“A Premier flat-lining in the polls has offered a basket of fixes to Ontario’s hot housing market that put politics ahead of good policy”
THE GLOBE AND MAIL, April 20, 2017
In response to two consecutive years of double digit growth in home prices, Kathleen Wynne on behalf of the provincial Government introduced 16 points to combat housing affordability. None of these initiatives aim to solve the underlying issue of lack of supply in the marketplace. We believe these measures will be but a speedbump to further price escalation and continuing strong absorption, particularly in pre-construction product versus standing inventory. At all levels of government, they continue to neglect the underlying problem, SUPPLY! We have itemized the main points below and included an estimate on the effect on both the GTA Real Estate Market and the Pre-construction High Rise market specifically. There could be further ranging effects from the introduction of these policies, all of which will unfold as the policies take effect.
1. Rent Control
What Ontario is doing:
- Expanding rent control to all private rental units (almost 100,000 condos included)
- Introduce legislation to standardize language in rental leases and make other changes to the Residential Tenancies Act
- Making sure multi-residential apartment buildings are charged property taxes at similar rates to other residential properties
- A $125-million program over five years “to further encourage the construction of new rental apartment buildings”
Impact on General Market: The policy was and will be received well by most consumers, but those in the Real Estate community know that rent control is only a Band-Aid solution that does not address the root cause of lack of affordability. What is needed is an increase in rental supply. This announcement will have the reverse effect on the supply of future rental product.
Impact on High-Rise Future Project(s): Favourable. We have heard from many developers planning projects of purpose-built rental that they are not seeing the same returns on their Pro-forma, and the majority of the planned supply will be diverted to condominium product as the profitability is much greater without the rent control factor. This will in turn continue to squeeze the rental market and further reduce the supply.
2. Foreign Buyers Tax & Speculation
What Ontario is doing:
- Introducing a 15% “Non-Resident Speculation Tax” in the Greater Golden Horseshoe region
- Partnering with the Canada Revenue Agency to strengthen reporting requirements and make sure taxes are paid on real-estate purchases and sales
- Ontario will rebate the tax if a foreign buyer becomes a Canadian Citizen or Permanent Resident of Canada within four years of the purchase
- If the buyer is a student who remains enrolled full time for at least two years after the purchase or if the foreign buyer has legally worked in Ontario for a year after the purchase the rebate will also apply
Impact on General Market: Ontario was late in the game with the foreign buyers tax. Australia and Hong Kong, prior to B.C. also attempted to cool their markets with similar taxes with minimum effect. This policy will be well accepted by the general market as an effort to protect affordability locally. A rebate will be given for new immigrants, students or permanent residents in the process of gaining citizenship. The effect on the Vancouver market is our best example of what could happen in Toronto taking into consideration that Vancouver had 3-4 times as many foreign buyers as we have. In August 2016, the BC government announced 15% Foreign Buyers Tax, in place for nine months. In Vancouver, the single-family market trades in the $3Million+ range stopped outright and has recovered slowly. Trades in the $1M-$3M range, paused for about 30-60 days and have resumed at pre-tax levels, and there was virtually no change in the Pre-Construction condo market and prices today are higher than last summer.
Impact on High-Rise Future Project(s): There will be a decrease in the volume of International sales. We know that International buyers will still participate in the purchase of local real estate. The effect will slow down absorption on some projects and deter developers from selling internationally, but there is less price sensitivity with the international buyers. The tax will just limit the upper price threshold of the majority of these buyers. The impact to Vancouver with a similar tax addition took international sales from 15% to an immediate stop effect with a gradual increase back up to 5% of the overall market.
3. Assignments & Reporting
What Ontario is doing:
- Working to understand and tackle real estate practices that allow “paper flipping” assignment, and other speculation
- Reviewing rules for real-estate agents to “ensure that consumers are fairly represented”
- Impact on General Market: This will become a bigger problem before it gets better as CRA retroactively enforces many of these corrections on past assignments. More transparency and standardization is required for this to be successful.
Impact on High-Rise Future Project(s): This may have an effect on the regulations regarding assignment sales and what is mandated in regards to reporting. The tax implications will need to be addressed prior to sale in most cases to fully understand the effect on each project. It will be very hard to enforce this and although we believe some projects may stop allowing assignments and/or place more stringent restrictions on who/how/how much an assignment will be approved at, the majority of vendors will find alternative ways to control this process by eliminating the so called “assignment”. This could occur through a sale of a potentially sold unit with a provision to release the original purchaser while participating in the upside, once the suite is firm (i.e. Changing the administration of the sale and the language of the assignment process with more transparency). The difficulty with this legislation is that policies will/can evolve to eliminate or further complicate this process and leave it in the hands of the Developer (Vendor) to control this process.
4. Vacancy Tax
What Ontario is doing:
- Introducing legislation to let Toronto “and potentially other municipalities” introduce vacancy taxes
- Impact on General Market: Well received – but very hard to track? Not sure how it will fair.
Impact on High-Rise Future Project(s): We don’t believe this will have a large effect on the pre-construction market, as to date, the overwhelming majority of suites sold pre-construction are occupied by end-users or their tenants at delivery. We do not see large numbers of vacant units across the city. This will be especially interesting to track in the Greater Golden Horseshoe and surrounding markets as they will have the choice to introduce this tax into municipalities.
5. Other Changes
What Ontario is Doing:
- Create new market housing and affordable housing units with surplus provincial land
- Creating a “Housing Supply Team” to identify obstacles to housing developments and work with developers and municipalities to address them
- Establishing a group to advise the government on the housing market and the effects of the newly announced changes
- Educating consumers on their rights in real estate transactions
- Giving municipalities “flexibility” to use property taxes to fuel development
- Overhauling standards for elevator repair
- An updated Growth Plan with municipalities to address density and “an appropriate range of unit size”
Impact on General Market: Generally there could be a slowdown in the amount of transactions in the GTA, which could make a bad problem worse regarding price escalation. The city should be mindful of these steps so that revenue from the Municipal Land Transfer Tax is not lost if the volume of transactions decreases in the marketplace.
Impact on High-Rise Future Project(s): The overall effect of these announcements on will only continue to raise the price and demand on the pre-construction condo market as it is the last bastion of affordability in Toronto, a city growing in International reach and acceptance and still viewed as greatly undervalued on a global scale.
“This is about Politics, not good policy”
THE GLOBE AND MAIL, April 22, 2017
by Hunter Milborne, Milborne Group