Aside from a third and fourth land transfer tax, is there anything that could kill the condo market?
How about Toronto city council DOUBLING development charges? Do these people have ANY idea how to run a city?
Do any of you suffer from that constant affliction that makes you think you’re supremely smarter than certain people?
We all do it.
We’re all far, far better general managers of sports teams than the actual GM’s in place. We all know what’s best for the Leafs and the Jays, and we all balk at trades that we wouldn’t make.
We openly talk at parties about who should have been chosen to play the role of Christian Grey in the movie adaptation of the book, or what name the “Royal Couple” should have chosen over “George.”
And as far as Toronto politics go, well, we all know best.
At least, we know better than those people we’ve elected, in a democratic process, to represent us.
More often than not, we’re in no position to judge or critique. We’re not privy to the inner workings of Toronto; the budget, finances, contracts, and such.
But then other times, we feel as though we do, in fact, know best.
For me, this is one of those times.
Last week, it was announced that Toronto city council is considering DOUBLING current development charges for condominiums.
For those of you not familiar with the process, consider this: every single condo unit built in the city of Toronto comes with a fee, paid to the city of Toronto. Two-bedroom units have development fees in the $12,000 neighbourhood, and one-bedroom units are around $7,500.
Toronto city council, always on the lookout for new tax revenue, has determined that maybe the Golden Goose can, in fact, be platinum! And thus, their idea to simply DOUBLE fees.
Hey, let’s not forget that land transfer tax was effectively doubled a few years back, when Toronto city council looked at the tax that the provincial government charges, as if it were a hamburger on somebody’s plate at a restaurant, and said, “Wow, that looks really good! I’ll have the exact same thing.”
Land transfer tax DOUBLED for consumers, although the tax is collected half by Ontario and half by Toronto.
In the case of the development charges for condos in Toronto, ALL that tax revenue will go to the city.
So what’s the problem?
Am I now sticking up for developers?
The problem, is that these fees are always passed on the the consumer (the condo buyer) by the developer, whether up front, after the fact, built-in, disclosed, or hidden.
One way or another, the buyer of the condo pays these fees.
Do you think it would happen any other way?
Developers, with their fancy lawyers, 80-page contracts, fine print, and ability to prey on the weakest and most naive segment of the buyer pool (ie. those that buy pre-construction condos), have had no issue passing development fees onto the condo buyers, nor will they have an issue in the future.
But the basic tenets of supply and demand tell us that this presents a major, major threat to the health and safety of the condo market.
Consider that when you buy a pre-construction condo for $300,000, it can cost you a LOT more than that in the end. The levies, fees, charges and other synonyms for “costs” can add up real quick, and if you Google “closing cost nightmare,” you’ll find some sad saps who were hit with costs in the hundreds of thousands by developers who were shrewd with their fine print. So in Toronto, that $300,000 condo could push $320,000 upon closing.
So what is the price sensitivity of today’s young condo buyer?
What if that $320,000 went to $330,000?
At what point would a buyer stand up and say, “NO!”?
Or, at what point would that buyer stand up and say, “I think I’ll just buy a resale condo, and avoid all these hidden fees”?
That’s what worries me.
Look out your window right now, and I’m almost certain you can see at least one crane. I’m downtown, looking west from my terrace, and I can see seven cranes from here. These buildings are under construction, meaning that the project has been financed, and the developer has likely sold 70% or more of the units.
But what if the developer hadn’t sold 70% of the units? What if the city of Toronto’s decision to DOUBLE development charges were to prohibit or discourage buyers from buying? Well, those projects either wouldn’t move forward, or the units would have to sell for a lot less.
Bottom line: doubling development charges for condominiums could slow the condo market significantly.
I say it “could,” because nothing else has seemed to slow the market in the past decade! Every time something happens that has legions of experts and Joe on the street saying, “This is it – the condo market is going to dip,” we see nothing but increases in price!
Consider the changes that the CMHC made to mortgage rules last year.
You used to be able to buy a condo with 0% down, or even get cash back! Now you have to put a minimum of 5% down, and that comes with punitive insurance premiums that discourage many buyers from entering the market. If you want to buy a second property, you have to put 20% down. And now any property with a price of $1,000,000 or more automatically necessitates a 20% down payment too!
Did these changes slow down the market?
Nope. Not one bit.
Experts said that this could slow the Toronto market and cause prices to drop, but prices kept on rising.
And when mortgage rates increased about 50 basis points last month, did that have an effect?
Not from where I can see. I have fourteen active buyer-clients, and not one of them put off their property search, or changed their search parameters.
So if Toronto city council goes ahead and doubles the development fees that condominium developers pay, will the condo market be affected?
Logic says “yes,” but empirical evidence says “no.”
Logically, it’s just a simple case of supply and demand. The demand would drop as buyers would scoff at the increase, and the prices would drop accordingly.
But as I pointed out above, evidence from mortgage rules to land transfer tax shows that nothing (so far) can stop this increasing condo market.
I do have a better question, however. My question is “why?” Why would city council take such a risk? Why would they risk starting a chain reaction that, logically speaking, could cause the condo market to drop?
The CMHC made their moves last year in attempts to cool the housing market. They were up front about it, and they were hopeful that the changes they implemented would slow a market that they saw as over-heated.
Does Toronto city council have the same plan?
I highly, highly doubt it.
I know I’ve been riding this bandwagon a lot lately, but I just don’t think city council has anything remotely resembling a “plan,” in anything that they do, anywhere, any time. In fact, I think that if you asked the 50-something city councilors to draw a graph with “price” on one axis and “quantiy demanded” on the other, they’d be unable to find equilibrium, let alone explain how the supply and demand curves can shift, and why.
I believe we studied equilibrium on the first or second day of grade-twelve economics. But I digress…
I just wish that Toronto city council would give more reason(s) for their actions, and in this case, I don’t think they’ve thought it through.
An economist or central banker might suggest that fiscal and monetary policy could or should be used to cool a heated market, or stimulate a cool one, but I don’t think a city councilor is in any way qualified to toy with the health of the real estate market.