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Testing Hypotheses About Rent Control
(Executive Summary)

Commissioned by Canada Mortgage and Housing Corporation
written by Frank T. Denton, Christine H. Feaver, R. Andrew Muller, A. Leslie Robb, and Byron G. Spencer

October, 1993

The full 2cm-thick statistical report may be purchased from Canada Mortgage and Housing Corporation, Ottawa

This project was carried out under the terms of a research contract with Canada Mortgage and Housing Corporation. The project involved the formal statistical testing of a range of hypotheses about the effects of rent controls on the rental housing market. The original statement of the hypotheses, as prepared by CMHC, was as follows:

  1. Rent
    Over the long run, rent regulations have no impact on rents. Rent regulations act to restrict rents from sharply increasing during periods of strong economic growth, but also inhibit sharp rent decreases in recessionary periods.

  2. Housing Starts
    There are no significant differences in the responsiveness of rental supply with respect to vacancy rates and rents, and with respect to changes in vacancy rates and rents.

  3. Vacany Rates
    Rent regulations are associated with lower vacancy rates, other things being equal.

  4. Property Values
    Rent regulations decrease the relative attractiveness of investment in rental housing. This is reflected in the fact that percentage changes in rental property values are smaller in regulated markets than in unregulated markets.

  5. Tenure Preferences
    Under rent regulations, the relative financial advantages of homeownership are lower. This increases the preference for renting.

  6. Conversions
    Rent regulations encourage conversions from rental to owner-occupied housing (particularly condominiums)

  7. Maintenance and Repairs
    Rent regulations discourage maintenance and repairs, and reduce the services, (e.g., cleaning,) landlords provide to tenants.

We undertook a careful search for data that would be suitable for testing these hypotheses. It is a common problem in applied statistical work that the data that are available are not ideally suited to the task at hand. The curent project was no exception. It was not possible to test any hypothesis about property values, and some recasting of the hypotheses relating to tenure preferences and conversions was required. In addition, it was necessary to substitute apartment unit starts and vacancy rates for rental unit starts and vacancy rates. Aside from those necessary changes, appropriate tests of the hypotheses proposed by CMHC were designed and executed, and the results interpreted. In spite of the limitations of the data we believe that the results of the estimation provide informative tests of most of the hypotheses.

The tests were of two types. The first was based on standard "parametric" procedures, as they are termed in the statistical and econometric literature. The second type was "nonparametric." The two types of tests led essentially to the same conclusions, thus making it possible to view those conclusions with a greater degree of confidence than would otherwise have been the case.

The data used in the study came from a variety of sources. They included metropolitan area time series for use in some of the tests and provincial time series for use in others. An important element of the study was a careful survey of the rent control regulations that have been in effect in the ten provinces over the period 1971-93. Based on that survey, a taxonomy of control regulations was developed. The taxonomy was used to classify each province/year to one of three categories: (A) no rent regulation; (B) rent control with review (mandatory); and (C) rent arbitration (voluntary). (The taxonomy provided also some additional detail, as described in the main report.) The subsequent analysis then sought to determine the effects of regulations of types B and C on the rate of increase of rents, the responsiveness of starts of apartment units to vacancy rates and rents, the level of vacancy rates in the rental market, the proportion of households that rent, the rates of conversion of single housing units into multiple units, and the proportion of rental units in need of major repairs.

The major conclusion of the study was that there appears to be no convincing evidence that rent regulations, as they existed in various provinces in Canada from the early 1970s through to the early 1990s, had significant effects on rents, on the construction of rental units, or on vacancy rates. A more detailed statement of the more important findings follows:

  1. The data that we have used and the tests that we have carried out provide no evidence to suggest that rent controls reduce the rate of increase of rents in the long run.

  2. There is some evidence to suggest that controls cause rents to rise more rapidly than they would otherwise in periods when the rental market is "soft," especially when the control regime is type B. If the long-run rate of increase is unaffected, that would imply that under controls rent increases must be less rapid in periods of market "tightness." However, there is no significant evidence that that is the case. We are inclined therefore to discount the evidence of "soft" period effects, and emphasize the finding of no long-run effects. Given the practical difficulties of defining market "softeness" and "tightness" with precision, the latter seems to us the more credible finding.

  3. There is no convincing evidence that the responsiveness of rental unit starts to vacancy rates or rents is reduced by the imposition of controls.

  4. The formal statistical evidence suggests that type B controls tend to be associated with lower vacancy rates. However, there is no evidence of that for type C controls, of when types B and C are combined into a single rent control regime. Given the practical statistical difficulties in trying to distinguish between the effects of a particular type of regime, one the one hand, and the characteristics of the provinces in which the regime is in force, on the other, we are inclined to emphasize the lack of effects when the distinction between B and C is ignored, and to conclude that overall there is no strong evidence that controls are accompanied by reduced vacancy rates.

  5. There is some evidence that controls are associated with a higher proportion of renter households. However, that should not be taken simply as evidence that household preferences for renting are increased, although that may be the case; the proportion of renters depends also on the availability of rental units. The evidence is present for type B controls and for types B and C combined, but not for type C alone. In light of our scepticism about the reliability of distinctions between the two types we would again attach greater emphasis to the evidence obtained whe the two are combined.

  6. There is no evidence that rent controls affect the rate of conversion of single housing units into multiple units.

  7. There is no evidence that rent controls increase the proportion of occupied rental units that are in need of major repairs.

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