New Provincial Plan Will Have Some Unintended Consequences
After carefully reviewing Ontario’s proposed Fair Housing Plan, I have some thoughts on the new rules that have taken effect retroactive to April 21.
First, the 15 per cent non-resident speculation tax: this maybe more symbolic and psychological than impactful in the real market.
The estimate from many of our clients on the extent of nonresident buyers in today’s GTA market is less than 6 per cent. A similar tax in Vancouver immediately depressed sales volume by 40 per cent and prices by 10 per cent before stabilizing, but Toronto is a different market. Over 95 per cent of ethnic buyers in the GTA are Canadian residents. The caveat may be that unknown amounts of financial support are coming from non-resident sources. We have no way of knowing the extent of this support, although we suspect this support will continue unabated.
We don’t believe this tax will have much of an immediate impact except in very specific ethnic neighbourhoods where the psychology of the tax will have its greatest effect. The highrise market is 80 per cent driven by investors, mostly for long-term rentals, and they are predominantly Canadian resident investors.
The tax won’t apply to rental apartment buildings, agricultural land, or commercial/industrial land. Watch for a shift in investment to these sectors as 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 and Kingston 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.
Now, let’s talk about rent control. The move to place all construction after 1991 under rent control guidelines may severely impact new purpose-built rentals. The annual fixed increase of up to 2.5 per cent may seriously impact the 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 rethinking 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 per cent of units are being sold today to investors as long-term rental units. This has been a primary source of “affordable housing.” 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 sale for new condo builds if the investor decides that 2.5 per cent is just not a sufficient return amidst rising costs — utilities, maintenance fees, interest rates, etc.
A $1,500 per month rental rate would be allowed an annual increase of only 2.5 per cent, or about $40, an amount likely insufficient to cover current and anticipated costs. Watch for current “rental” condo units being put up for sale.
The unintended consequence reduces rental inventory yet should increase the supply of “affordable housing.” If supply increases dramatically in a short period, MLS prices will also adjust slowly downward for condo units only; it will not affect affordability in the overall market.
Now, on the vacant home property tax. I’m not sure how this will be monitored but it has been suggested that it could be done through hydro and water usage. Not sure about this one. We don’t see vacant units as an issue in the GTA, so no impact except for the software that can adjust your hydro and water usage when you are not in residence. This one is probably a bureaucratic nightmare.
Municipalities can now impose a higher tax on vacant land approved for housing. Talk about Catch 22. The municipal approval process is so onerous that delays from land purchase to actual moving of dirt can take many years. So, the municipality causes the problem and now they can tax you for the delay. Bizarre. The unintended consequence is that the tax will be passed on to the consumer, further increasing the price of new housing. Not exactly a “fair” consequence.
And now, let’s talk about the 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 Fair Housing Plan says. But 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 should be produced in the GTA to mitigate price pressure.
These various new tax measures tackle the consequence and not the cause of escalating house prices, the lack of supply and will have little effect on the long-term price pressures for housing in the GTA.
ANDREW BRETHOUR is the president of PMA Brethour Realty Group, a full-service professional realty company with offices in Canada and the United States. You can reach Andrew through PMABrethour.com.