Conversions, condominiums and capital gains : changes in the structure of the Ontario rental housing market

The low level of housing starts intended for the rental market, and the very low vacancy rates reported in rental buildings in the late 1980s, led to the widespread view that there was a supply crisis in the Ontario rental market. This paper challenges that view. The total number of additions to rental supply in Ontario was far greater than the number of rental starts because of large numbers of conversions and because of investor-owned condominiums. Contrary to the usual view, many additions came from conversions of relatively new units; and simple tenure switches were also important. Evidence from classified advertisements strongly suggests that the conversion sector of the rental market in Toronto was far looser in 1989 than in 1971, despite the fact that the large-building vacancy rate in 1989 was 0.3, just one-tenth of the 1971 rate. This paper argues that the rise in the relative importance of conversions and investor-owned condominiums is no fluke, but rather is the consequence of the interaction of the income tax system and the high rates of inflation and capital gains of the 1970s and 1980s, as well as certain details of Ontario rent regulation. It argues that these forces have encouraged (a) conversions of units from ownership to rentalf (b) additions of rental units in small complexes (small buildings, or a small number of units owned by a single owner in a large building) rather than in large, and (c) non-corporate ownership