In 1982 the provincial government reintroduced rent controls in Manitoba,
ostensibly to protect tenants from rapid increases in rent. While it is
arguable that there may have been some justification for their introduction
at that time, (we will leave it to historians to decide) the fact is that
any program designed to artificially control free market forces will eventually
produce harmful side effects. Rent controls are no exception.
Economists are virtually unanimous in their condemnation of rent control. Most of the harmful side effects have been well documented, such as inhibiting new construction, the deterioration of existing rental housing stock, the substantial administrative costs, and the fact that the costs of rent control fall disproportionately on the poor, the very group they are supposed to assist.
However there is another harmful side effect, and one which until recently has received very little attention locally, that is the impact rent controls have on the property taxes paid by single family homeowners.
Rent controls affect single family homeowners you ask?
Yes, indeed they do!!!
Prior to 1987 most property assessments were determined by replacement costs. However with the introduction of market value assessments, income generating properties are no longer determined by the replacement cost approach but rather by the income (capitalization of income) approach. Using this method of determining value, the net operating income of a property is multiplied by a capitalization rate to produce it's estimated market value, or the amount that a willing investor would pay for the property.
Because the income stream of apartment buildings are controlled by government fiat (the rent guideline has been set below the level of inflation every year since 1987 - with the exception of 1992 when the guideline was adjusted upwards to accommodate the impacts of the introduction of the G.S.T.) the net operating income for most apartment buildings has been declining. This in turn has resulted in decreased market values. For empirical proof one need look no further than the significant and wide range reductions in assessments awarded many of Winnipeg's apartment buildings during the past six years by the Board of Revision.
As property taxes are based upon assessed value, the decline in the value of apartment buildings has resulted in a major loss of property tax revenue to the City of Winnipeg. Between 1994 and 1996 the total assessed value of all apartment buildings fell by 138 million dollars representing an annual loss in property taxes of some 5 million dollars. Accordingly the City has been forced to make up for this revenue shortfall by either reducing expenditures (cutting services) or by increasing the taxes on single family homeowners. The fact is that by continually setting the annual guideline below the rate of inflation, the provincial government has created a situation whereby single family taxpayers are now subsidizing those living in rental accommodation.
It is time to recognize that rent controls are a failed policy.