Housing will likely be a big issue in the fall federal election. With high housing prices in most major centres creating more difficulties for first-time homebuyers, there has been a shift to renting—but even here, shortages have developed.

Even smaller cities such as Charlottetown and Kitchener are seeing shortages of affordable rental units with the vacancy rate in Charlottetown bottoming out at 0.2 per cent.

So why is this happening? Why are many Canadian would-be renters facing very low vacancy rates?

Two reasons—rising demand and tight supply. And rent controls only exacerbate the situation.

Anyone who has taken (and understood) a basic economics course should be familiar with the basic flaws of rent control.

In the short-term, rent controls put the rent growth rate of “controlled” units below the market-determined growth rate, which leads to excess demand at the lower rents. Given a fixed supply of units in the short-term, this leads to a small shortage of units.

In the long run, however, there’s a supply-side response to lower rents that results in relatively fewer new units being built and a failure to maintain existing ones. Combined with population and income growth, which fuel rising demand, the shortage is exacerbated.

A paper published in the September 2019 issue of the American Economic Review by Rebecca Diamond, Tim McQuade and Franklin Qian, on the effects of rent control in San Francisco is the latest evidence yet of how rent controls in the long-term impact tenants, landlords and even economic inequality.

San Francisco, like many other North American cities in the 1970s, imposed rent control in 1979 on all standing buildings (with five or more units) though new construction was exempt along with smaller multi-family buildings (although this exemption was removed in 1994). The authors make use of this 1994 legal change to compare a subset of suddenly rent-controlled San Francisco buildings relative to another set that were left without the change.

As a result, tenants covered by rent control remained in their units longer than those without rent control, slowing mobility to other housing over time and reducing apartment supply. At the same time, affected landlords responded over time by shifting resources to other real estate by converting their buildings to condos exempt from rent controls.

In the decade after this change, the authors found that this rent control change reduced renter mobility by 20 per cent while affected landlords reduced their rental housing supply by 15 per cent. The conversion to higher-end condominium buildings in turn attracted more higher-income people to the San Francisco area, which in turn exacerbated income inequality given the reduced mobility of lower-income people in the rent-controlled units.

The lessons for Canada’s major cities are obvious. Rent control combined with rising demand will only make the rental situation worse. In cities such as Toronto and Vancouver, the move away from apartment construction and towards condos is already well underway (although the Ford government in Ontario last fall eliminated rent control for new rental units).

All that condo construction is a response to incentives that, over time, has eroded the supply growth of affordable rental units. The solution is to relax rent controls and provide tax incentives to developers to build new apartment units, to increase the supply of rental units and make renting more affordable.

The sooner this is done, the sooner the benefits will come to renters, landlords and cities interested in mitigating economic inequality.