The Irony of Rent Control - Evidence in Vancouver Rental Market

Vancouver Rental Market

Rent control is well known to anyone in Vancouver rental market. In May 2024, the BC Residential Tenancy Branch (RTB) dropped a bombshell by approving a 23.5% rent increase over two years for two landlords, on top of the standard annual increase. The RTB cited an exception clause in the rent control regulations, allowing landlords to exceed normal rent hikes if they can prove that unforeseen circumstances have dramatically increased their operational costs, making it unsustainable under regular rent caps.

At first glance, this decision might seem reasonable, even a way for the RTB to shake off its reputation for favoring tenants. But a closer look reveals a different story—one that highlights the irony of rent control. The landlords’ financial hardship was due to their decision to choose variable-rate mortgages when purchasing the property around 2021, a time of historically low-interest rates. When rates began to rise in 2022, their mortgage payments ballooned, pushing them into financial distress—a scenario all too common for property investors, homeowners, and even larger developers caught off guard by interest rate hikes.

The core of the issue here is that these financial difficulties stem from investment decisions gone wrong, not from the nature of the property itself—whether it's a rental, a personal home, or a land investment. Typically, the burden of poor investment choices falls on the investor. Just as developers who went bankrupt due to unexpected rate hikes couldn’t blame anyone but themselves, these landlords are in a similar position. Nobody bailed out those developers; they faced foreclosure. Yet, in this case, the landlords managed to shift the consequences of their bad investment decisions onto their tenants, thanks to the rent control system.

This case exposes a fundamental paradox of rent control: while intended to protect tenants, it often ends up harming them. The landlords successfully leveraged rent control rules to pass on the cost of their investment mistakes to their tenants. It’s a stark contrast to homeowners who lost their properties due to rate hikes or developers who went bankrupt. They had no tenants to bail them out.

Real Estate Investment - Q & A

Book Now

The irony deepens when you consider that rent control was in place when these landlords made their investment decisions. When they bought the property in 2021, rent control rules were already limiting rent increases, so they should have planned for zero rent growth as the worst-case scenario. If they failed to consider this, it indicates poor investment planning. And even if they chose variable rates, they had opportunities to lock in fixed rates but chose not to, hoping the rates would stay low. They missed those chances and are now trying to make tenants pay for their miscalculations.

Some might argue that without rent control, landlords could have raised rents to cover their losses. But that’s a flawed assumption. Rent increases are still governed by market supply and demand. Just look at Alberta, where there’s no rent control. Have rents skyrocketed? On the contrary, rent increases there have been smaller than in BC. Alberta’s population growth in cities like Calgary has outpaced Vancouver’s, yet their rent growth has been slower. Why? Because rent control suppresses the return on investment in rental properties, discouraging development and leading to a shortage in supply, which in turn drives up market rents.

Examples abound, like Argentina’s rent control laws, introduced in 2020 when inflation hit 211.4%. Initially, rent increases slowed, but within three years, rents surged past inflation rates, harming tenants more than helping them. By 2023, a free-market economist was elected president and immediately repealed rent controls, leading to a 20-30% drop in rents as the market responded with increased supply.

Yet, despite the evidence, many tenants still believe rent control keeps rents lower. And in BC, how many politicians have the conviction and courage to repeal such controls? For landlords, instead of individually applying for rent increases and risking rejection, they could unite and use this case as a precedent to push for the abolition of rent control during election season. With the right political backing, the chances of success might be higher than they think.

This case serves as a powerful reminder of the unintended consequences of rent control and the importance of thoughtful, well-considered policies in the rental market.