls and the rate of rental housing construction.

Interestingly, the study also found that even full-on rent freezes are not as scary as they are made out to be. The authors calculated that shifting from zero control to rent freezes decreases new construction by six units per 100,000 inhabitants per year — hardly a complete construction stopper.

Last year, 32 U. S-based economists, mostly economics professors, signed a letter to the country’s housing authority requesting it to pay more attention to rent controls. In the letter, the authors state that “the economics 101 model that predicts rent regulations will have negative effects on the housing sector is being proven wrong by empirical studies that better analyze real world dynamics.”

Rent controls limit profit, though.

In Ontario, bringing back rent control in units built after 2018 would prevent rent gouging in the newer stock, helping to ensure that new units don’t remain forever unaffordable.

Between 2022 and 2023, landlords in Ontario increased rents in vacant units by an average of 36 per cent. Bringing back controls on vacant units would prevent abusive increases. It would also remove the financial incentive for evictions and other tactics used to displace tenants.

Under current Ontario rules, above-guideline rent increases allow landlords to transfer the cost of renovations to tenants. Landlords decide what to renovate and when, and they own the asset whose value increases with the renovation. Yet tenants’ foot the bill. Closing this loophole would help stabilize rents.

Focusing the housing debate on new supply is a cop-out. It keeps the attention on what should be built where.

This focus on construction keeps us from having a much more difficult conversation: the conversation about limiting profit in existing rentals. Most politicians and housing pundits actively avoid talking about this, even if the evidence is in.