Toronto Housing Market Monkey Business 2017

Will The Foreign Buyer Tax Hurt Toronto’s Market?

Soaring housing prices, homeless house hunters, priced out Millennials, Greedy Investors, Landlord Tyrants, Sneaky Realtors, and the Bumbling Government. Here we go! Under immense pressure from the constituents, the Ontario Government has decided to move forward with a 16 Point Anti Housing Bubble Plan.

This 16 Point Plan is anchored by 3 main initiatives:

There are several secondary initiatives, however the above three are the more impact-full ones that impact us all. Digging beneath the surface, we will review the Ontario Liberal Government’s exercise of futility.

The 15% Non Resident Speculator Tax (NRST)

Making it’s second appearance In Canada the recently coined term “Speculation Tax” is officially hitting the Ontario housing market April 22nd, 2017 (one day after being announced). Before delving into the nuances behind this, we should ask ourselves where we have seen this cheeky little tax before.

Vancouver circa 2016, we saw the very same tax on Foreign Investment properties. The initiative was to cool off Speculative Investors who are trying to cash in on aggressive monthly growth in the housing market. The result? A blip in the Vancouver housing market in the first couple months following inception of the tax, followed by steady appreciation.

Vancouver saw 18% appreciation for the year of 2016, despite the tax being implemented at the beginning of August.[1]

The theory behind the 15% Foreign Buyer Tax, is that enacting this tax will slow down Speculative Investors who are assumed to be driving the real estate market. According to the Canadian Mortgage and Housing Corporation, the reality is that out of over 100 purchasers of Toronto, only 3-4 of those Buyers were foreign Buyers.

“A report from Canada Mortgage and Housing Corp. published earlier this year found only 3.3 per cent of Toronto condos are owned by foreigners, while in Vancouver 3.5 per cent of condos are foreign-owned.”[2]

The most important consideration is that the Governments 16 Point Anti Housing Bubble Plan is tackling the problem with initiatives designed to stifle Housing Demand. This is a Supply Side issue. Anything outside of increasing housing starts does not address the issue at hand, which is excessive inventory shortage.

As you will see in the data above, the inventory has been on a steep decline since Jan 2015. Overall in Central Toronto Inventory has declined 44.1% since January 2015.

If we look even further back to the 2008 mini recession, and subsequent outcome, Central Toronto median prices dipped from $356,000 by 13.7% for the immediate 2 months after the recession hit, and then rebounded up 13.7% two months later. Furthermore the prices continued to increase moderately month over month thereafter.

Increase in Rent Control

The Government has expanded Rent Control to prevent landlords from increasing rental rates on tenants beyond the allowable limits which are indexed to inflation. The implicit reason for this is allow for affordable housing for all.

In theory, this is a great position to take. However, in practice a landlord can end a lease with 60 day written notice to the tenant once the full term of the lease has been executed, and simply re-rent the unit to a new tenant at a substantially higher rate.

I’m sure we can all agree that anything to promote affordable housing is a great initiative, however, it will do little to nothing to prevent the rapid increase in housing prices. The Government would again be better served to focus on Supply Side initiatives that would have a direct positive impact on the affordable housing initiative.

Stricter Controls on Assignment Sales

  • The province will work to understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as “paper flipping,” a practice that includes entering into a contractual agreement to buy a residential unit and assigning it to another person prior to closing.

This, in our opinion, is a positive effort on the Government’s behalf. The issue right now is not with the effort but rather the ambiguity – We’d like to wait to see what exactly the controls will be and how the government is going to tackle addressing capital gains tax on assignment sales.

As it stands currently, Capital Gains tax in Canada is one of the lowest you’ll pay worldwide – so we certainly have room to increase the allowance on Capital Gains that is subject to taxation, while leaving investors with room to profit. The outcome should be to not eliminate assignment sales, but rather make it a more profitable option to close on properties and rent them out to perspective tenants to increase the supply of affordable housing.

Our thoughts on other Monkey Business proposed in the 16 Point Housing Manifesto;

  • Modifications to the Residential Tenancies Act including eviction protocols, a better definition of “landlords own use”, and standard lease agreements.

We like this initiative as a rule of thumb, allowing the interaction between landlord and tenant to be an equitable and fair one.

  • The Government intends to create a program which incentivizes developers to build a more balanced mix of free-market housing, and affordable housing.

We LOVE this initiative and look forward to the Government spelling out the details behind the plan. Developers will always opt for the highest and best use principal where they can create the best return on investment. If a tax incentive could be created for high density developers to include reasonable proportion of affordable housing within their new housing starts, this would encourage the dream of home ownership, and is great for the Province.

  • A new legislation that would allow the city of Toronto to tax Investors who purchase an investment property and leave it empty for a certain amount of time with the intention of selling the unit. The goal here would be to not allow dwellings to be unoccupied and coerce the owner to either sell the unit, or rent it out.

Let’s address the Elephant in the room: The issue (and the solution) is SUPPLY side. We need an influx in new developments to match demand to cool the market.

Vacancy rate in Toronto are at an all time low, so the proposed vacant homes property tax would be redundant. Investors do not leave units vacant. This would represent lost income to an investor, which is sole reason the unit was purchased. This item on the agenda would appear to be unnecessary.

  • A 5 year $125-million initiative to rebate developers for focusing on developing affordable rental housing.

Fair affordable housing should exist. At the same time, we are in a free-market system, so developers will always decide from a R.O.I. Metric. Unless the Return On Investment becomes higher with the rebate, it is not likely developers will entertain this initiative.

  • More flexibility for municipalities when it comes to using property tax tools to encourage development.

(Baleen whales have a comb-like fringe, called a baleen, on the upper jaw, which is used to filter plankton, as well as small fish and crustaceans. blah, blah, blah-blah, blah)

  • The inception of a Housing Supply Task Force whose sole purpose would be identify market inefficiencies, that can be turned into opportunities for new housing developments.

This is a very pragmatic idea, and in theory could help find opportunities for new housing developments. This could bolster new supply, and may be a good starting point.

  • A concerted effort to identify and deal with practices of tax avoidance, and excessive speculative investment in housing.

The current state of the Toronto Housing Market seems to be driven by End-Users. Again, this is anecdotal evidence, but as practicing Realtors that work in the core of Toronto, we would be inclined to tell you that out of 100 Buyers that we work with, approximately 85 of them are End-Users. We would assert that Spec Investors are certainly not the culprits, driving market prices to all-time highs.

  • The Government is calling into question the rules by which Realtors are governed by within the transaction process, to ensure that consumers are being treated fairly.

Realtors have been demonized in this market, and like anything else, all it takes is few bad apples to get the monkeys roaring. With the competitive landscape of Real Estate in 2017, Government is in a roundabout way calling attention to how multiple offers are being handled ethically. A Document called the Form 801 has been adopted since Summer 2016 which requires parties involved in a Multiple Offer for a subject property to be identified in this document to be referenced in the event of suspected “Phantom Offers” used to inflated the amount of offers on a home, and help inflate the bids of the parties who are actual involved.

Beyond the above initiatives, there is a small subset of short term goals the Ontario Government would like to tackle.

Monkey business as usual.