In the light of economic theory, the causes and solutions linked to Quebec’s rental housing shortage are far from mysterious. The crisis is not the result of a sudden drop in household income or cuts in social housing budgets. Rather, it is caused by government measures that prevent the rental-housing market from operating normally. These obstacles deter the construction of new units that could meet the higher demand experienced in recent years.
The regulation of rental rates illustrates the harmful consequences of government intervention in the housing area. Although rent controls might appear beneficial to low-income households, they are nothing of the sort. In fact, experience shows that housing prices are generally higher and housing shortages more acute in cities where this type of measure is adopted.
With rents regulated, owners are less likely to obtain a return on investment as good as the one they could get by putting their money into other activities. They thus neglect the maintenance of their units and the construction of new housing. Because regulated units are less profitable, owners are tempted to convert them into condominiums or to find non-residential uses for them. In certain extreme cases, owners simply refuse to rent their apartments and might even seek to demolish their buildings, replacing them with non-residential buildings. We can quickly observe that when the number of rental housing units comes down, the market tightens, and a new “housing crisis” hits the headlines.
Rent controls can actually deter owners from lowering rents during periods when vacancy levels are high, because it becomes difficult for them to raise rents later when demand for rental units goes up and the market tightens.
Some pressure groups assert that the current crisis was caused by federal cuts to public housing programs. It is true that Ottawa stopped subsidizing the construction of low-rental housing in 1994. But Société d’habitation du Québec figures show that since then the Quebec government has increased its own programs so that spending on housing subsidies in our province actually went up by more than 21 percent between 1996 and 2000. In addition, the percentage of Quebec households benefiting from subsidized housing or from income supplements intended for housing went from 3% in 1981 to 8% in 1999. The number of such households rose from 121,000 in 1991 to more than 235,000 in 2000.
Since taxpayers are directly financing these assistance and support measures, it becomes difficult to argue that the housing shortage results from a government withdrawal from public housing.
It is also worth emphasizing that nowhere in the world has any city improved the housing conditions of low-income households through massive investment in public housing at the expense of the private market. It has been observed everywhere that low-rent public housing destroys the market for affordable private housing and is always far more expensive for society as a whole.
Why? Because public housing managers are not subject to market discipline and they have no magic recipes for building and managing residential units more cheaply than private managers are able to. They are also required to rent their units at well below cost price and to minimize deficits, which nearly always leads them to cut into the preventive measures that would reduce long-term maintenance costs.
Quebec is no exception. For example, 1997 SHQ figures show that public housing for a single person receiving income security cost the government $680 a month in an existing unit or $1,062 in a new unit. By way of comparison, adequate lodging for a single person cost $349 to $425 a month on the private market.
There are two options for resolving the housing crisis: 1) invest more in public housing and adopting new tax breaks, which would lead straight to a heavier financial burden for all Quebec taxpayers; 2) deregulate the housing sector and help certain tenants bear the cost of necessary short-term adjustments. Our elected officials, provincial and municipal, have so far chosen the first course. But the second option would be fairer and less costly. With this in mind, here are some recommendations:
- The provincial government must deregulate rents and let them move to levels that will encourage new housing starts. The recent experience of certain large U.S. cities that have adopted similar measures (Boston is a good example) shows us that this measure will not create a situation any worse than we are experiencing now.
- The government must promote lower construction costs for new rental housing units. Significant savings can be obtained by deregulating the construction industry and revising certain articles in the building code.
- Support for low-income individuals must distinguish between those who require temporary assistance and those needing permanent help. For the former group, direct monetary assistance to help obtain housing on the private market would be less costly and more efficient than new investments in subsidized housing.
Pierre Desrochers is Director of Research at the MEI and author of the Research Paper entitled Comment résoudre la crise du logement au Québec?