Campus Co-op is a co-operative in financial straights. “Rejuvenation”, its former plan to build new properties to support its aging houses, was abandoned and not replaced. It is unclear at present how it will raise the necessary revenue to keep its houses from degrading to slum condition. Its financial position is currently cripped by losses from high summer vacancies (i.e. rents not collected on rooms not rented). These losses have increased from 80,000$ a year in the 90’s and early 2000’s to a current budgeted level of 250,000$. For CCRI residents this has meant coping with large increases to their rent, to the point when it can no longer be said that CCRI is a cheaper, better alternative to the private rental market. These rent increases have largely been justified as the duty of current members to support the co-op for the benefit of future generations. However, when the rent increases come to mean raising rents to above market-level, (and CCRI experiences the corresponding and foreseeable decline in revenue) the moral argument breaks down and it morally required to think rationally about the market conditions in order to set rental rates appropriately.
To an extent, the problem of decay of CCRI houses century homes is inevitable. Previous large scale investments into the houses were only made possible due to government programs which effectively subsidized large structural repairs (i.e. CMHC’s grant of 370,000$ to CCRI in 1985). However specific irrational actions by CCRI have greatly exaggerated its own problems over the last decade. To understand why, it must be grasped that CCRI sells two products: school year rental housing, and summer rental housing. During the school year CCRI membership is restricted to current students, and during the summer the housing is open to anyone willing to pay rent. These are two different products because they sell to different markets, they have different elasticities (in a highly elastic market, demand reacts quickly to changes in pricing – vice versa for inelastic), and they respond to different sets of competing goods. However, despite this obvious economic reality, CCRI has for time everlasting held to the dogma that its school year rental prices should be the same as its summer rental prices. The fact that CCRI reports projected earnings and actual income to the membership with a single yearly figure, rather than by term, serves to conceals the absurdity of this dogma from the membership.
When one looks at the month to month data more carefully, the problem is clear: for the last several years, the increased rent at CCRI has been reflected in actual increases in revenue during the periods from September to April. However, in the summer, the actual earnings have steadily declined despite (or rather, due to) these higher rents. This can easily be explained if one recognizes that summer and winter rents are different products, and thus have a different price at which their demand and supply curves intersect (i.e. the point of profit maximization). It is a simple truth for classical economics that if one sets the price too high, every further increase in price will reduce profit. Modifications in the price of a good will only increase profit if that modification moves it closer to the ideal price point.
It is not obvious that CCRI’s summer rental prices were significantly below market, even as far back as 2002. This hypothesis is supported by the data which shows demand (i.e. the number of summer renters) strongly dropping off as summer princes increased. Price is not the only issue here: at the same time, U of T had recently built a glut of new student housing, which greatly increased the supply of cleaner summer student housing downtown. CCRI did not respond to this increase in market supply for summer housing with either a significant effort to increase the cleanliness of its housing (i.e. by hiring housekeepers), or by lowering rents. To make matters worse, CCRI began charging non-students extra surcharges to live in CCRI during summer months only. This lack of attention paid to the elasticity of summer demand reached its high point in 2009 when summer vacancy losses topped 350,000$.
To understand CCRI’s logic in this irrational price setting it is necessary to recognize that when one sets the price of a good or service below the optimal price point, every increase in price will in fact produce an increase in revenue. So, if a co-operative is under the market price, (as a cooperative which claims to be affordable in downtown Toronto rightly should be!) any increase in price will correspond to an increase in revenue. In this situation, it may be considered appropriate to moralize a rent increase, i.e. “we’ve been irresponsible, so we need to raise rents”. However, when current rents are level with the market price, one should not straightforwardly assume that further increasing rents will result in increased revenue. Thus, when rents are level with the private market, it makes no sense to moralize about the need for higher rental costs – since higher costs will likely result in lower revenues anyway. In 2010, it is not obvious that CCRI’s winter rents are any longer below market, and it should assume that further drastic increases in rent may very well result in lower winter rental revenues.
The defeat at this year’s Spring General Membership meeting of the proposed 4% rent increase as of May 1st 2010, and its replacement with a 2% rent increase as of September 1st 2010 is the first step forward to thinking rationally about CCRI rental revenues. The second step is to separate winter from summer rent such that they must be raised separately, and that projected earnings and actual revenue for summer must be reported to members as a separate item in the CCRI budget.