Friday, January 15, 2010

Seafield Update

This is a quick follow-up post to the post I made on the RTO decision (PDF) last year to raise rents at an apartment complex in the West End. A relatively exhaustive series of blog posts is covering the decision. Start here.

In my analysis I was intrigued the RTO decision interpreted the law that it needn't use any evidence forwarded by tenants in making its decision to markedly increase rents above the annual cap. It turns out, according to the Supreme Court of BC, you can't do that. The law was meant as a way of ensuring that extreme cases of low rents could be fairly addressed. Unfortunately, the law has been difficult to interpret and follow. This case highlighted how much variance there is in rents, even between comparable units. Variance in rents is due to dwelling location, amenities, and quality, and quality of tenant; the law does not address the latter factor in any way.

What will this decision mean? Well, for rents that are significantly below market, there is some argument for ensuring the law is kept in some form. The alternative is a situation where the rental cap is removed and there is a continual push on the Legislature to do just that. On a street level it likely won't have much impact at all. This part of the law that allows above-cap rent increases is rarely used because of the significant amount of research and time required to make a valid case.

Removing the rental cap has its own problems, most notably that landlords can use it as a way of eviction. There are provisions for preventing this but are not universally enforced. The other method BC landlords often resort to is moving in to the property for some months -- the law says it must be at least 6 months -- but it is the prerogative of the evicted tenant to confirm this and complain to the RTO. We heard about this situation for a recent Olympic rental.

The biggest myth around rental caps is that it keeps rents below their fair market value. This is patently untrue according to all the data I have seen. The data we do have on rents come from CMHC (see UBC Sauder School of Business graph (PDF)). Average rent is increasing in line with average income, about 1.8% per year, which is less than the rental cap of around 3-4%.

No matter what the laws and protections awarded to both tenants and landlords, we do know that the vast majority of tenants are not subjected to looming eviction or massive rental increases (or even rental increases at the cap for that matter...). When a business relationship -- which the tenant-landlord relationship is in its essence -- goes sour and trust is lost, the boundaries of law, fairness, and morality are tested on both sides. I know of both tenants and landlords who seem to be perpetually in some sort of conflict with the other. I wonder if it's worth the time and cost.

9 comments:

JimTan said...

“The biggest myth around rental caps is that it keeps rents below their fair market value. This is patently untrue according to all the data I have seen. The data we do have on rents come from CMHC (see UBC Sauder School of Business graph (PDF)). Average rent is increasing in line with average income, about 1.8% per year, which is less than the rental cap of around 3-4%.”

Why then did the Seafield Apartments fall so far below market rent? Perhaps the Rent Office's decision is starting to have an effect.


https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?lang=en&cat=79&itm=53&sid=90d28c08062f43569ac1a670c92b3ae7&fr=1263372137958

“Same sample average apartment rents increased an estimated 2.9 per cent this year, compared to a 4.3 per cent increase in 2008. Although this is a smaller increase, it is above the rate of inflation for Vancouver, which has been sitting just above one percent through 2009.” Page 3

patriotz said...

Why then did the Seafield Apartments fall so far below market rent?

Obviously it had very low turnover. I think the average turnover for a rental unit in Vancouver is only a few years (I think the average for all households including owners is 7 years), and since landlords can ask for any rent they want from a new tenant, buildings with average turnover are not going to deviate much from the market rent in aggregate, by definition.

jesse said...

Of all the renters I have discussed rents with -- a few scores -- I can think none who have had their rents continually raised at the cap in the past 5 years.

The vacancy rate in Vancouver city is low but check out the vacancy rates in the suburbs. CMHC report Fall 2009 (PDF). We cannot discount that rents are rising faster than inflation however incomes are unlikely to follow suit. That's not sustainable for very long.

Arwen said...

The single reason that Seafield "fell below" was that the West End character buildings gentrified at a rate higher than inflation+2%. I lived in the West End for many years, and Seafield - like others - was "character": they were always cheap and you didn't complain about the heat sputtering. (See also Holly and Diana Courts, the Kenilworth, and 1209 Jervis.)

Anyway, that was tested as all the Yaletown and Coal Harbour development happened. At about the time Shangri-La was a hole in the ground, all the character buildings started actually increasing every year, and their new suites grew quite a bit in comparison to their old suites.

Rents are kept in check by incomes. Any area can gentrify at inflation + 2% if they just hang in and increase to the maximum allowable every year: the rent control system mainly slows the rate of gentrification in a given area, it doesn't prevent it from happening.

But there are still character building landlords renting at the traditional prices. Harder to find, these days, but there was a new 2 bedroom lease started recently in a building I well know at $1100 for as many square feet all in; coin laundry, galley kitchen, old build. This is below what the Seafielders are already paying.

So the Seafielders were caught by extraordinary times and their building being sold commercially. And they've found comparables in the area - that was the point of Justice Loo's decision. That info wasn't evaluated.

(BTW: A landlord of the character building holding steady mentions that the higher prices aren't worth the vacancy loss or the diminished pool of potential applicants, and he doesn't believe it's sustainable. Anecdata: but why he's making his business decision.)

david said...

"We cannot discount that rents are rising faster than inflation however incomes are unlikely to follow suit. That's not sustainable for very long."

While I do agree that rents arent going to rise much in the near future, I think there are ways around this statement. I think the rent of the average person cant increase faster than inflation, but not the rent of the average place.

Basically if a 1 bedroom rent increase faster than the average person can afford, then the person could take on a roommate. I have a friend who lives in a 1 bedroom with a roommate. The living room has a door so it basically becomes a 2 bedroom with no living room. This makes it cheaper per person than before.

I also have 2 friends who live in a 3 bedroom place. Right now then can afford it and use the 3rd bedroom as a computer room, but if they need more cash, they would probably take on another roommate.

My point is that the average place could increase above inflation for quite some time, it just needs to hold more people.

jesse said...

"the average place could increase above inflation for quite some time"

That implies that a city's desirability increases. In your argument incomes are increasing slower than rent increases therefore the average resident is willing to either pay more of his/her income for the same utility or reduce his/her standard of living. It also assumes that the dwelling supply is lagging population growth. That vacancy rates are increasing indicates we do not yet have a supply shortage.

The other approach would be to sum the number residents and divide by the number of rooms to get a sense of dwelling utilization. We do know the number of residents per dwelling has been slowly decreasing since the mid-'90s, in part due to a greater share of residents living in attached dwellings. For there to be increased utilization in a magnitude to affect prices I would have expected the trend to be flatter than it is.

I will also surmise that there would need to be a significant shift in behaviour to overcome the 1 person or couple per bedroom threshold. Other cultures have no such barrier but in Canada's history the mindset of sharing rooms with non-spouses (university/college accommodation aside) tends not to extend to the next generation.

It may be true that Vancouver's desirability is increasing with time. Rising rents, through improved desirability, changes in cultural norms, or income gains, is the last best bastion of hope for rational bulls.

david said...

I wasnt trying to imply rents will rise faster than incomes in Vancouver any time soon. I am actually hoping to get decreased rent when my lease is up in 7 months. I was just trying to say that it is possible for rents to increase faster than inflation.

I have a friend in New York who lives in what used to be a Studio/loft (a big one). They threw in some walls and presto, it is a 3 bedroom now, and she pays almost 1000 bucks a month for one of those bedrooms.

Vancouver is not New York, I am just trying to say it is possible to get more utility out of a space. At the same time things like laneway housing and basment suites add rentals to the pool which will keep rents down.

I do think Vancouver is becoming more desirable, it is just a question if we have enough jobs for the people who want to live here.

Mewdell said...

Rents at the Seafield haven't fallen below "market rent" as this discussion suggests. If they were paying significantly less than other renters in geographically similar buildings in the neighbourhood, the decision wouldn't have been overturned.

The Landlord's impression on what is "market rent" is totally out of whack.

You can see some of the research done by the tenants here. They completed a scientific survey of the West End and compared it to both data from the Canada Housing and Mortgage Corporation and what the landlords claimed other unrenovated heritage apartments are charging for rent:

http://seafieldapartments.com/seafielders-respond-to-landlords-demand-for-up-to-73-percent-rent-hike/982

jesse said...

"They completed a scientific survey of the West End"

Well that's the thing. The law, as interpreted, required little means of scientific surveys to make the case. Landlords need to find but one example of a comparable unit with higher rent and that's all that was needed to justify the increase. The surveys undertaken by residents, while correct and well-researched, were extraneous to the adjudicator's ultimate decision!