In last Thursday’s blog post, I briefly touched on the subject of AirBnB, so briefly, in fact, that it almost necessitated an entire follow-up blog.
Many of the readers commented that they wouldn’t want to live in a condominium that allows AirBnB, which I find ironic, given the massive push by investors and owners alike to either have their condos allow short-term rentals, or to simply illegally rent out their units.
Today, I want to highlight a few recent articles about how AirBnB’s have affected Toronto, and then, as is so, so often the case on this blog, delve off into the politics involved with both current short-term rental regulations, and potential future ones down the line…
Show me a government that doesn’t love a tax, and I’ll show you a government that won’t succeed.
I may have done my Grade-Eight school project on the Liberal Party of Canada, back when a new guy on the scene named Jean Chretien was running for Prime Minister, but I am not a fan of the party in 2017, as my regular readers will know.
Tax and spend. It’s not a cliché, and it’s not an exaggeration; it’s a platform.
So when Kathleen Wynne introduced her completely useless “Fair Housing Plan” back in April, I was shocked that she didn’t include a tax on short-term rentals!
A good politician is one that can invent new taxes out of thin air. Potato-chip-tax, toilet-flushing-tax, stepping-on-a-side-walk-crack tax – all solid new ways to generate revenue.
So why in the world did it take so long for the government to profit from short-term rentals in Toronto?
There are those that think we have a “problem” with short-term rentals in Toronto, and those that think it’s fair game. Either way, the solution, as is always the case in Ontario, is for the government to claim regulations are needed, and knight themselves the regulator, overseer, and rule-maker, while implementing new taxes in the process.
This past June, it finally happened; the municipal government finally stepped up to deal with the “problem” of short-term rentals by…..wait for it……….requiring hosts to register with the city and pay fees.
Well if that isn’t the way to deal with short-term rentals, then I don’t know what is!
Kidding aside, the city of Toronto released a Staff Report on June 7th called “Proposed Regulations For Short-Term Rentals,”, whereby they proposed four new regulations:
1) Amend the City’s zoning bylaws to create a new land use called “short-term rental” that is permitted in principal residences across the city,
2) Prohibit short-term rentals that are not in a person’s principal residence.
3) License companies that facilitate short-term rental activity, like Airbnb.
4) Create a registry for anyone who operates a short-term rental in their home.
#1, #2, and #4 are all within the municipal government’s power.
But #3 is very interesting, since there is no guarantee that AirBnB will play ball. More on this on Wednesday, where I’ll show you a North American city which is calling itself “the model” for short-term rental regulation, and has a deal in place with AirBnB.
How does the city of Toronto define a “short-term rental?” As follow:
A short-term rental is any rental of a residential unit lasting up to 28 days in a row. The 28 day definition distinguishes short-term rentals from longer rentals (it is not a cap on the number of nights a home can be rented). Any rental that lasts 29 consecutive days or more would be considered a long-term rental. A more precise definition of short-term rental is discussed later in this report.
So we’re not talking about one-night AirBnB’s here, we’re talking about 4-week stays as well.
The staff report goes on to identify four areas of concern:
1) Housing availability and affordability. It comes as no surprise that taking housing stock out of the market, will decrease supply, and increase prices.
2) Neighbourhood and nuisance issues. Do you want to live next door to a 9-room house, full of tourists?
3) Economic development and tourism. How does this affect the hotel industry?
4) Taxation. Save the best for last, I suppose, but I would agree that short-term rental operators are not paying tax in the same way as their hotel-counterparts.
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Regarding fees and licensing, the report suggested the following:
1) Registry fees of $40-$150 per home for short-term rental operators.
2) Licensing fees of $5,000-20,000 per night for commercial operators.
3) A 4% tax on registered short-term rental hosts operating out of their principal residences.
The report also recommended that the operator would have to post their license in any advertising for their short-term rental.
–
Since this report made its debut in June, the media has been abuzz with reports about short-term rentals in major Canadian cities.
I don’t think the staff report had anything to do with the buzz, but rather the city of Toronto managed to get out ahead of the storm that was brewing.
Short-term rentals are a problem in Montreal, Vancouver, and believe it or not – Saskatchewan too. Here’s some choice reading:
June 15th, 2017: “The Long-Term Problems of Short-Term Rentals In Montreal”
August 9th, 2017: “Here’s How AirBnB Is Making Your Montreal Rent More Expensive”
August 10th, 2017: “Illegal Short-Term Rentals Spawn Record Complaints In Vancouver”
August 12th, 2017: “Short-Term Rental Properties On The Rise In Saskatchewan”
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As for Toronto, the buzz really started to pick up at the start of August.
August 4th, 2017: “Growth Of Big Players In AirBnB Rentals Shows Need For Regulations, City Says”
August 6th, 2017: “Large Commercial Operators A Growing Concern In The AirBnB Market, Study Says”
And what “study” are they referring to in that last article?
This is where things get really interesting!
Last week, a research group from McGill University released a 48-page report entitled: “Short Term Cities: AirBnB’s Impact On Canada’s Housing Market.”
It takes a while to download, but trust me – it’s worth the read.
The results are what you might expect: that AirBnB rentals are taking long-term housing out of the market for residents in Vancouver, Toronto, and Montreal, and in cities where demand for housing already outpaces supply.
I know most of you won’t read the 48-page report, so here’s the executive summary:
Across the Montreal, Toronto and Vancouver regions, 81,000 Airbnb listings have been active at some point in the last year, and 51,000 in May 2017. Montreal had the largest number for most of the year, but Toronto is now taking first place. These listings are heavily concentrated in the central cities of the three CMAs, and they are growing rapidly; the three cities have experienced a 50% year-over-year increase. A majority of listings in all three cities are entire homes rather than private rooms.
Airbnb hosts in Canada’s largest three metropolitan regions earned a collective $430 million in revenue last year, an average of $5,300 per listing and a 55% increase over the year before. This growth is driven by Toronto, where total revenue nearly doubled year-over-year, and where average revenue per listing is also growing strongly. Revenue is highly concentrated among the most successful hosts; 10% of hosts earn a large majority of overall revenue.
There are now 13,700 entire homes rented 60 days or more per year on Airbnb in Montreal, Toronto and Vancouver, each of which is unlikely to be rented to long-term tenants. They account for one sixth of all Airbnb listings, and a majority of nights booked on the service. Even more worryingly, these listings are growing around 25% more rapidly than other categories of listings. Many neighbourhoods—above all in Montreal—have seen two or three percent of their entire housing stock converted to de facto hotels.
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The report doesn’t draw the obvious conclusion: that short-term rentals have a direct impact on price.
From the report:
Airbnb has removed as many as 13,700 units of housing from rental markets in Montreal, Toronto and Vancouver. In some areas this represents more than two percent of the total housing stock—a number comparable to the rental vacancy rate in the three cities. In general, these are neighbourhoods with above average rents, but there are significant economic pressures threatening further conversions of long-term rentals to de-facto Airbnb hotels in a number of more affordable areas—particularly those lying on mass transit lines. In the last year, conversions to short-term rentals have outpaced new home construction in a number of neighbourhoods.
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That paragraph is from the report’s section called, “Airbnb’s impact on rental housing,” and yet I can’t help but think that the effect AirBnB is having on the rental market is just as big as the market for properties being sold.
Any way you slice it, taking housing stock out of the market, for rent or for sale, is going to have an impact on price.
I put up a listing for lease last week for a 1-bed, den, 1-bath unit with parking, for $2,200 per month.
I ended up getting eight offers.
Five of the offers were from prospective tenants who hadn’t even seen the property. That is how competitive the rental market is out there.
One agent told me, “I won a 16-offer bidding war for a condo in Liberty Village last night.”
Another agent told me, “A kid in my office has lost nine offers for lease…………so far this week.”
Part of this has to do with the time of year. A lot of renters are looking for September 1st.
But as the McGill report clearly states, more than two percent of properties have been removed from the market due to short-term rentals, and I think that number is probably higher in downtown Toronto.
And when it comes to the sale of properties, the same argument can be made. The higher returns from short-term rentals are causing many operators to keep their properties, rather than selling them. No longer are investors looking to sell and take their profits, when they money flowing in from short-term rentals is probably 3-4 times what they’d get by leasing for a one-year term.
I think this McGill report is going to open a lot of eyes, and other major Canadian cities, and maybe even those in the United States, will take notice.
But I don’t think that taxation is the answer to the “problem” of short-term rentals, and I put problem in quotations, because, again, not everybody thinks this is a problem. Many people think we’re in a free market, and thus market participants should truly be free, without government intervention and regulation.
If the government does want to do something about the housing crisis – and yes, we’re bordering on crisis, then their staff reports should focus less on the amount of revenue raised from new taxes, and more on the potential number of properties to come onto the market, for lease and for sale, if and when they implement new policies, as well as how this will affect prices, and affordability.
On Wednesday, I’ll tell you about one of my favourite cities in the world, and how they have dealt with their own short-term rental crisis…
Geoff
at 10:36 am
Is the “model city” NOLA?
Jack
at 11:42 am
David, you put “problem” in quotation marks. So you don’t think it is a problem? So you would be perfectly happy to own a condo unit in a building where half of the other units are essentially an unregulated hotel?
When you write “Many people think we’re in a free market, and thus market participants should truly be free, without government intervention and regulation”, why don’t you just say what you think? Do you agree with those “many people”?
David Fleming
at 1:02 pm
@ Jack
Fair question, but if you’re a regular reader, you know I’m not one to shy away from giving my opinions. I just risked alienating every hardcore Liberal out there by putting my two cents in the intro.
As for the idea that “Many people think we’re in a free market….,” etc., I’m making this point without giving my opinion. Not EVERY point I make in every blog needs my yay or nay.
Since you asked, I do believe in government intervention and regulation, in some cases, and not in others. That’s the role of government after all. But there is no ONE approach, which is what makes governing so difficult.
In this case, I think we are on the verge of a housing crisis, but the problem is so much greater.
We have a left-wing, socialist government that is not only allowing people to naively believe that home ownership in a world-class city is a right for all, but TELLING them this. So where do we start? There are so many conflicting ideas and policies. If you wanted lower prices in the city, and more buying/selling, than eliminating land transfer tax, allowing development in the green belt, providing tax breaks and/or subsidies for people buying outside the core, allowing tax deductions for people living outside Toronto but commuting (ie. write-off their public transit or car/gas), etc., etc., etc., would all help accomplish a reduction in demand in Toronto, an increase in supply, and a resulting decrease in prices. But those are major policy changes that have repercussions elsewhere, and cost the government hundreds of millions of dollars.
Geoff makes a good point, in that a “perfectly” free market is a recipe for disaster.
We need government intervention and regulation, but what, how, when, where? That’s why people will argue about money, politics, and policy until the end of days.
What to do about short-term rentals is merely ONE consideration, out of dozens, that all three levels of government need to make with respect to how to deal with the housing crisis.
Jack
at 3:23 pm
@David
Thank you for your response and clarification. I do appreciate the work you put into this blog, and I admire your persistence in keeping it going week after week. I often find insights here that I haven’t seen elsewhere. But I was disappointed with this post on short-term rentals.
Although Airbnb does not affect me personally, there are a number of reports in the media from people whose lives are disrupted by Airbnb coming to their building. And now there is research with real numbers showing how short term rentals distort rental markets. And yet your post seems to imply, implicitly if not explicitly, that this is a pseudo-problem that governments have invented so they can raise more tax.
Obviously there are other problems in housing markets. Some can be mitigated by government actions, and some cannot. But just because governments cannot solve them all doesn’t mean that they should do nothing.
Juan
at 12:18 pm
It’s not a “free market” as long as the government restricts the development process like they do.
Geoff
at 12:35 pm
A perfectly free market is a recipe for disaster, I think we’d all agree – hopefully. I mean I like industry and love capitalism and the entrepreneurial spirit, and it’s necessary, but I don’t want the lakes polluted and the forests depleted in the name of profit either.
Juan
at 12:56 pm
Yea I don’t think a truly “free” market is ideal, but I like to point this out because so many RE owners complain about government regulation while at the same time profiting from supply restrictions.
In the Airbnb case, I think ideally the City would simply ban its use beyond primary residences, and properly police/monitor this. No tax is necessary, and all a tax will do is get passed on to AirBNB guests (which would ultimately hurt the hosts).
Obviously people may still run a full time AirBNB and claim it as a principal residence, but this can’t really be avoided.
Boris
at 3:39 pm
You need to read some Schumpeter, Rothbard and Mises.
Environmentalism is fully covered by the property rights chapters in these Austrian economics books.
Property Rights – the most important component in a well working democracy. Being stolen from us day after day by our elected and unelected officials.
Boris
at 3:45 pm
https://mises.org/library/libertarian-manifesto-pollution
T
at 2:34 am
The government controls supply and demand.
On one side we have development process restrictions, zoning, etc. Supply.
On the other side we have CMHC and incentives for first time purchasers. Demand.
Any coincidence values are sky high? Of course we pay more taxes based on those values? It’s a rigged system.
Could you imagine if the government stopped interfering with both supply and demand?
Alexander
at 1:04 pm
First government regulate the market on hotels charging them thru the nose, people and companies are finding ways to go around those regulations, government is unhappy in losing tax revenues and citizen who can not afford real estate, they regulate and tax, people and companies are finding ways to go around those regulations, etc, etc…
DR
at 1:09 pm
You had a post about some kids coming up to your rec floor, throwing a huge party and puking in the elevator. This is pretty much every other weekend over here.
Front desk is now used to check guests in and out and the lobby, at all hours, looks like an airport with people sleeping on our couches and their bags sprawled everywhere while they wait for their rooms.
The principal residence requirement (if enforced correctly) would be great for neighbors. The host would likely care more about screening if it is the home they like in for the other 10 months of the year…
Libertarian
at 2:12 pm
It seems to me that the people in favour of AirBnB are real estate investors while those against it are homeowners, most of whom are not real estate investors. Who gets to have their way? In a democracy, we say it’s the majority. So if the majority of people don’t want AirBnB in their neighbourhood, then that’s what should happen.
You told the story last week about one of your condo clients wants to go on the roof in the winter. The board said no because he’s the only one. Just think of the city as one large condo. A few owners want AirBnB. The vast majority don’t. The board will side with the majority. If somebody wants to run a hotel, let them build a hotel.
T
at 2:25 am
Exactly.
Kyle
at 3:38 pm
People should be asking why the number of Airbnb hosts growing exponentially, while the number of long term apartments keep shrinking? Airbnb hosts are free to charge market rates, free to set the rules, not have to worry about not getting paid, not need to meet all sorts of extra building codes and never have to worry about the one-sided Landlord and Tenant rules. I’m actually surprised that there are any apartments left.
Max
at 5:15 pm
AirBNB can be a potential solution to older condos or ones that can use the extra money. Government needs to force AirBNB to set up a registry. Condos that allow it could register their address with airbnb. Each airbnb member trying to rent out they’re unit would be forced to do it through their condo. A portion of the profits would go to the condo reserves. Imagine the profit a condo can make. Reserves could be drastically increase to cover a sorts of expenses and maybe even lower the contributions needed for reserve over the long run. Condos need this to avoid being slums.
Darren
at 2:11 am
Something similar to this is quite popular in Australia (at least in Gold Coast).. lots of condos where a large percentage of the units are owned by investors. They often have a front desk just like a hotel and you can book them just like any other hotel. Of course the owners can select days to remove it from the pool and enjoy it themselves.
T
at 2:23 am
Google ‘1 King West, Toronto’.
Then look at a few listings in the building.
Then go have a look at the place.
You will find answers to why this is not popular.
People do not want to live in hotels. It’s disgusting.
Mike
at 8:32 am
I did do AirBnb until my condo board passed a minimum 6 month lease rule. Honestly the AirBnb people that came were better than my tenants as all they would do is use the unit pretty much to sleep in, they never used the amenities nor had noise complaints. They came dropped their stuff off and explored the city or were in town for a concert/festival then left. Plus made more money for myself when using Airbnb , government needs to embrace it as do condos , the uber effect will come soon.
Matt
at 9:14 am
I wonder whether if the CRA were to take the same approach with AirBnB as it did with eBay (http://pages.ebay.ca/CRAinfo/), if many of the units listed on AirBnB would be taken off the market. Has there been any work done in testing the level of compliance with existing tax law by AirBnB landlords?
Libertarian
at 2:30 pm
I’m interested in this as well. We’ve had enough comments on here from real estate investors who think that everything to do with real estate is tax free.
CRA now requires Canadians to report on the sale of their principle residence, so to report AirBnB properties is a logical extension.
T
at 2:19 am
Finally incentive is being removed from running these makeshift hotel operations.
I know several people each with several condos in the core, all airbnb rentals. CMHC backed mortgages on many as they are somewhat fresh purchases. Some are even in buildings where airbnb has been banned.
Unreal how people have been gaming the systems and the more specifically the real estate industry lately.
Joy Peter
at 9:04 am
Nice post.Very informative. Many factors are responsible for it like demand and supply, employment.
George K
at 9:30 am
Great guide this is and can be very useful. Implementing it for Find Bank Foreclosure will witness amazing results.
shorttermcondorental
at 12:44 am
Great read nice blog post, started in December of 2017 Toronto city council has approved regulations for short-term rentals in the city that would apply to such services as shorttremcondorental.com. Thanks again for sharing
lisa
at 11:50 am
I think this is a really cool idea to make some extra money on space you don’t use. When I was in Europe, two friends and I stayed at a person’s house in Florence, Italy and it was so much better than a hostel! It was warmer, homier, and the people were nice enough to have breakfast for us as well as give us advice on where to visit. Definitely worth it, as long as the right precautions are taken.lisa