That’s a very good question, and most people’s answers will start with the words, “It depends…”
It depends on the city the condominium is in, the age of the building, the number of units, the construction of the building, the amount of money in the reserve fund, and to a lesser (or greater, as we’ll soon see….) extent, the mandate of those in charge.
I had a conversation last Friday with a member of the board of directors at a downtown Toronto condo, and I disagreed with just about everything she said, and the entire mandate of her “leadership panel.”
Do you know what I think is one of the worst economic decisions a municipality can make?
The property tax “freeze.”
This decision, in just about every municipality on the planet, is one that has nothing to do with finances or economics, and everything to do with politics.
It’s a political move, again and again.
Whether you’re a “fiscal conservative” or a “left-leaner,” the decision to freeze property taxes is one that is always announced in front of a podium, during a campaign trail.
And I think it’s the exact opposite of what is needed most of the time.
Don’t get me wrong, I’d love to pay less tax! Especially property taxes!
But here in Toronto, where we have the lowest property taxes of any municipality in Ontario, I think freezing property taxes would be the wrong way to “give back to the tax-payers,” if that’s actually what would be intended with such a move.
The value of real estate in Toronto continues to rise, and there’s really no reason to freeze taxes.
And the price of goods and services in society continues to rise, as it does, every year, thus the municipality’s expenditures will increase as well.
Unless we start to see a period of deflation, why would the municipality freeze a tax?
There is a point to this discussion, I promise you.
I’m trying to draw a parallel here to the notion of “freezing condominium fees,” which I also feel is a mistake, given that condo expenses go up every single year, and coupled with inflation, it’s impossible to freeze fees.
Or so I thought, until I met a lady last Friday who felt it was in her condominium’s best interest to do otherwise.
In fact, she told me it was her board’s “mandate” to freeze condo fees “for the foreseeable future.”
Our discussion was amicable, and respectful, so please don’t think that I took issue with her personally (she’s probably reading this, as she said she would “love” to see what the reaction would be), but as I told her in person, I feel this “mandate” is a tragic mistake.
The words “it depends” should be brought back into the conversation once again, since I suppose it depends on your age, investment horizon, and life cycle, as to whether or not you would benefit from a freeze on condo fees.
If you’re 24-year-old, buying into a condo where the condo fees are going to be frozen for three years, you probably think it’s fantastic. You’re not going to be in that condo for more than 3-5 years, and thus not only will you save money, but when you go to sell your condo, the fees will be attractive to a potential buyer.
But the lady I spoke to last week is in her late 60’s, and along with her husband, they have retired and are living in the condo with no plans of moving. So they’re clearly not in the same boat as the 24-year-old, and I don’t feel they’ll benefit from the freeze, which as I explained to her, will eventually have a negative affect on the condo.
Her reasoning for the condo fee freeze, to be blunt, was what you call “pie in the sky” thinking. She felt that in today’s world, where the job market is tough, where Canadians are taking on more debt, where the cost of just about everything seems to go up and up and up, it would be “nice to get a break” once in a while. I’m paraphrasing, but that’s the overall logic.
She felt that a condo fee freeze would help residents “worry about one less thing,” (her exact words), and the break they get from an increase in fees each year would be a financial benefit as well as an emotion and psychological one.
To me, that sounds nuts. It sounds like the decision to freeze fees was based more on “what would be nice,” rather than what the building needs.
What the building needs, in my opinion, is a board of directors that understands basic math, and even more basic economics.
The annual rate of inflation for August, 2014, in Canada was 2.1%, and previous months were 2.1% and 2.0% respectively, so let’s assume that the number is reasonable on a go-forward basis.
I’m of the opinion that every condominium in the city of Toronto should see their fees increase by at least the rate of inflation, every year, otherwise they’re just playing catch up.
But I’m also of the opinion that a condominium’s major expenditures are likely to increase more than just the rate of inflation – specifically water, gas, and electricity.
You might point out here that in many buildings, gas, electricity, or both are paid for by the unit owner, but that’s just for their own unit. What about the common elements which make up half of the building? The cost of heating the hallways and lobby, the cost of the lights in the parking garage – all of these common elements are paid for by the condominium corporation.
Labour isn’t getting any cheaper either, and condos need warm bodies for property management, concierge, cleaning, equipment maintenance, elevator servicing and repairs, HVAC maintenance, snow removal and salting, landscaping, and waste removal, among other things.
I go through a LOT of condominium budgets, and rarely do I see these expenditures decreasing year-over-year.
But let’s say for argument’s sake that the condominium’s expenditures only increased by 2-3% per year. After three years, the expenses will be 6-9% higher, and it seems to reason that the condo board will have to increase fees by that amount.
So isn’t the notion of a condo fee freeze just a delay of the inevitable?
There’s just no real way to “catch up” three years down the line, unless you happen to take the condo’s reserve fund to Las Vegas, and bet it all on green, double-zero.
I say that in jest, however you just know that if there weren’t rules against it, a board of directors somewhere would have already tried to do it!
The Condominium Act outlines the types of investments that can be made with reserve fund monies on behalf of a condominium corporation in Sections 95 and 115. Have a look HERE.
The investments have to be guaranteed and insured by the Canada Deposit Insurance Corporation, so while the condominium corporation can make a return by investing the reserve fund money, it’s not going to be substantial, and most condo boards elect to keep the money in a standard savings account with one of the Big-5 Canadian banks, which returns about 0.5% – 0.75% interest.
I don’t think there’s any shortcut here, folks.
I think condominium fees must be increased every single year in order to keep up with the increase of goods and services in our society. It’s about as basic a notion as you’ll find.
I know that all condominium owners, when they get the annual package from property management, and open it in the elevator on the way up to their unit, will hold their breath as they scroll down page one (the only page they’ll probably read…) looking for that percentage, in bold, detailing how much their fees are going to increase.
And when we see “…….monthly common element fees will increase by 1.7% for 2014-15,” we all breathe a sigh of relief!
Nobody wants to see a massive increase, but then again, if they’re caught off guard by the increase, then it means they probably didn’t attend the Annual General Meeting, in which case I don’t feel bad for a person who isn’t involved with the inner workings of their largest investment and the place they call “home.”
I appreciate that in some buildings, the condo board tries everything they can to keep fees low.
But to be honest: there’s very little they can do.
Sure, they can fire a property management company and replace them with a cheaper one, or cut back the hours of a cleaning company. But there’s nothing they can do to fight an increase in utility costs, or the simple fact that all buildings age, and with time, comes repairs.
To “freeze” condo fees would be irresponsible, and it would demonstrate an incredible lack of vision, and planning.
It serves to provide immediate gratification, and nothing more.
To some people, it’s a badge of honour. “Our condo fees didn’t increase at all this year.” Yeah, well, great. Wait until they go up 15% three years from now.
If you’re a condo buyer, and your lawyer is reviewing the condominium’s Status Certificate, make sure you find out how much expenses have increased, whether the building has run a deficit in recent years, and of course – how maintenance fees have increased.
That is, if they weren’t already frozen…
at 8:05 am
The argument with regard to the City and its tax rate increasing with inflation is purely nonsense. Why does Toronto have ‘lower’ property tax rates than other cities? 1) Because it is denser than its peers (2) This low tax rate is imputed into higher property values, propping up the tax base. When generally left to their own accord, capital markets work!
The most insane thing about the last mayoral election is that everyone spoke about tax rates and inflation. Even Tory said he thinks linking tax rate growth to inflation makes sense. This is completely idiotic! Inflation is already inextricably linked to how much we pay in taxes as the assessed values of our houses increases. By INCREASING the tax rate while asset values also increase, we are double taxed.
One can argue “oh but in a deflationary environment yada yada”. Show me the last 5 year period where we say housing price depreciation in Canada. I am sure it has happened, just how often? The market will reprice assets to account for taxation policy differentials. This is called tax competition. Imagine if your personal tax rate grew at inflation. Eventually we would all be paying infinity % tax. But prior to that we would hit 100% taxation rates, and prior to that we would reach an indifference point where no one would bother working.
at 8:38 am
@Boris. A common but incorrect assumption by many is that taxes automatically increase along with any increase in the assessed value of a property.
Realty taxes are a function of a very simple equation: Assessed value multiplied by the mill rate. Since Ontario implemented a market value assessment regime in 1998, all municipalities in the province utilize “current value” for property assessment purposes.
It is the municipality that determines the mill rate, which is determined only after the annual budget has been formulated.
at 9:04 am
I have no idea what you are trying to say.
Taxes increase as the notional of the property increases as a result of MPAC reassessments – exactly what I said.
MPAC assessments incorporate many things, at the end of the day it captures asset appreciation (inflation). Sure its only done every few years. So what.
at 9:19 am
If you’re property increases at a lower rate than city average, your property tax will decrease not increase if there is no increase in property tax rate. This happened to me twice in the last 5 years.
at 9:25 am
I don’t follow.
If my house is assessed at a factor of 0.7% per year and assessed at $700k, then it is reassessed at $900k at 0.7% factor, guess what, I am paying more taxes as a result of asset appreciation (inflation) which is inputed into how they adjust values. Pretty simple math folks, please wrap you head around this concept.
If your property value increases AT ALL on reassessment, assuming no changes to the tax factor, then you will pay a greater TOTAL NUMBER of property tax dollars (let’s be careful in the language we use here as it seems to be confusing you two).
Queen and Jones
at 9:56 am
Boris, anyone can prove their point when they make incorrect assumptions – “assuming no changes to the tax factor” is your fundamental error. That’s not how property taxes work. The mill rate isn’t some fixed percentage like the HST, but rather a plug that gets the municipality to the revenue total they require in any given year. All things being equal, if your property increases from $700k to $900k your property taxes won’t increase if that reflects the average increase across the city. In fact, if your rate of increase is less than the average, your property tax bill will actually go down, even though your property is now worth $200k more.
Please stop telling people they’re wrong when you don’t understand what it is you speak of.
City of Toronto Property Tax FAQ’s: http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=8605ff0e43db1410VgnVCM10000071d60f89RCRD&vgnextchannel=63b0ff0e43db1410VgnVCM10000071d60f89RCRD
In particular: “Q: If assessment values for properties increases, will the City have more tax funding available? A: All property in Ontario is assessed by the Municipal Property Assessment Corporation.
The effect of reassessment, at the municipal level, is “revenue neutral” and does not generate any additional revenue for the City. With a reassessment, the City must adjust the tax rate to remain revenue neutral, so no new funding comes to the City of Toronto as a result of property valuation changes.
If your property value increases at a rate less than the City average, your property tax will decrease due to the reassessment.
If your property value increases at a rate more than the City average, your property tax will increase due to reassessment.
The City may need to increase taxes due to its budget requirements, however, this is separate and not related to reassessments.”
Torontoist “Everything You Ever Wanted to Know About Property Taxes”: http://torontoist.com/2014/01/everything-you-ever-wanted-to-know-about-property-taxes/
at 12:09 pm
It’s not quite like that, and is understandably confusing. Two homeowners each have a house valued at $500k. Average house prices increase 5% this year across the city, but owner A’s house increases by 10% and owner B’s increases by 2%. In this scenario, Owner A will see a property tax increase but owner B will see a reduction, notwithstanding a general property tax rate increase. The city only takes in as much money as it did the year before, but different homeowners will pay different amounts based on how much their assessed value changes.
at 9:29 pm
You missed the reason why Toronto has lower annual property taxes than other cities:
Because it charges you a chunk of your future taxes when you purchase your property in the form of a land transfer tax.
Your ignorance to this fact justifies the politicians choice to do it in the first place!
Considering that properties change hands at known intervals on average, every $1000 in transfer tax is roughly equivalent to $200 per year in annual property tax. When you adjust for this, the taxes are comparable to those of other municipalities.
at 9:55 am
@Boris – The municipality does actually LOWER the tax factor each year to offset the increase in prices (assuming no increase in tax). I know it’s hard to believe until you see it. Look at the historical tax rate for your city over the past few years and you will see this.
Here is one for Toronto:
You can see the Total Tax Rate has actually DECREASED year to year.
If you house is exactly average you do not pay more tax just because the assessed value of your house went up, only if the increase is more than average or if the municipality actually increased your taxes.
at 10:04 am
Boris — You clearly have no idea how mill rate works… By definition of how the mill rate works, if everyone’s property value increases on average by XX%, then the mill rate (factor) will decrease by XX%. It won’t say at 0.7%, it will be 0.7-0.7*XX%. So only if your property increases by MORE than the average property for the entire city do you end up paying more.
Your assumption that the tax factor will not change is outright wrong. The tax factor is not a fixed value, it is a value that is recalculated each year based on the property valuation of the entire tax base — not yours specifically, but everyone’s as an aggregate.
If you property value increases a lot because you put in a nice reno, or you’re in a hot neighbourhood, then yes your net tax bill will likely increase because your valuation increases more than the average.
at 11:31 am
The whole process is:
A) city sets operating budget for year
B) assessed values of all properties is determined (only done every x years, but values are phased in so the assessed values do change every year)
C) city determines required tax rate (toronto does not use a mill rate, some weird accounting/legal distinction between a mill rate and a tax rate) to generate A) from B)
Also to note, Toronto is incredibly lopsided between res and commercial taxes – read the tax bill for your corner convenience store and you’ll understand one reason TO is more expensive
than anywhere else.
Also, if you look at property taxes in any major cities you’ll see they’re way higher than here. I hate paying my $9k in property taxes plus garbage and water fees as much as the next person, however, the reality is that cities are expensive to run. Read the deloitte study on the city’s finances. Reality is we’re getting what we pay for when we have under-investment in our infrastructure because Toronto voters won’t cough up an extra $1,000 a year to make the city better.
at 12:37 pm
Just to drive Daniel’s point home. Toronto tax rates by category on a property valued at $500k:
This from the website of a local Realtor: http://josiestern.com/calculators/greater-toronto-area-property-tax-calculator/
In other GTA-area cities, the gap between residential and commercial / industrial rates is not nearly as wide.
at 10:24 am
The lady who was the subject of this article should be focused on being fiscally responsible for the condo. It is not her position and none of her business when it come to other owners and their budgets. If they own a home presumably they knew the costs going in. Trying to protect them from reality is patronizing and not what they elected her to do.
at 11:08 am
I agree with this. The condo board is not a government that imposes taxes, it is a homeowner
“collective” that is responsible for keeping the communal “home” heated, lit, and in good repair. The condo board deciding to freeze fees so that residents can spend their money on other things is analogous to a homeowner who defers maintenance for the same reason.
at 11:10 am
It would be very interesting to see how per sq ft Toronto condo fees evolve over time in a given building, as a function of the location, age, builder, etc. David, Appraiser, etc. — does anyone collect this information?
at 11:54 am
How Much Should Maintenance Fees Increase Each Year?
Enough to cover operating expenses and to maintain an adequate reserve fund. The real question is how much should operating expenses increase each year. I don’t think the answer is 0%, but i also think it should be considerably more than inflation, without a good explanation for which items have gone up and why?
at 4:12 pm
Oops, should say, “but i also DON’T think it should be considerably more than inflation, without…”
at 1:38 pm
For a comprehensive explanation of how realty taxes are calculated in T.O. : http://www1.toronto.ca/wps/portal/contentonly?vgnextoid=6245ff0e43db1410VgnVCM10000071d60f89RCRD&vgnextchannel=63b0ff0e43db1410VgnVCM10000071d60f89RCRD
at 11:43 pm
Anyway, having got all this stuff off our collective chests, let’s get back to reserve funds and taxes. I agree that condo fees should rise at whatever percentage is required to cover the corporation’s costs without dipping into, or scanting, the reserve fund. Because if they don’t, then the corporation will either dip into the reserve fund or do without necessary maintenance and eventually you will need a special assessment. Anyone who argues against the rise in fees doesn’t understand how buildings deteriorate over time or what the real costs are.
As for real estate taxes, I also agree that a freeze is unwise. We have put off a lot of maintenance in this city over the years and the chickens are coming home to roost. A big boost in taxes is coming soon or a massive disaster, choose one of. (Anybody remember the ice storm?)
at 9:49 pm
Database for condo fees – Great. Idea. David, why not (if you have the info) illustrate the tale of two condos – one that has a condo fee that is probably pretty high but the property management gets everything done right (ie Summit at king/bathurst), vs…that place on Lombard, the one with the Interstellar Black Hole water heating superconducting thingamajig?
at 11:50 am
If condo fees go up every year then our salaries should as well ! Which they are not
at 3:11 pm
As a landlord I can only increase the rent by the cost of living increase. And I can’t play catch up if I do not raise the rent one year. Can condiminiums legally increase fees more than the cost of living regardless of a freeze the previous year?
at 10:21 pm
I was just given a notice of 2 days that there will beincrease for my condo fees of 5.5%. Did you get a reply on the question you posted back in Jan? Just looking for some feedback.
thanks a bunch,
at 10:16 am
Our maintenance fees have increased 43.29% since 2014, not including $600 extra for a ‘special assessment.
at 2:17 pm
I live in a community of townhouse condos. After living here for 5 years with maintenance fees increasing annually, they are now raising them from $270/mth to $400/mth. That’s a 50% increase! This increase is to cover past debts incurred by the president of the community (poor money management) and future activity center that we thought was included with the purchase of our home. Is this legal?
at 11:03 pm
How much (what percent) can the townhouse condo management company legally raise the common expense fees for one year. Our fees have gone up 90% over the last 49 years.