Could Kathleen Wynne Make The Toronto Housing Market More “Fair” With Ontario’s Fair Housing Plan? We Say Not a Chance!
It may not come as news to most you reading that Ontario’s Liberal Government announced that they will slap a 15% tax on all home purchases by non-resident foreigners and, will expand the Province’s existing rent control system to include all tenants as part of the 16 point Ontario Fair Housing Plan.
The plans for the enactment come in the wake of the average home price jumping 33% in the Greater Toronto Area over the last year, provoking warnings of a “real estate bubble” originating from sensationalized media reports.
We have chosen to touch on this topic three weeks after the announcement so that we could digest the information and observe the reactions from the public before dissecting the repercussions of this new policy.
So, the Provincial Liberal Government, whose leader according to recent polls has an 18% approval rating; whose government heads the world’s most indebted sub-sovereign borrower; and, who recently added a staggering $25 billion to the Province’s barely manageable long-term debt to cover up the Hydro One mess they created, has now, in their infinite wisdom, set their sights on “fixing the Toronto Real Estate Market”. Based on the Liberal Government’s track record alone, I would put more confidence in the Trump Administration – who has a 42% approval rating, btw – to create lasting peace in the Middle East.
If the Government was serious about addressing the Toronto housing market, their plan would have focused on policy changes, tax reductions, and subsidization aimed at adding supply, and namely, creating an environment that would lead to the creation of more single-family homes and high-density housing. On this one major point alone, the Ontario Fair Housing Plan entirely misses the mark. Instead, it seems Wynne chose to use the opportunity to put herself on the podium for political grandstanding rather than for introducing intelligent policies that create long-term, positive impacts on the marketplace.
As mentioned, the two major cornerstones of the 16 point plan were aimed at a Foreign Investor Tax and the implementation of Rent controls for buildings built after 1991. In order to evaluate the soundness of this plan, one must critically examine the variables:
Foreign Investor Tax
It is currently estimated by CMHC and the Toronto Real Estate Board that approximately 5% of the GTA’s Housing Market is affected by foreign buyers. With that said, we can assume that this is the percentage of purchasers who will fall under the new tax enactment; however, when one reads the small print, many groups are excluded and the percentage of those affected is actually much smaller than you might think. While non-resident purchasers will be taxed an additional 15% to their home acquisitions, new immigrants will be exempt. A rebate will also apply to home purchases made by foreign nationals working in Ontario, as well as all international students. With this in mind, we are now looking at a total of less than 1% who will be affected by the new regulations. After considering the number of loopholes available to the remaining 1%, it is clear that the proposed tax has no substance and there are far too many ways around it to have any sort of substantial impact on the Market. This tax will be more for optics and political votes than anything else. Rather than create lasting change, this policy was designed to make headlines and appease some elements of the electorate who wanted to be assured that the government was taking sweeping action. While consumer perception can play a big part, once the shock of the headlines start to wane, it will have little to no impact on the overall Market. In simple terms, it is just a distraction.
Rent Control
In Toronto, the current vacancy rate in the city is less than 1%. Toronto has finally been able to turn the corner from damage that was done as a result of the previous rent control laws as developers backed by pension funds were starting to look at purpose-built rentals and in a significant way. Currently, there are 28,000 purpose-built units with a value of 2.7B in the pipeline. With the implementation of rent control to new buildings, the tap is going to be turned off and developers will return their focus away from purpose-built rentals and back toward the pre-construction condo market. Already, many of these new proposed rental projects are being cancelled. The expansion of rent control may help current renters, and while this may be seen in a favourable light to many voters, the resulting lack of supply and lower turnover ultimately means that future renters will face higher rent and less choice, putting further long-term pressure on the resale condo market. Rent control is the last thing Toronto needs and the government invoking this legislation is looking for a short-term political win to the long-term detriment of the housing supply in Toronto.
Having read the entire 16 point plan, there is virtually nothing in it that will encourage homeowners to sell their existing homes or motivate Developers to build new ones. The overall market fundamentals have not changed in any way as a result of the introduction of the Ontario Fair Housing Plan and in some segments, the conditions have been tightened even further.
Why is it that the Government’s playbook for dealing with perceived market problems is always to raise taxes and create further market restrictions? What the Toronto Real Estate Market needs, is in fact, the very opposite – it is not rocket science. Since the Wynne government never consulted with us prior to releasing their 16 point plan, we felt it necessary to unveil our very own Fox Marin 11 point Housing Plan.
Fox Marin 11 Point Plan
- Introduce legislation to open up and encourage Lane-way Housing.
- Ease zoning and density along major downtown corridors like Bloor (i.e. Danforth and Bloor West).
- Open up the Port Lands and in doing so, we could open up about 100,000+ new homes.
- Release sections of the greenbelt and subsidize aspects of development.
- Implement legislation to incentivize legal basement apartments – the city should encourage this and not just look the other way.
- Reduce the land transfer tax by 50%. Toronto is the only city in North America with a double Land Transfer Tax. This is the number one reason why homeowners choose to renovate rather than sell their homes. As a result of the double L.T.T, the costs to “move up” are just too high.
- A massive investment in transit infrastructure. Specifically, more subways both downtown and to the suburbs making it easier to commute into the city from other, less expensive outlying areas.
- Speeding up the OMB [Ontario Municipal Board] processes so that projects aren’t sidelined for years waiting for a hearing date. Developers should be able to fast-track projects in a year, not 3-5 years.
- Abolish all forms of Rent Control.
- Reduce massive levies on new construction which are often passed down from the developer to the end purchaser. Some estimates are as high as $50,000 for a one bedroom downtown.
- Institute greater transparency in the offer bidding process. Often times, the winning bid can be hundreds of thousands of dollars more than the next offer. Aside from a buyer being forced to blindly overpay for a home, the new sale sets a higher precedent for a neighbourhood, pushing prices even higher and in many instances out of reach for some buyers.
The long and the short of it is that Toronto is now finally being recognized around the world as being an amazing place to live and with that type of international recognition comes expensive Real Estate. This is just a fact of life when living in a world class city; and, with a high cost of living, there will be inequality and there will come a time in the near future when the majority of Toronto’s inhabitants are renters just like they are in New York or London. Toronto doesn’t need “fair“ policy designed to get a government re-elected, it requires intelligent, well thought-out legislation and urban planning policies that would open up supply enabling our City to grow into itself over time.
What To Expect
Every time there has been a major external event or Government policy change in recent history, the market has taken a bit of a pause: In 2008 with the subprime crisis, 2010 with the introduction of HST, and 2012 marked major adjustments to lending policy. In all these instances the market paused for about 6 months before beginning to ascend again. Even in Vancouver, the market is on fire after having taken a brief pause and after its Government’s snap announcement of a Foreign Investment Tax last summer. The Real Estate Board of Great Vancouver says the condominium market is the most competitive it has ever been since it started measuring the market back in 2005. The average days on the market for a condo in Vancouver is now 19.
Given all the media hype around the Wynne announcements combined with the added spring inventory market, combined with buyer fatigue of the last six months, I would expect that the Market is going to take a bit of a much-needed breather for the next few months with a wait-and-see attitude. Although there is not much data out there yet, we have noticed a significant drop in showings and offers on properties selling on offer night.
We are about to enter into a great window to buy while the market takes a bit of a breather, as it has done historically after an announcement in Government Housing related policy. Over the short-term (3-6 months), I would not expect prices to fall but rather, to continue to increase, just at a much slower rate than what we have been seeing over the past year. If you are an investor or a home buyer, we are entering into a small window of opportunity. Those that are thinking about selling would be very well served in working with highly competent agents that are skilled at marketing and staging properties in order to maximize the highest selling price for their client’s property.
The fundamentals are still the same and in some ways, have only been made stronger due to the actions of the Wynne Government ensuring long-term continued price growth and inventory shortage. Barring any unforeseen macro events, I would predict that the market will start to pick up where it left off in the fall and in a year from now, and we will see market prices to be 15-20% higher than they currently are today. Let’s not forget, we are still on the extreme side of a Seller’s Market so even a marginal increase in inventory does not indicate that there will be a monumental correction. We still have a long way to go until we can achieve balanced market conditions and the underlying fundamentals that got us here have not changed. As long as the Governments in BC and Ontario continue to address their respecting housing issues by attempting to curtail demand, any successes that they have will be short lived and more about short-term political gains rather than creating long-term positive change. The challenges facing the Toronto Market are on the supply side which is what our 11 point plan addresses and all current levels of our governments continue to ignore and as we all know, the cost of ignorance can be very high.
-RF
