Inflation is coming for your rent

Canadians, your rent is probably going up 5% next year and 4% the year after that

Rent control is a price-control regulation which caps the rate and frequency at which landlords can increase an existing tenant’s rent. In Canada rental regulations are provincial and four Canadian provinces have them: Ontario, Manitoba, British Columbia, and Prince Edward Island. Quebec has its own species of it too, in that a government body sets a rent increase guideline. This means that across the country, 3.7 million renter households (82% of all renters and 26% of all households) are partially shielded from changes in the market rate, provided they don’t change address.

Over time this creates a wide gulf between the average rent paid in these provinces and market rates. In Toronto, the market rate — the average asking rent in listings — for a 2-bedroom unit in October of last year was $2,600/month. However, the average rent paid for a 2-bedroom unit across the city was only $1,700. Looking at the ratios between market and average rents reveals there are millions of people paying below-market rents. Given where the market is, if they were allowed to, landlords in rent-controlled provinces could raise rents substantially on their existing tenants without running vacancy risk.

How Rent Control Works

The provinces which set rate increase guidelines base them on the lagged rate of inflation. For example, in Ontario, most properties built before 2018 are covered by rent control rules which limit the maximum rent increase each year to the rate of inflation the year before. Specifically, each year the government sets the maximum allowable rent increase as equal to the increase in average provincial CPI from June to May of the previous year compared with the year before that. In 2020 the government calculated the average level of the Ontario CPI from June 2018 to May 2019 (136.0) and determined the increase over the June 2017 to May 2018 average (133.1). That increase was 2.2% which became the maximum allowable rent increase across the province: When a tenant reached the anniversary of when they first signed their lease in 2020, their landlord probably raised the rent by 2.2%.

In 2021, the guideline was 0%. Because of Covid, the government froze rents. In 2022, the guideline is small, just 1.2%. This is because early in the pandemic inflation was low and this coincided with the calculation period. In 2023 however, the calculation will capture the rapid increase in prices we’ve seen recently. We already have price levels through February 2021 and prices will rise further in the next few months as the war in Ukraine and the Federal government’s carbon tax increase (effective April 1) show up in energy prices. The result is that unless the rules change, landlords will be able to raise rents in Ontario — and other rent-controlled provinces — by about 5% in 2023. For a typical 2-bedroom unit in Ontario, this means an extra $100/month.

In 2024, rents will continue to rise rapidly even if inflation slows. To see why, consider the chart below. Because prices are rising rapidly now, the level of the CPI in June 2022 will be much higher than the prior year’s average. So even if price increases are modest from that point (for instance 2%, as shown in the chart), the annual average — and therefore the 2024 guideline — will still be ~4% higher. If price increases are faster than 2% as is now widely believed, the rent increase guideline will be even higher.

Rents contribute to self-sustaining inflation

Because of the lag in how rent guidelines are set, they help to bake in inflation. If inflation is high this year, the rent guideline for next year will be higher. In a tight rental market where market rents are much higher than average rents, landlords will raise the rent as much as possible, and that will show up in the rental component of the CPI. Higher CPI means higher inflation which means a higher rent guideline the following year. This isn’t enough to cause an inflationary spiral on its own (rents are about 7% of CPI), but it contributes to the persistence of inflation and is one of the reasons why central banks are so fixated on rents as a barometer of underlying inflation.

Rising rents are also a key channel by which higher inflation disproportionately harms low-income people. Because low-income households have a lower savings rate and spend a larger share of their incomes on hard-to-substitute necessities, they will face a larger erosion in their standard of living than wealthier households during periods of high inflation.