Emery is wrong on rent control: Bigger landlords are controlling the housing market and tenants need protections

November’s announcement by the Progressive Conservative Higgs government of a new bill to address the province’s rental situation says a lot about how bad New Brunswick’s rental laws are.

Imagine a government bragging that it was going to prevent landlords from raising rents within the first year of a lease.

Missing is any kind of rent control, like the measure brought in by the Nova Scotia government in October.

If you try talking to public officials about this, as I have in recent months, one of the lines you often butt up against runs something like this: “I am not sure if rent control is the right mechanism,” or “rent control could make the situation worse.”

Rent control—widely used in other provinces to regulate the rental sector—is decidedly out of favour with New Brunswick’s gentry classes. There has not been much of a debate about rent control anywhere similar to the one in Nova Scotia.

It was, therefore, a bit of a surprise to see that University of New Brunswick’s Vaughan Research Chair in Regional Economics Herb Emery publish a piece in the Telegraph-Journal on Nov. 2 referencing the Nova Scotia debate in relation to our own proposals to impose rent controls in New Brunswick.

While Emery doesn’t mention any of the efforts of the New Brunswick Coalition for Tenants Rights directly (for instance, my commentary on rental reforms and the New Brunswick Tenant Advocate Jael Duarte’s response to New Brunswick’s recent rental reforms), citing instead an article published in Huddle, his article summarizes fairly well the opinion of New Brunswick’s landed and propertied establishment.

Emery’s argument is that rent control doesn’t work, if housing markets are perfectly competitive. He goes on to argue that if markets are competitive (and he seems to assume they are), then advocates of rent control are proposing policies that would actually distort housing supply and make it even more scarce and more expensive—obviously bad for tenants.

But is the housing market competitive?

In Fredericton, the Canada Mortgage and Housing Corporation (CMHC) counts approximately 8,500 apartments on the primary rental market. Of those, about 1 in 6 (1,529) are owned by one company: Killam REIT, a real estate investment trust based in Halifax (see here, p. 31).

An additional 2,000 units are owned by Colpitts, the city’s largest corporate landlord, a family-run company based in Fredericton. That means two firms own 3,500 units of the rental market, or over 40 per cent of it. There are other large rental companies in the city, some locally owned like Cedar Valley Apartments, others large corporate landlords like CAPREIT. It is safe to say that in Fredericton, the market is “closely held,” meaning few owners own a lot of it.

For most institutional and neo-Keynesian economists (the opponents of the dominant neoclassical economics), that type of market concentration is not competitive.

But neoclassical economists—which dominate economics textbooks and business schools—assume      that they are, even if their arguments often lack empirical rigour. They are the arguments that are most favourable to private property owners, who dislike interventions designed to serve the public good—interventions like rent control.

Rent control, Emery tells us, “dampens the market signal to increase the housing supply.” The market, in Emery’s view, is the tenant’s best protection, and any limitations to supply (including tax policy, regulations or zoning) are anti-tenant. As he points out, “The economist’s point is that we need to let the price signal do its job to induce the supply needed for the long-run solution.”

Simple right? Let the market build more housing by deregulating them and cutting their taxes.

The problem in New Brunswick right now is not a lack of new apartment buildings. There is a lot of building going on, so much so, it is entirely possible that the labour force and the construction industry lacks resources to be able to keep up.

But this new demand is not for affordable apartments. Rents in new buildings often start close to or above $2,000 a month. That is affordable for some people (according to Canada Mortgage and Housing Corporation methodologies for calculating affordability, that rent would be affordable for households with greater than $6,600 a month of income). But alas, in a deeply unequal province like our own, where fully 45 per cent of single mothers (fully 13,230 households) and one in six children live in poverty, that is too rich for most.

In fact, the private market is building housing that is affordable for only the top 15 per cent of the province’s income earners, or about 110,000 people according to the 2016 Census earning above $70,000 per year.

Close to no housing is being built for anyone else, and when it is built, it is built by cooperatives, non-profits, and often with government subsidies, builders derided by Emery in the Telegraph-Journal.

Neoclassical economists using Emery’s logic often say that building for higher income tenants now will lower the cost for everyone because older buildings will have to open units to lower-income renters as higher-income ones move on to newbuilds.

As Moncton Mayor Dawn Arnold pointed out last winter, the housing shortage “is going to balance itself out. I believe the market will adapt.” It is like trickle down economics, but with houses.

These fundamentalist beliefs inform public policy all over the province.

All over the province they fail tenants. Oligopolistic builders have no interest in building so much supply that it deflates their assets. They are going to build houses at $2,000 rents because there is a healthy market for it.

And it is not just the supply of housing units that is oligopolistic, or non-competitive. It is the whole supply-chain around the rental housing sector: home materials, construction companies, insurance companies, evaluators—almost all current “markets” are dominated by a few large players who increase the entry costs of their competitors.

These large players are also gaming the market, purposely using their market power to increase the price of apartment buildings, diminish the vacancy rates, and push up rents.

By increasing rents, corporate landlords can show higher “net operating income” (NOI) from properties, which is a measure commonly used in the industry to assess the net asset value of multi-family residential properties. By increasing the NOI, companies like Price Capital, a real estate investment firm, can pursue “forced appreciation” of properties, pushing asset values up and essentially printing money from apartments. They can then take that money and buy yet more buildings.

This has been made possible due to the high demand in the finance industry for real estate-related incomes to replace government bonds. Low interest rates throughout the 2010s spawned new uses for mortgage debt and rental incomes that used to be illegal in Canada between the 1930s and 1985.

New Brunswick is a territory where there is still lots of room for more forced appreciation. But the higher rents will also no doubt lead to a growing housing crisis that municipalities across the region will have to manage.

Right now, there is no faster way to make money in Canada than to buy an apartment building in New Brunswick.

We have called for rent control to prevent corporate investors from buying up New Brunswick’s affordable stock so they can print money with it. The Higgs government still doesn’t admit a problem. And reading the Vaughan Chair at UNB in the Telegraph-Journal  we can see why: he has surrounded himself with people who give advice based on an academic fantasy of how real economies actually work in the real world.

There are two solutions to the housing crisis in New Brunswick, one short, and one long. The short term fix is to protect the existing affordable housing stock by making it harder for speculative, corporate landlords to come in and buy it up. The fastest way to do that is to put some form of rent control tied to the units themselves, and not merely the tenants (as in Nova Scotia) because real estate companies make money on tenant turnover. One of the things that attracts corporate speculators to New Brunswick is that tenants have no tenure rights, making the turnover easy.

The second solution is longer term, and requires more investment in essential infrastructure like affordable housing. The obsession in Canada with balancing budgets since the 1990s has produced huge service and infrastructure deficits for which we are now paying. The homelessness crisis, for instance, in addition to being a human tragedy, costs the public more to manage than does investing in affordable housing.

Economists, like sociologists, have an important role to play at the current juncture, identifying policy problems and proposing workable solutions. With a platform as important as the Vaughan Chair, the economics department at UNB owes the public better than platitudes about supply and demand.

Matthew Hayes is a spokesperson for the New Brunswick Coalition for Tenants Rights and the Canada Research Chair in Global and Transnational Studies at St. Thomas University.