Most Ontario landlords will be able to increase rent by up to 2.5 percent next year. The cap does not apply to rental units first occupied after Nov. 15, 2018.—Canadian Press, June 30, 2023
What is a rent cap, and what is Ontario’s rent cap in 2024?
A rent cap is a government regulation that makes it illegal to increase rent by more than a specified amount. Five Canadian provinces and one territory have rent caps: British Columbia, Manitoba, Ontario, Quebec, Price Edward Island, and Yukon.
In Ontario, for renters who moved into their rental homes before November 15, 2018, rent increases in 2024 are capped at 2.5 percent.
When a rental unit becomes vacant, the rent can be raised to any level that the market will bear.
How does a rent cap influence the market outcome?
A rent cap sets the rent below its market equilibrium level, which creates a shortage of rental units—the quantity of housing demanded exceeds the quantity supplied.
Figure 1 illustrates a market for rental housing with a rent cap, like the Ontario market for housing rented before November 15, 2018.
The demand for rental housing is the curve labeled D and the supply of rental housing is the curve labeled S. With no rent cap in place, the equilibrium rent would be $2,200 per week and 1.2 million housing units would be rented. With a rent cap set at $2,000 per week, 1.0 million housing units are rented and a shortage of 0.4 million housing units occurs.
Is a rent cap efficient?
A rent cap is inefficient. The number of units rented is less than the equilibrium quantity, so a deadweight loss arises—the total surplus from the rental housing market shrinks.
Figure 2 illustrates the inefficiency of a rent cap.
The figure shows that renters are willing to pay $2,400 a month for the 1.0 millionth housing unit and landlords are willing to accept the capped rent of $2,000. The gap between these two rent levels is a deadweight loss on the 1.0th million housing unit. A deadweight loss also arises on all quantities below the equilibrium quantity of 1.2 million units. The grey triangle shows the deadweight loss.
How does Ontario’s rent cap influence the outcome in the uncapped part of the market?
Housing rented after November 15, 2018 is not subject to a rent cap. For these housing units, supply and demand determine the rent. But demand in the non-capped market is greater than it would be if no rents were capped. Frustrated renters spill over into the non-capped market, which increases the market rent.
Figure 3 illustrates a non-capped market for rental housing, like the Ontario market for housing rented after November 15, 2018.
The supply of rental housing is the curve labeled S. The demand for rental housing if there were no capped rents is the curve labeled D0 and the equilibrium rent would be $2,200 per month with 0.4 million housing units rented. But people who missed out on a rent agreement before November 15, 2018, enter the uncapped market and demand increases to D1. The increase in demand raises the rent $2,400 per month, and 0.6 million housing units are rented.
So, doesn’t the absence of a rent cap make the market outcome efficient?
It does not! The spillover from the rent cap to the uncapped part of the market creates more deadweight loss.
With no rent cap, 1.6 million homes would be rented for $2,200 a month. Of these homes, 1.2 million homes would be rented on agreements made before November 15, 2018, and 0.4 million would be rented on agreements made after that date.
With the cap on rent agreements made before November 15, 2018, 1.6 million homes are still rented, but only 1.0 million pay the capped rent and 0.6 million renters in the uncapped market pay $2,400 a month. There is an overproduction of uncapped housing that costs more to rent than it would in the absence of a rent cap.
Figure 4 illustrates this additional source of inefficiency. The grey triangle shows the deadweight loss arising from this overproduction.
Who benefits and who loses from Ontario’s rent cap?
The people who have been renting the same home since before November 15, 2018 benefit because they pay less than the market equilibrium rent.
The people who started renting a home after November 15, 2018 lose because they pay a higher rent than the market equilibrium they would pay if there were no rent cap.
For information on the Toronto housing market, see the City of Toronto Housing Data Book.
Now take a short quiz to ensure you understand what you just read.