his issue brings together the RENTT (Rental Executives National Think Tank) panel in a slightly different format than usual. The panelists discuss issues that will affect the rental housing industry nationally, such as Octoberâ€™s federal election, the potential for a recession, and the effect of the economy on rental demand. We then speak to panelists individually about issues specific to their province. 14 | March 2019
A look ahead at 2019
Nicolas Denux, Partner, Groupe Denux
Greg Romundt, President, Centurion Asset Management Inc.
Avrom Charach, Vice President, Kay Four Properties
RHB: Welcome to RHB Magazine’s RENTT panel. We appreciate the time and effort involved in participating in today’s discussion and sharing your experience. Our readers will benefit from your input and experience. Today we’d like to talk about what 2019 looks like for Canada and the rental housing industry. What is the expected outcome of the October federal election? How will it affect
federal housing policy and federal income redistribution measures? Nicolas Denux: I hesitate to pick a winning side, but while current events may have weakened the Liberals, I suspect they will keep their majority, although likely a smaller one. My expectations are that nothing much will change if Liberals keep their majority. I expect current programs from CMHC for new rental construction to continue but worry that
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federal income redistributions are funded by deficit spending, so future taxpayers will be stuck with the bill for today’s federal income redistribution measures. Greg Romundt: I believe we will see Trudeau swept from power with a PC majority. I expect to see measures to reverse some of the mortgage restrictions that have slowed the real estate market either by the Liberals or the Conservatives as an elections platform. This would be bad policy but good/typical politics. Avrom Charach: Until a few weeks ago, I would have suggested a Liberal majority. At this time, I wonder if the October election will result in a minority government. It was positive to see the additional housing dollars allocated in the most recent budget to the Rental Construction Financing Initiative, which supports new rental supply at close to new construction rents. If we do not see a majority government, I doubt we will see any more positive changes. In fact, a minority government may be pressured by the third party to redirect money from the Rental Construction Financing Initiative to the National Housing Co-investment Fund, which is only useful to the social housing sector. I am not sure that anything more than what we saw in the budget will be undertaken to increase the private rental housing supply regardless of the outcome of this election. RHB: Will Canada see a recession, a slowdown in growth or neither? Nicolas Denux: The crystal ball question! If I knew, I wouldn’t be here! I expect a slowdown in growth because there is a mix of opposing factors: headwinds, from trade to oil export being limited but there are tailwinds if interest rates stay low or go back down, and the current employment situation is positive overall. The economy is probably running at close to full capacity in the apartment markets we are present in, those being Montreal and Vancouver Island, so growth can pretty much only slow down from here. An actual
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recession seems less likely. Greg Romundt: A recession will happen. We’ve had basically 11 years of uninterrupted growth and no expansion lasts forever. A recession is inevitable and a requirement in a market economy to restore balance for future growth when it comes. Avrom Charach: I tend to agree with the many experts who foresee a slowdown in growth from 2018 levels. The uncertainty from an election coupled with the protectionist policies we see outside of Canada gives rise for that concern. RHB: What impact will the economy have on rental demand? On interest rates? Avrom Charach: Interest rates will likely stagnate, which means that rental demand will not increase. The prolonged low interest rates have only hurt our industry and I do not believe that will change significantly in the next year. Rental demand will not increase and the continued construction of new condominiums and rental housing in Manitoba will likely mean slightly higher vacancy rates in 2019. Nicolas Denux: I do not expect a dramatic change in 2019. A slowdown in the economy can help reduce the risk of interest rate increases, which helps on the financing side but also softens demand in the rental market. Beyond 2019, I am less worried by the economy than by a potential oversupply of rental in some markets. Multi-family construction is on a tear on Vancouver Island and, although supply has not yet met demand, I would not be surprised if it does in a few years considering the pace of construction. The same applies in Montreal. Greg Romundt: Rental demand is already robust. I believe an economic slowdown, if it’s not a severe one, will increase rental demand further. People need a place to live, and would likely not have the confidence to
buy in a slowdown, and thus would likely have a higher propensity to rent. I expect that given the large deficits that the government is already running in an expansion, the deficit would explode higher in a recession such that there would be little appetite to increase the deficit further with further fiscal spending. As a result, the Bank of Canada will have little choice but to cut interest rates dramatically to cushion the slowdown.
British Columbia RHB: Will the provincial minority government survive in BC? If not, what government will succeed them? Nicolas Denux: I think so. The current minority government has a thin majority with the Green alliance but are doing everything they can to keep their alliance together, even if it leads to questionable decisions. RHB: Will the TransMountain pipeline go ahead? How will this affect the economy? Nicolas Denux: I think so, as it is the most logical and practical solution. The difficulty it will take to get it approved has shown, as many have said, that big resource projects are very difficult to get approved in Canada. Big investments dollars will flow elsewhere in the future, mainly to the U.S. Once construction goes ahead, the TransMountain pipeline will be a plus for BC and Alberta’s economy, with the spinoff spending and employment in BC being a positive for BC.
Manitoba RHB: Do you see Premier Pallister calling a provincial election in 2019? Or in 2020 before the programmed date of October 6, 2020? Avrom Charach: I do not foresee an election call this year, mostly because the federal election is imminent. Certainly the announcement of a drop in the PST has led to much speculation that a call might happen in the spring of 2020, after winter and after people have seen a few pennies
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more in their pocket for a few months. I am not sure that will happen but currently the opposition parties are not gaining ground in the polls. The ruling government would have to balance off the strength of the opposition with the negative opinion that may come from an early call. I am not a betting man but I would suggest that the election will happen on October 6, 2020. RHB: What impact do you think the Manitoba government is likely to have on rental providers in Manitoba this coming year? Avrom Charach: Very little. The current government has been so focused on debt reduction that they have barely touched our industry since taking office. I believe that the drop in GST will help us by reducing our operating costs by a fraction of a per cent. It seems unlikely that with an election coming in the next 18 months that any housing policy which could anger business or renters would be introduced before the next election.
Ontario RHB: What reforms will the Ford government enact to expedite housing developments in Ontario? How will these reforms affect the housing and rental markets? Greg Romundt: I’m not convinced that any changes that would be brought would be effective in significantly ramping up rental development. The is that it is difficult for new rental to compete against condos from a viability point of view unless the government is prepared to do things like property tax and development charges waivers, which requires municipal buy-ins. Given how financially stretched both provincial and municipal levels of government are, I doubt that even if they would be able to part with the revenues. While I have the view that Ford has the intent to “do something”, I’m not convinced that anything he would do would be effective.
Saskatchewan The Saskatchewan economy depends on the world demand for its resources and its agricultural output. The dispute with China is not helping, when that interferes with the export of canola. CIBC Economics forecasts real GDP growth in Saskatchewan of 1.8 per cent in 2019 and 1.3 per cent in 2020. That is better than a recession, but not strong growth. As in recent years, vacancy rates above 6 per cent, and modest rent growth seem likely.
Alberta For the Alberta economy, the key factors are the world price of oil, and the twinning of the TransMountain pipeline to increase the capacity to export Alberta’s oil resources. A stronger economy would make for more employment and that would make for higher rental demand and lower rental vacancies. Regardless of the result of the upcoming Alberta provincial election, the Alberta government will obviously continue to press for TransMountain to go ahead. The future position of the federal government is less clear. Clearly, with its strong electoral support in Alberta, the Conservatives would drive the pipeline forward. The current Liberal government also appears to be committed to the completion of the pipeline. A future Liberal majority government would also almost certainly move forward with the pipeline. Where the situation becomes unclear is if the October federal election results in a Liberal minority government. As in all minority government situations, the party with the balance of power can demand certain action. It is unclear what position the federal NDP would take.
New Brunswick New Brunswick has a minority government now, with the Green Party holding the balance of power. Recently, the Green Party leader
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introduced Bill 10, to seek to amend NB’s Residential Tenancies Act. Currently, New Brunswick has some of the lowest rents and highest vacancy rates in Canada. Those conditions rarely lead to the introduction of rent control. However, Bill 10 proposes to bring in a rent increase limit of the lesser of inflation and 3%. This is a head scratcher. CFAA President, John Dickie, notes rent control would be counter-productive. “Now, in New Brunswick, market rents only rise more than inflation if a landlord improves a property, or if the demand for rental units increases in a particular area. The proposal will reduce the incentive to improve properties, which is the last thing New Brunswick needs. As well, the proposal will interfere with market adjustments to changes in the location of rental demand. As is always the case, rent control will tend to cause a scarcity problem, even when there is no problem before the measure is introduced!” If enacted, Bill 10 would also require landlords to provide prospective tenants with a heating cost disclosure form. The New Brunswick Apartment Owners Association (NBAOA) and other landlords object to that because the heating cost and power consumption are mostly controlled by the tenant, not the landlord. Bill 10 would also require landlords to accept rental payments in cash. NBAOA objects to that because many landlords have implemented a policy of not accepting cash for safety and control reasons for themselves and their staff. Bill 10 may well be merely a push for public support on non-environmental issues, rather than an issue on which the Greens will demand government action, but it is unhelpful to the rental industry for the issues to be pushed forward.
RHB, RHB Magazine, RENTT, A look ahead, 2019