We have reviewed the Press Release (https://news.ontario.ca/opo/en/2017/04/making-housing-more-affordable.html) and the Technical Backgrounder (https://news.ontario.ca/mof/en/2017/04/ontarios-fair-housing-plan.html) and present the following commentary on the impact of the new rules that take effect retroactive to April 21, 2017.
- 15% Non -Resident Speculation Tax
- This maybe more symbolic and psychological than impactful in the real market. Less than 6 % is the estimate from many of our Clients on the extent of Non-Resident buyers in today’s GTA Market. A similar tax in Vancouver immediately depressed sales volume by 40% and prices by 10% before stabilizing – Toronto is a different market. Over 95% of ethnic buyers in the GTA whether Asian, South Asian or other are Canadian Residents. The caveat may be that unknown amounts of financial support is coming from Non-Resident sources. We have no way of knowing the extent of this support…we suspect this support will continue unabated. It will be the Banking community who will have to monitor this transfer of wealth. We don’t believe this Spec tax law will have much of an immediate impact except in very specific ethnic neighbourhoods…Markham, Brampton for example where the psychology of the tax will have its greatest effect. The High Rise market is of course 80% driven by investors; mostly for long term rental and they are predominantly Canadian Resident investors. The fear of CRA audit may be enough to soften this investor driven market…a modest contraction of the rather frothy investment market is a good thing…but it may be short lived while demand continues unabated.
- The Tax won’t apply to Rental Apartment Buildings, Agricultural Land, or Commercial / Industrial Land…Money will flow to the area of least resistance and greatest acceptance. It is suggested that capital is moving from China and India for Financial Security rather than Capital Appreciation. Watch for a shift in investment to these sectors…an UNINTENDED CONSEQUENCE.
- As a tax applicable only in the GTA, if Non-Resident investment is considered such a critical driver of demand then watch for investment targeting tax exempt areas…Ottawa, London, Kingston…these are stable markets with balanced price appreciation…If Non-Resident investment is here in Canada for Financial Security and not necessarily for Appreciation it will flow to other Ontario Cities…another UNINTENDED CONSEQUENCE…Ottawa, a Tax Free Zone!
- Rent Control
- The move to place all “new” construction after 1991 under current rent control guidelines may severely impact new purpose built rentals…the annual fixed increase of to 2.5% may seriously impact rate of return in an era of rising interest rates. The lowering of the municipal apartment tax rate to match other residential rates is a terrific change…but seeing is believing!!! We think a lot of rethink will be going on in the purpose built field and given the modest annual increase allowed may defer or cancel many planned projects.
- The real impact here may be on the tens of thousands of condo units purchased by investors over the past decade. About 80% of units are being sold today to investors for long term rentals. This has been a primary source of “affordable housing”. The development industry has delivered thousands of units priced under $500k over the past decade…affordable product for the average family household income in the GTA of $104k. This product also served as the basis for rental stock when purpose built rentals did not exist.
- The UNINTENDED CONSEQUENCE is the investor market may be a tougher sales process for new condo builds if the investor decides that 2.5% is just not sufficient return amidst rising costs…hydro, maintenance fees, interest rates etc.
- A $1500 per month rental rate would be allowed an annual increase of only 2.5% or about $40…an amount likely insufficient to cover current and anticipated costs. Watch for current “rental” condo units being put on the market for sale.
- The UNINTENDED CONSEQUENCE reduces rental inventory yet should increase the supply of ownership “affordable housing”. If supply increases dramatically in a short period MLS prices will also adjust slowly downward…but for condo units only…it will not affect affordability in the overall market.
- Leveraging the Value of Provincial Lands
- Go for it…a supply side acknowledgement…but they should be looking to add surplus employment lands to this category of supply. A terrific opportunity missed here to broaden the base of housing supply immediately.
- Vacant Home Property Tax
- Not sure how this will be monitored…suggestion is through Hydro and water usage…low usage means a vacant home or unit…what about all those conservationists out there…or the ones who were cut off because they couldn’t afford their Hydro bills…they are coming to tax you!!! Not sure about this one. We don’t see vacant units as an issue in the GTA…so no impact except in software that can adjust your hydro and water usage when you are not in residence! This one is probably a bureaucratic nightmare.
- Municipalities to impose a Higher Tax on Vacant Land Approved for Housing
- Talk about Catch 22…the Municipal approval process is so onerous today that delays from land purchase to actual moving of dirt can take many, many years…so the municipality causes the problem and now they can tax you for the delay…bizarre…UNINTENDED CONSEQUENCE…tax will be passed onto the consumer…further increasing the price of new housing…not exactly a “Fair” consequence.
- Housing Supply Team and Advisory Group
- Finally a return to common sense. In the period from 1997 to 2004 our Firm together with the Province, the Federal government and 37 municipalities prepared an annual Residential Land Inventory Study that identified the actual supply by product type in the plan process, at draft and registered plan status…this should be reconstituted. They intend to streamline the development approval process…good news…but give them some teeth to move projects forward. This is a positive step forward in getting at the root cause of rapid price acceleration…supply, supply, supply! But what about investment in suburban infrastructure; sewer, water, roads to ease the pressure on supply?
- Assignment of Agreements
- Mostly evident in the High Rise market in our experience although it was creeping into the low rise market…this practice should not be permitted…unless there is extenuating circumstances…transfers might be allowed to a relative, or due to health or severe financial hardship…the assignment practice has become standard practice in the High Rise market and encourages speculation when you are dealing with a four year cycle from purchase to closing. Prohibiting this practice would go a long way to eliminating the “paper flippers”.
- Working with the Real Estate profession to make sure consumers are fairly represented
- Good idea…and how about adding that all those practicing in the trading of Real Estate in Ontario be a licensed professional. The new home industry currently can sell their product by “engaging a full time salaried employee” that doesn’t have to be licensed. This maybe a reasonable approach for the Custom Builder or a Builder of less than 10 houses a year in small town Ontario…but it should not be an acceptable practice for the tens of thousands of new homes sold by the Building Industry by unlicensed individuals with little or no knowledge of real estate law and no protection for the consumer.
- Updated Growth Plan
- Carefully written premise trying to balance the demand for housing next to the policy directives of the Greenbelt, Transit Policy and Climate Change…the key word missing from this statement is “balance”. The Growth Plan is more about restricting than managing growth. Supply management is critical to stabilizing prices…and until the Province recognizes that the underlying cause of price pressures is limited supply as measured against continuing strong demand…prices will keep escalating until supply and production is balanced…this means a new housing target of 60,000 to 70,000 units per year be produced in the GTA to mitigate price pressure. The issues are about Plan Process and Production Management in the GTA…these various new tax measures tackle the consequence and not the cause and will have little effect on the long term price pressures for housing in the GTA.
Any questions, comments or clarifications please send to AndrewB@pmabrethour.com