Faced with skyrocketing rents the government voted to close the “loophole” allowing unlimited rent hikes on private apartments first used on or after November 1, 1991. The government is involved – but will it help bring affordability to Toronto?
On Thursday, April 20, Premiere Katherine Wynne released the details of the province’s Fair Housing Plan, which outlined 16 provisions to help ease the intensity of the GTA’s run-away real estate market. Ontario’s Fair Housing Plan will be rolled out province-wide, and has provisions that impact buyers as well as renters. The strongest provision by far was to close the “loophole” on unlimited rent hikes. While not all provinces have rent control, in the face of a market that was pricing its residents out of their cities, it has levelled the playing field for renters. Regardless of a rental suite’s age, it is now subject to all of the rules in the Residential Tenancies Act, including the annual provincially legislated rent increases.
Some of the other provisions include:
- Enabling a standard lease to help both tenants and landlords know their rights and responsibilities, while reducing the number of disputes
- Protecting tenants from eviction due to abuse of the “landlord’s own use” provision
- Ensuring landlords can’t pursue former tenants for unauthorized charges
- Prohibiting above-guideline rent increases in buildings where elevator maintenance orders have not been addressed
- Removing above-guideline rent increases for utilities, to protect tenants from carbon costs and encourage landlords to make their buildings more energy efficient.
(Ministry of Housing)
While it didn’t seem fair to protect some renters from drastic increases, but not others, the rule was established this way in order to encourage new rental construction. The idea wasn’t as effective as predicted. Once real estate prices started to rise significantly, developers turned their sights to condos. They were ideal for a short-term investment with significant return and could be done through financing and not cashflow. With a growing population, the GTA saw a massive construction boom of condos, but almost no new purpose-built rental construction.
With a lag in purpose-built rental and a growing population – not all of whom wanted to buy condos – vacancy rates quickly began to plummet. Hovering around one per cent, it became increasingly harder to find a place to rent, and as the shortfall between supply and demand started to grow, it also began to have an effect on market rent. Rents were rising quickly, and finding an affordable apartment became more difficult, the lack of supply and the growth of demand forced prices to increase in response.
With the condo boom came investors who realized that they could capitalize on the rental shortfall by becoming part of the rental pool. Instead of just making their money buying and selling suites, they could hold them and earn rental income to cover expenses while they waited for the property to increase further in value.
By about 2012, the private condo investor rental market was subsidizing the apartment rental pool in the city quite considerably. The CMHC suggested that about 25 per cent of the condos in Toronto were being used as rental units. But the actual number was likely much higher. Some put it at around 50 per cent. The Canadian Mortgage and Housing Corporation (CMHC) only took their figures for the rental market from the Multiple Listings Service (MLS) but that source doesn’t account for the privately rented suites from myriad other rental listings sources.
But supply and demand dictated the real estate landscape even further. Making market rents rise through tight supply, it became a lucrative time to be in the rental business – and still is. Several developers switched their focus, moving to purpose-built rentals as a long-term, high-return investment. Current rents were desirable, and the knowledge of uncapped rent increases that would allow these new landlords to raise the rent as much as they wanted, annually, made it even more enticing because the ability to maximize future returns was built into the “1991 Loophole.”
Now that the loophole is closed, and new buildings are no longer allowed to raise rents beyond the annual provincial guidelines, a modest maximum of 2.5 per cent but usually lower, some developers are saying it won’t be cost effective to keep building purpose-built apartment buildings. While this rule is very beneficial to renters, it may further cause a tightening of vacancy rates and, ultimately, cause market rent to climb faster. The developers were at least hoping for an increase to the cap to 3.5 per cent as they felt this more realistically accounted for rising cost of doing business, but this wasn’t granted.
There is still such a thing as vacancy decontrol, so the province won’t see “true” rent control. Landlords can raise the rent as much as they want between tenants. The decontrol provision is a way of maintaining market value on a suite. The idea is that suites change residents frequently enough that owners won’t see a significant lag in their profit potential.
Except that causes landlords to search for other solutions to longterm tenants paying significantly less under market value – especially significant in the private investor owned rental condos.
With the rapid increase in rent over the past decade, many have used the “landlord’s own use” provision in the Landlord Tenant Act. Serving the N12 form to a tenant, the landlord can have the tenants out in 60 days. They are supposed to occupy their units themselves, but end up just re-renting at a higher price. While this is bad faith and thelandlord’s own use provision was intended to allow an owner to be able to access their own property for personal use if needed, it was only intended for actual owner’s use in good faith.
The Fair Housing Plan shut that provision down by putting the onus on the owner to show that they were moving into the unit in good faith – and it also compensated the resident with one month of rent. Good faith includes producing proof like an invoice for a mover or setting up the utilities in the owner’s name if outgoing tenants suspect fraudulent use of the N12.
It’s a tighter law, but it may not be tight enough – and outgoing tenants would have to take time to search and follow the property, then file a claim. It will only help for as long as it takes for a creative landlord to find the next simple way to evict tenants to raise the rent, and some of the potential other options still create vulnerability to tenants. Will this new plan, providing security to tenants help affordability as the government had suggested? Chances are, supply and demand will always win.