So rental increases in BC have been capped at 2% this year. To put it in simple terms, this means a $2,000 / month rent could increase to a maximum of $40 per month to $2,040 / month. Time to celebrate hey? A win for the underdog!? About time those Landlords got what they deserve?! Unfortunately, the answer is a resounding “NO!”
The problem with rental increase capping, is it actually has the opposite effect. It is the epitome for short term gain, long term pain. Just take a look at Vancouver Year-Over-Year. Last year (2021) saw a rental increase cap of 2.5%. So in theory, market rents should increase at a rate of 2.5% or lower. So how is it year over year the Vancouver market has increased from 18-25%?! This example here is enough to prove the caps do not work. But let’s break this down some more in case you want some numbers that are outside of national pandemic times etc.
Check out the chart below for Vancouver:
Rent Cap (%)
Now how about if I told you the above graph was for…. LONDON! Yes, one of the world's capital cities, a peak destination for millions, an area which holds roughly 4 times the population of Vancouver, with nowhere near the landmass. How is it then, that a city of this worldwide stature see’s minimal year over year rental increases. It clearly can’t be quantity demanded, as let’s be honest, four times the population and London is one of the most desired cities in the world, maybe it’s price? Is Vancouver too expensive? Nope, London is more expensive as a whole. So what is it?! Remember that 2% increase we were cheering not too long ago? Yep, that’s the culprit right there.
See when you impose a cap, you actually deter investors/landlords from, well, investing. This means they don’t put their hard earned money into the market, which means less rental properties out there. Less rental properties out there means more competition for tenants, which means higher pricing can be charged by landlords, as they know people need places to live. Rent is a very inelastic good. This means that someone looking to rent, can’t easily just decide it’s too expensive so they’ll just buy somewhere themselves. There really isn’t an alternative beyond moving to a different city. Not really much of an option. So like most inelastic goods, when the price goes up, the quantity demanded of that good does not change as people need it. The opposite of this is an elastic good, i.e. the cost of chicken goes up, so you decide to buy beef instead, it’s an easy swap. Now if more investors/landlords came in and more supply was available, that particular rental can become more elastic, as you can say no to that one and move on to another rental. Hard to do in a city that is usually around 1% vacancy rating for rentals! That’s the official economic breakdown of it all.
Another unfortunate circumstance to the above is the quality of rentals. It’s pretty well known there are A LOT of disgusting rentals out there in the city. Yet because there is so little quantity supplied, landlords don’t have the same incentive to repair/update their rentals, as they know they can just rent them out without doing so.
The cap is also a very short lived benefit. It’s all well and good while you’re staying in the same rental, however as soon as you decide to leave, you're dealing with the higher market rates those caps supposedly tried to protect you against! In Vancouver’s case, about 6.5% a year.
London has the rule that your rent can only be increased to reflect market rates. That is not anywhere near as much of an issue if market rates are increasing 0.5%, possibly none at all year over year. The key rule in economics applies here “There is no such thing as a free lunch” and unfortunately it's renters who get hit with the bill. But in an economy that has double digit inflation on a lot of goods, and sky high interest rates, a lot of landlords will not be motivated to put their dollars into the real estate market. Who would when your yearly costs have gone up $500+ a month, but you’re only allowed to charge $40 to tenants.
See you next week!