I’ve had the weekend to digest the “Ontario Fair Housing Plan,” the title of which sounds eerily-similar to the “Ontario Fair Hydro Plan,” and I’ve come to the sad, yet somewhat expected conclusion, that the entire thing is just political rhetoric.
Save for a foreign buyer’s tax that might affect a couple people here and there, and rent controls, the rest of the “plan” is a list of vague, rambling, hollow, and incomplete “points” that don’t specify actual action to be taken, or a timeline, or a plan for implementation.
Mumbo-jumbo. Gobbledygook. Hocus-pocus. Blather.
What else would you expect from Kathleen Wynne?
“You can’t tax your way into a cooler market.”
That’s what I’ve said all along.
From the moment the rumblings started about the government “taking steps to cool the market,” through the speculation about what measures they would take, right up to last week when their 16-point plan was announced, I’ve continued to reiterate that the government simply can’t tax their way to a cooler market.
It’s naive. It’s novice. And it’s insulting to the constituents of the province.
Taking money away from people is not going to help cool the real estate market.
The real estate market, like any market, is about two things: supply and demand.
I know, I know – I’ve said this before a thousand times. And although that’s more of a metaphor, I think over the years, the times I have mentioned supply and demand may now actually add up to a thousand!
In any event, while I didn’t have high hopes for the Liberals’ measures to address the housing market, I did hope that they would do the simplest, easiest, most obvious thing possible and start their “plan” by looking at supply and demand.
Having read through their plan, it’s now clear that they did nothing of the sort.
Friday’s blog, for which I applaud each and every one of you who commented, probably had more meaningful, well-thought-out ideas than every meeting between the Liberal figureheads over the past few months.
Why can’t they see what’s staring them right in the face, and yet we simple folk can?
If you want to cool the market, you need to do one, or both, of the following:
- Decrease Demand
- Increase Supply
It’s not rocket science, and yet watching the Liberals try and figure this out is like watching monkeys try and put blocks into slots.
All the Liberals needed to do, that is, if they really wanted to attempt to cool the market (many think they weren’t interested in seriously implementing policy change, but rather wanted to hold a press conference and make announcements about nothing), is figure out how to decrease demand, or increase supply. That’s it. It’s that simple.
Instead, what we got last week were 16-nonsense-points, some of which had nothing to do with real estate (elevators???), or were vague, or referenced a future call to action.
Let’s start from the beginning here, and I’m working off the “16-Point Plan” which can be found HERE.
1) Foreign Buyer’s Tax
I’ve been saying all along, that if we want to cool the market – in this case, by decreasing demand, then we can do so rather easily by implementing a foreign ownership ban, that masquerades as a tax.
Because as I’ve said with Vancouver – nobody, I don’t care how rich they are, is going to pay a $300,000 fee to purchase a $2,000,000 property.
That tax in Vancouver is essentially a ban.
And while I can see why governments don’t want to enact “bans,” and thus they’ve implemented a tax that nobody is going to pay, I still can’t see why Ontario, or Toronto, didn’t implement the tax as Vancouver did.
Because make no mistake – our tax is not their tax.
Their tax is a 15% tax on foreign buyers.
Our tax is a 15% on foreign buyers, subject to a slew of exemptions and rebates.
Their tax will have a tangible effect, and already has.
Our tax will have virtually no effect.
The government really dropped the ball here, that is, if they wanted to actually decrease demand with this foreign buyer’s tax.
And personally, I was all for the tax, er, ban.
Canada is for Canadians, or at least it should be. I see no reason why hard-working, tax-paying Canadians should be pushed to the back of the line, because people across the world, who’s currency renders ours Monopoly-money, are buying up our real estate like it’s going out of style.
I know there’s a counter-argument to be made here, and one upon a time, I would have made it. Every country strives desperately for foreign investment, and some time ago, as will be the case in the future, Canadians will be starving for foreign investment.
But that time is not now. Not with respect to real estate.
So while I personally would have supported measures similar to that of Australia, I think what the government did last week – telling constituents that they’re bringing in a tax, when the tax will have a fraction of the implied effect, is gutless.
2) Rent Controls
This is, quite possibly, the stupidest thing the Wynne government has ever done.
Thirty years from now, university students will be reading about this policy decision in text books.
I haven’t seen a single economist who thinks this is a good idea, in fact, every economist out there is saying it will have the complete opposite effect as what was intended.
And let’s not forget, that this whole issue came out of a CBC story that was, in my opinion, flawed journalism.
Back in February, Shannon Martin from the CBC wrote a story about how her rent was going up $1,000 per month, and that led to other stories about rents “doubling.”
As several commenters pointed out on Friday’s blog, this wasn’t about rents going up – it was about getting tenants out so that the landlord could sell the unit.
If you’re a landlord in this market, you know that not only do you need to sell your condo with vacant possession (ie. no tenant attached), but you also need the unit vacant for the sale process so you can clean, stage, and have unfettered access.
So through legal means, you can tell the tenant his or her rent is going up “one hundred billion dollars,” and that will cause them to walk away.
There was zero mention of this in the CBC story, nor was it explained in follow-up articles.
All the media was about how “prices for rentals are doubling,” and all the while I pulled my hair out and tried to find somebody to listen.
I must have told 5-6 media members, through interviews that they solicited, how misleading these stories were.
But nobody reported what was really going on.
And I felt like this:
How fitting that a Liberal policy change was based on flawed and misrepresented information.
3) Actions To Protect Tenants
The Liberal government is going to give us a “standardized lease,” which might be worthwhile, except that we already have one.
If you do a lease through MLS, you’re signing the standard OREA “Agreement to Lease,” which is subject to the clauses and conditions that the landlord and tenant agree to.
Those clauses and conditions must be variable. They form part of the negotiation, just like the price, deposit, and closing date.
Who is going to create this standardized lease? Who is going to enforce it? How is it going to be implemented? And what if a landlord doesn’t like it?
As it stands now, the “standard” OREA “Agreement of Purchase & Sale” doesn’t stop somebody from taking a ballpoint pen and striking out some of the “pre-printed text.”
What the hell do they mean with this standardized lease?
4) Leverage The Value Of Surplus Provincial Lands
Great idea.
But how long will it take to implement?
This will undoubtedly go through studies, committees, panels, reviews, and eventually fizzle out like most other proposals.
5% of the units will be “affordable ownership,” they say. What does that mean? Tax-payers subsidize the ownership of a handful of units for people who essentially win the lottery?
5) Vacant Land Tax
This is how the point reads: “Introducing legislation that would, if passed, empower the City of Toronto, and potentially other interested municipalities…”
“If passed.”
So the Liberals are taking credit for allowing Toronto City Council to potentially vote on something like this, at some point, maybe.
Classic politicking.
6) Property Tax For New Multi-Unit Residential
Hilarious!
This is a joke, right?
The Liberals think that point #6 still applies, despite point #2.
The point reads: “This will encourage developers to build more new purpose-built rental housing…”
Really?
But you completely discouraged them from building rentals when you brought in rent control!
Oh, Liberals!
7) Rebating a Portion Of Development Charges
$125 Million over 5 years.
Isn’t the GDP of Ontario about $800 Billion per year?
Who cares about $125M, especially when it’s “in those communities that are most in need of new purpose-built rental housing,” which essentially means they have no idea where they’re going to implement this yet.
Once upon a time, $125 Million over 5-years was significant.
Now it’s what Kyle Lowry is going to sign for this off-season…
Oh, and by the way – that $125 Million is being rebated to developers. So the Liberals will have to replace it with…….more taxes on us?
8) This BS:
“Providing municipalities with the flexibility to use property tax tools to help unlock development opportunities….”
Seriously?
This is such politicking!
This doesn’t even MEAN anything!
It’s just words, strung together, sounding important!
Remember what I said about crazy pills???
9) Housing Supply Team
This makes me want to puke:
“Creating a new Housing Supply Team with dedicated provincial employees to identify barriers to specific housing development projects and work with developers and municipalities to find solutions.”
Great. So they’re creating another wing of government, that will create more new and useless jobs, that taxpayers will foot the bill for.
And more nonsense/meaningless rhetoric: “…identify barriers to specific housing development projects….find solutions.”
It’s like in Grade One, when the teacher says, “Break into groups, and discuss.”
Except this isn’t Grade One – this is the adult world, and the Liberals want to create a wing of government, to……….break into groups, and discuss.
10) Paper Flipping
Once again, the point doesn’t lay out any action, but rather implies that maybe, at some point, something will happen:
“The province will work to understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as paper flipping.”
What is this crap?
“Work to understand,” they say.
How many panels, committees, groups, and boards will be created to address this topic?
11) Double-Ending
They want to end, double-ending?
The public doesn’t like it?
Well neither do I, and neither do most agents.
But the truth is, folks, if Realtor Bob wants to double-end his listing, and he can’t represent buyer and seller, he can always find some rookie in his office to submit the offer for his buyer, and pay a referral fee.
Agents will find a way around this, just as foreign buyers will find a way around the tax.
Sorry – but don’t shoot the messenger.
That aside, I do like the idea of a complete overhaul of the system that governs us. REBBA 2002 was written in, well as you might guess, 2002.
I have no idea why this legislation is so out of date.
But wait…..wasn’t the Condominium Act written in 1998?
12 Housing Advisory Group
Great. More government.
13) Educating Consumers
What?
When?
How?
Where?
These 16-points get worse and worse as we move to the bottom.
It’s just hollow, mindless drivel at this point.
14) Partnering With C.R.A.
I suppose if we all pay more tax, then somehow, magically, we’ll be able to afford real estate?
15) Some BS About Elevators?
Come on, Liberals!
You’re not even trying anymore!
You’re so desperate to flush out your 16-point plans that you put something in here about elevator repair!
16) Growth Plan
When I see words like “understanding” and phrases like “working with,” it just shows me, once again, that they’re not actually outlining any specific proposals, but rather are going to give us a long paragraph that we get tired of reading halfway through, and simply give up, and assume they’re doing……something.
Although the last part of this paragraph does specify that “nothing” will happen to the Green Belt, which, of course, is one of the most frequently-suggested solutions to our housing woes.
–
Phew.
And here I thought I might come off as being cynical for a change…
Look, I don’t want to turn this into a political debate, but at the same time you can all infer that I’m not a Liberal supporter.
Kathleen Wynne has set this province so far back with her actions over the last four years, and now she’s standing up in front of a podium, promising things she can’t deliver, with “policies” that have no teeth, and essentially taking credit for future successes at the municipal and provincial levels.
If the government wants to cool the market, they have to do one of the following:
- Decrease Demand
- Increase Supply
Aside from a foreign buyer’s tax that might take a handful of buyers out of the market, these policies do nothing to decrease demand, or increase supply.
And the only one of the 16-points that has any teeth – the rent controls, will ultimately lead to lower supply in the long term.
This is 16-points of bullshit, in my opinion.
The irony is – I haven’t found a real estate agent out there who thinks this “16 point plan” will have an effect on the market. Nor do I have one single buyer who wants to change his or her plans.
Sure, sellers are asking, “What impact will this have?”
But the early results out there – from opinion pieces in the media, suggest that most people don’t think this 16-point plan does anything to address the “crisis” we’re in, let alone take steps to “cool the market.”
This will cease to be a story in two weeks.
I’m sick about this. It makes me want to bury my head in the sand.
How did we get here?
Who voted for this woman?
And what else will she do in the next 13 months to try and win favour with the voting public?
I shudder to think…
Jack
at 7:08 am
Yes, it is supply and demand. But it is not as straightforward. In a normal market, prices are driven by supply and demand. In a speculative market, supply and demand are driven by prices.
Chris
at 8:59 am
The real estate market is so obfuscated that it can hardly be considered an open market. Buyers and sellers lack clear and timely information, upon which to base their decision.
In the stock market, you can see what a stock has been selling for. You can see how its price has changed recently. You can read about its fundamentals.
In the housing market, none of this information is available to the public. You don’t even know what other people are bidding on the home. The entire system is set up to confuse, disorient, and obfuscate facts.
Until this is remedied, talking about the real estate market as if it is some sort of free and transparent market, akin to other markets, is fundamentally flawed.
Jack
at 10:32 am
Agreed. The housing market is neither open nor free nor transparent. Buying and selling real estate will never be like the stock market, but more clarity and transparency would be a good thing. Too bad that publishing sales data for everyone to see is not included in the “16 points”.
Chris
at 10:41 am
Definitely agree. While the housing market will never be like the stock market, we can look south of the border to see what greater transparency looks like. Websites like Zillow and Trulia provide tons of great data. For example, look at this house for sale in Dallas, Texas:
https://www.zillow.com/homedetails/6909-Meadowbriar-Ln-Dallas-TX-75230/26753178_zpid/
I can see its sales history, tax assessments, comparable properties, etc. Meanwhile, up in the Great White North, any attempts to share this data are bogged down by lawsuits from real estate boards.
I should also point out that while this blog is focusing on double-ending, the actual wording of point 11 of the Ontario Fair Housing Plan is far broader:
“Working with the real estate profession and consumers, the province is committing to review the rules real estate agents are required to follow to ensure that consumers are fairly represented in real estate transactions. This includes practices such as double ending. The government will modernize its rules, strengthen professionalism and improve the home-buying experience with a goal to make Ontario a leader in real estate standards.”
So yes, double-ending is explicitly mentioned, but hopefully point 11 will encompass changes to transparency, obfuscated bidding practices, etc.
Jack
at 3:35 pm
As for publishing sales data: I don’t understand why the governments bother with even discussing this the real estate boards. All the important information about home sales is recorded in databases under government control. MPAC even has a web site where sales for individual properties can be looked up, but currently only with a long (years) delay. Just invest a few million to update the feeds to be real time, make the web site a bit more user friendly and let anyone access it.
Joel
at 5:21 pm
This is a great argument. It is not a free market when a group that benefits from high prices controls the information.
DC
at 7:48 am
No realtor likes it, but a land speculation tax would have worked, along with going after the closed bidding process and major under listing.
Alexa
at 12:09 pm
This. A solution that could work in one sentence.
kd
at 8:26 am
Rent controls make me nervous. The rest is just noise.
If enough landlords decide the lure of rising property prices isn’t enough to offset new operating losses, we could actually see supply increase enough to soften price increases. Of course if those lining up to construct more purpose-built rentals now decide to go back to building condos, notwithstanding the increased costs imposed by the new Condo Act, a countervailing trend may ensue.
Either way it’s hard to see how any of this is good for either tenants or owners.
rene
at 8:49 am
Agreed. How long will the rental market see the meg effect? Are we building more condos from rentals and when will that decision be enacted?
Steve
at 8:39 am
Your comment about realtors trying to game the rules and get around the double ending a sale is quite shocking . Surely there must a code of ethics that prohibits these questionable behaviours which obviously breach the intent of the law.
If bankers can go to jail for insider Trading or tipping off their friends some insider information, why are realtors not going to jail for a similar practice ?
Politicians are now going to jail for accepting commercial benefit / cash gifts for supporting policies or deals made 10 years ago, and the government should do something to bad realtors and send some to jail to demonstrate they mean business and to stop these unethical practices .
Joel
at 11:21 am
I think if they actually take an action on the ‘paper flipping’ we will see an actual change. Not allowing assignment sales would change the way many people look at real estate investments.
Within the financial sector you need to be an accredited investor in order to invest in higher risks and leveraged investments, but we allow anyone to do it in the housing market. This would see a drop in foreign and domestic investors.
There were so many loopholes in the foreign buyer tax that it was slightly above useless.
Alexa
at 12:11 pm
What are the loopholes? The legislation isn’t even drafted yet.
Chris
at 12:21 pm
Not so much loopholes as exemptions that people worry (rightly or wrongly) will be exploited.
http://www.fin.gov.on.ca/en/bulletins/nrst/nrst.html
Exemptions
An exemption to the NRST is available to a foreign national who receives confirmation under the Ontario Immigrant Nominee Program (“nominee”). To qualify for this exemption, the foreign national must be confirmed under the Ontario Immigrant Nominee Program at the time of the purchase or acquisition and the property must be used as the foreign national’s principal residence.
An exemption is also available to a foreign national who is conferred the status of “convention refugee” or “person in need of protection” (“refugee”) under the Immigration and Refugee Protection Act at the time of the purchase or acquisition.
A foreign national who has a spouse (as defined in the Land Transfer Tax Act), who is a Canadian citizen, permanent resident of Canada, “nominee” or “refugee” is exempt from the NRST if the foreign national jointly purchases residential property with that spouse.
However, the exemption does not apply if the Canadian citizen, permanent resident of Canada, “nominee”, or “refugee” and his or her foreign national spouse purchased the property with another foreign national. For example, if three parties purchase a property as follows:
one Canadian citizen and his or her foreign national spouse; and
a third party who is a foreign national,
the exemption would not apply and NRST would be payable.
Rebates
A rebate of the NRST may be available in the following situations:
The foreign national becomes a Canadian citizen or permanent resident of Canada within four years of the date of the purchase or acquisition;
The foreign national is a student who has been enrolled full-time for at least two years from the date of purchase or acquisition in an “approved institution”, as outlined in Ontario Regulation 70/17 of the Ministry of Training, Colleges, and Universities Act; or
The foreign national has legally worked full-time in Ontario for a continuous period of one year since the date of purchase or acquisition.
In order to be eligible for the rebates, the foreign national must exclusively hold the property, or hold the property exclusively with his or her spouse. The property must also have been used as the foreign national’s (and if applicable their spouse’s) principal residence for the duration of the period.
The rebate will be paid with interest, calculated at the prescribed refund rate under the Land Transfer Tax Act.
Supporting documentation will be required to substantiate all applications for rebates.
Juan
at 12:49 pm
So what do you think needs to get axed to make the tax useful, the student exemption? I doubt the refugee exemption will be all that relevant.
I think it’s hard for the government to disallow PRs from buying property.
I’m curious how foreigners will view the rebates. They have to outlay a large sum of money now for a rebate 2-4 years in the future.
Chris
at 1:00 pm
I’m honestly not sure. I’m reserving judgement on this tax until we have more data to see what kind of impact it has had on the market.
I wasn’t saying one way or another if I agree or disagree with the exemptions, was just outlining what they are.
Joel
at 5:19 pm
I don’t think there should be any rebates. The student one is bad as it will take away education options for Canadians and provide a financial benefit to the parents. There is absolutely no need to buy a house wherever you go to school.
If you are a permanent resident or citizen you pay no tax, if not then you do. Companies can only have Canadian citizens as owners or they also pay the tax.
I don’t know that a foreign buyers tax is the way to go, but what they did was provide enough options that most can easily skirt the rules and avoid the tax.
Daniel
at 11:34 pm
i can’t respond to Joel’s comment directly for some reason, but specifically “The student one is bad as it will take away education options for Canadians and provide a financial benefit to the parents. There is absolutely no need to buy a house wherever you go to school.”
You think foreign students take away education options for canadians? you do understand that foreign students pay something like 4x the tuition of ontario residents right? You do understand that foreign students are basically subsidizing ontario students right?
Juan
at 12:38 pm
What is the big difference between the Toronto and Vancouver foreign buyers tax?
Geoff
at 12:47 pm
I would think the biggest thing the government could have done is simply mandate that all bid details be open to all participants who have submitted a bid during the purchase process. I also think that would have been the easiest thing to execute as well.
Jack
at 3:47 pm
How long before a large company with deep pockets and expertise in auctions, such as eBay, Sotheby’s or Google, implements a system for selling homes by open auctions, with a cut of say 1%? Then there will be no need for intermediation by brokers, except perhaps some buyers will want to hire someone to help them research the market.
Geoff
at 4:34 pm
Well it would have to be a hell of a system, as auctions generally focus on one criteria – price – whereas a home has multiple considerations including for instance conditional vs. unconditional offer, closing date, flexibility on certain conditions, etc….
Jack
at 7:51 pm
Yes, it would have to be a hell of a system. That’s why I don’t think it will be put together by an amateur in his garage.
Xi Dada
at 9:07 pm
Hey you never know, the most valuable company on the face of the planet was put together by two guys in a garage.
jeff316
at 10:12 pm
I don’t think those would be problems for an auction system, other industries/items frequently subject to auctions involve reserve prices, clauses, conditions, etc. Art is a big one. Lots of behind the scenes wrangling.
The issue with the auction system is whether it would be another dead cat bounce for real estate prices, just as they may be slowing.
Potato
at 1:02 pm
On rent control:
“As several commenters pointed out on Friday’s blog, this wasn’t about rents going up – it was about getting tenants out so that the landlord could sell the unit.”
Precisely: without rent control, all other tenant protections are toothless. The landlord can just set the rent to a billion dollars a month and effectively evict the tenant for any reason whatsoever. “Economic eviction”. Without security of tenancy, renting becomes a non-option for lots of people, and then they feel forced to buy no matter the price, which adds fire to the demand side. So extending rent controls are probably the best part of that package for reducing demand.
The economists’ arguments against rent control in the papers are also very weak. Yes, rent control is one more marginal thing against building purpose-built rentals, and in other jurisdictions where it’s been put in, rental construction has historically slowed. But low cap rates are a bigger problem for building rentals, and lie outside the government’s control — with or without rent control, we’re not going to get rentals built when condos are a much more profitable use of the land, so we can at least protect tenants. A better compromise might have been rent controls but with a cap a few percent above inflation: room to increase rental rates above general inflation if needed/warranted by the market, but not complete freedom to issue economic evictions.
Ralph Cramdown
at 1:38 pm
I once saw an investor’s property worksheet, with entries for three separate inflation estimates — one for maintenance and operating costs, another for the rents, and a third for the market value of the property. Yes, those numbers will be slightly different year to year, but anyone who thinks they’re good at estimating those differences, or that they can be wildly divergent over the long term is a damn fool.
Jason
at 9:54 pm
Agreed. Rent control with a 2% cap above inflation would be a better option if rent control is necessary. There are definitely going to be some purpose built rental projects cancelled with the implementation of these measures as they stand now!
jeff316
at 10:09 pm
I had been weighing whether to get after the weak arguments put forward by David and others against rent control but your post is better than anything I could have written.
Daniel
at 11:30 pm
really dude, low cap rates are a problem for building apartment buildings? what RE school did they teach you that at.
After several years of strong rental growth going in yields on a new build are maybe 5%. Combined with cap rates down around 4%, maybe even lower, is what unlocked purpose built rental. That simple. So, you’re making a 20% c-o-c yield, if cap rates stay low for the next 5 years while you get the project entitled and constructed and leased. You 100% sure of where interest rates will be in 5 yrs?
You tell me how to lease up a 400 unit apartment building when i’m wedded to the rents? Why is the vacancy rate at 1%? Is that some industry conspiracy?
How anyone can even remotely support straight up rent control completely blows my mind. I mean, i guess i understand the simple minded reasoning of high rents = bad therefore rent control good, but i presumed people reading a RE blog would give it just enough thought to figure out how dire this is for our society.
o
at 2:04 pm
As I mentioned in a previous post, I own a property in the GTA right on the subway line. I am not a flipper or speculator, just an average guy who settled down and bought a house to use as a home.
I have room in my basement for 2 apartments. I also have enough space in the back to put in a laneway house….if those ever get approved. In short, I have the ability to increase housing supply in this city.
In the past, I hesitated to offer my space as a rental due to the lack of protections to landlords. Now that they added rent control, I can say with 100% certainty that I will not be getting into the landlord game. How many homeowners in Toronto are just like me?
So the big question is, how do they get people like me to open up their spaces, because I don’t see anything in this plan that would give me incentive to add supply. Serious question if anyone has any suggestions.
Ralph Cramdown
at 2:25 pm
“How many homeowners in Toronto are just like me?”
It doesn’t matter. You were too prudent to become a landlord before, and you still are. Net, no change.
o
at 2:35 pm
So how do you suggest people like me become less prudent? Do you think these 16 steps will encourage people like me to risk opening up my space?
Chris
at 3:20 pm
For your situation, I’m not entirely sure what else could be done to incentivize you to rent out the additional space in your home.
However, for those who have additional properties, the vacant home tax discussed in point 5 of the Ontario Fair Housing Plan would provide incentive to either rent the property or sell it.
“Introducing legislation that would, if passed, empower the City of Toronto, and potentially other interested municipalities, to introduce a vacant homes property tax to encourage property owners to sell unoccupied units or rent them out, to address concerns about residential units potentially being left vacant by speculators.”
Numbers vary on the estimate of vacant homes in Toronto. As Kyle is liable to fly off the handlebars into a fit of rage if I cite Better Dwelling again, here’s a CBC article on the topic:
http://www.cbc.ca/news/canada/toronto/tax-vacant-homes-ontario-mayor-tory-finance-sousa-1.4048197
“He cited census data that suggests there are as many as 65,000 homes empty in the city right now and his officials will now sift through city data such as hydro and housing bills to find a more accurate number. ‘That is a very significant number and it is a number of homes that, if they are vacant or are not on the market … that has an impact on prices,’ Tory said.”
Condodweller
at 8:10 pm
Correlating hydro usage should clearly identify unused homes.
Jack
at 3:57 pm
Yes, being a landlord carries risks. So every landlord must decide what profit will balance that risk, and so how much to charge for rent. Beyond that, how does rent control change that for you? Do you expect that the risk of being a landlord will increase over time? Do you expect that your costs will rise faster than inflation? I am asking this because I am curious, I don’t mean to imply that you are wrong.
O
at 7:20 pm
I am opposed to rent control on philosophical grounds.
Condodweller
at 8:14 pm
I am not overly concerned about rent control at this time, as I explained in my post above. I am much more concerned about being able to evict bad tenants. I can’t believe it takes months to get rid of someone if they stopped paying rent. My selection process mitigates the issue somewhat, one can never be sure though.
Jason
at 9:50 pm
I am a landlord with properties in Toronto and Montreal. I am opposed to rent control in the form it has proposed by the Ontario Liberals. I think the proposal punishes investor in pre-construction condo projects because, on completion, 50% of the units will be for rent and therefore your initial lease will be below market rent. Off of that low base, if you’re only allowed to increase rents indexed to inflation, it will take forever to get up to market rent, assuming the tenant doesn’t turn over. I think if rent control needs to be implemented, it should be done similar to Montreal where there is no rent control for any new building for 5 years after completion. After 5 years, the unit is subject to the guidelines. It could be reduced to 3 years perhaps. In my experience, I tend not to increase rents to market rent after the first year because it can be a big adjustment for the tenant. I phase the increase in for a few years. I’m happier to have a good tenant who takes care of the unit than to increase the rent by a large amount and cause more tenant turnover. To answer your question about whether costs for a landlord increase faster than inflation, the answer is definitely yes. Condo fees and property taxes generally increase at a faster pace than inflation.
I had already stopped investing in new pre-construction projects, but if I was still investing in those projects, these rent control measures would force me to stop for the reasons mentioned above and I would focus on resale condos. I have several condos currently under construction and I will have to assess whether i need to let the unit sit empty until I get close to market rent or accept a lower rent and hope the tenant turns over and I can increase the rent to market price.
Joel
at 12:16 pm
Many people would see it as a good thing that investors are not buying up multiple pre-construction units. Someone that moves into a condo should not be forced out, it is a mutual agreement between renter and owner.
Jason
at 3:35 pm
I’m not suggesting they should be forced out! I’m suggesting that there should be a mechanism to allow landlords to increase rents on newly constructed units that were leased at a discount because construction of the common areas and amenities were not yet complete. Once the building is registered and construction is complete, rents should reflect that. With such a low vacancy rate, more rents, units are needed. I believe rent controls, if passed, will limit that supply, both from purpose built rentals and individual investors.
Ralph Cramdown
at 2:08 pm
I am not an expert, so forgive me if I get things wrong. But it is my impression, in Toronto at least, that developers are in a big hurry to get an occupancy permit so they can start charging their investors interim occupancy fees, but are much more lackadaisical about finishing the job and registering the condominium. In between, investors are forced to either eat those monthly fees, or find a tenant willing to live in a construction zone with a bunch of unfinished amenities, almost certainly at a discount to what a unit in the completed building would rent for.
I don’t see how this is the government’s problem, or the renter’s problem. If you as an investor agree to start paying for something before the builder has finished building it, that strikes me as a bad idea.
There’s a seemingly sophisticated investor further down in the comments section who claims 1) that the vacancy rate is around 1% and 2) that lease-up at full market rates in a newly constructed apartment building is Mission Impossible, which sounds similar to what you are saying. But this doesn’t make much sense to me. If the rental market is really that tight, would these units not fill up within a few months if actually priced at market rates?
Help me understand.
Jason
at 3:50 pm
I’ll do my best to help you. In my experience, the delay between occupancy and registration of a building varies greatly depending on the developer. Some units I’ve purchased have had a very short occupancy period of 1 to 3 months between initial occupancy and registration. Some others have had a long occupancy period of about a year and some developers (Urbancorp) and maybe others have had occupancy periods of more than 2 years. During occupancy period, units are rented at a discount because of the reasons you mentioned. Incomplete amenities area, hallways aren’t finished, lots of dust, noise, etc. once the builder registers and construction is complete, a landlord should be entitled to raise the rent to market rent since the items mentioned above are resolved. Why should a landlord only be allowed to raise rent 2% a year off of an artificially low base when the building is complete?! I’m not saying it’s th government’s problem, but if they are implementing policy, they have to look at it from both sides.
I agree that the current Condominium Act is crap and that there shouldn’t be an occupancy period. Units should be delivered when the entire building is complete, but that’s not going to happen. It is one of the reasons that I’m not investing in pre-construction condos any more. As for why do people do it, For the power of leverage. If you can buy a $500,000 condo for 15% to 20% in deposits and ride the rising real estate market during construction, it’s a no brainer. It was much easier to do that in 2009/2010/2011. At these prices, I wouldn’t take that risk.
Ralph Cramdown
at 2:13 pm
Yes David, this is all political. But what did you expect? One can’t complain when he takes his car to a mechanic and a problem was fixed, which turns out have been mechanical. Ditto with politicians and political issues.
The use and ownership of land, taxation, and determining who bears the burden of the costs of government services are about as political as it gets. That’s politics, or democracy, or legally constrained capitalism, or whatever you want to call it. Here’s an important point which I think bears mentioning: When a large enough fraction of society finds the situation unbearable, war and revolution are often the result, and it sucks for those of us who aren’t broke. I can agree with some posters here who might say to a household whose primary breadwhiner is a barista at Starbucks: “Nobody is entitled to own real estate in Toronto.” But as the water level creeps up, and people starting expressing that sentiment to professional households with graduate degrees, it starts to sound like “if they cannot afford bread, then let them eat cake,” which ended badly for the landowners of the time.
Anyway,
I think an important analysis tool is to look at political decisions and ask “can this be fixed? What are the long term consequences?”
If we decided that the foreign buyers’ tax or the greenbelt protection was a bad idea, we could fix it inside a month. The readjustment by wary investors might take a bit longer to happen. The effects of reversing rent controls might take longer still. But the costs of paying somebody $1 billion not to build a power plant, signing a long term contract to buy electricity at $0.80.kWh, or spending $4 billion on a subway with only one stop? Those go on forever, absent a default or currency inflation.
There’s also that nasty little matter of increasing healthcare costs as the boomers (and society, on average) age. This certainly isn’t the fault of any living politicians, but the bill is coming due.
At some point, you have to check a box:
__ Real estate here, and residency, and the associated taxes, makes a good investment here
__ Real estate here is a good investment in spite of likely taxes and future liabilities
__ Maybe somewhere else.
I have political opinions, some of which have changed over time. But I’m not trying to express them in this comment. Political decisions will be made, regardless of what anyone desires. Unless we(?) can stupefy everyone on Facebook, those decisions WILL be made by something resembling the majority or at least a plurality.
jeff316
at 10:07 pm
Hallelujah. Thank you.
Condodweller
at 2:36 pm
There are a lot of IFs in the 16 points and perhaps this is why the media has focused in on the first two points. I have two main impressions from these new “rules”:
1. This whole thing seems like floating a trial balloon to see how the public, and perhaps more importantly, how builders/investors react before committing to anything.
2. They are using the “cooling the real estate price” head line to bring in a slew of other provisions effecting things on the minds of not only purchasers but renters as well i.e. standard lease, elevators, rent control etc.
Ironically the first two items will, IMHO, have absolutely no impact on house prices. NRST is an easy don’t hurt Canadians but get some extra money into government coffers solution where as rent control will have no impact whatsoever other than getting developers to abandon their rental building development plans.
Rent control from individual investor’s point of view who may have several condos to rent out is totally meaningless at the top of the market. If they wanted to really protect renters, rent control should have been put in place years ago in anticipation of rent increases. The horses have left the barn a long time ago. With rents where they are, 2.5% annual increases are more than enough to cover increasing property taxes and maintenance fees with the exception of brand new condos but in that case any investor who believes that 27 cents/sqft maintenance fees are realistic deserve what they get.
Anyone who is relying on future rent increases to make his/her investment workable should find other ways to invest their money.
I think the most effective measures will be the following:
#10/14 Eliminating loopholes where people will be forced to pay either capital gains or business tax on flipping homes will eliminate speculation which again IMHO stands the best chance of cooling, or at least stabilizing home prices.
#11 Double ending, as someone has pointed out, will be the thin edge of the wedge. This also has the potential to moderate prices if they were to make the bidding process more transparent or completely revamp the process.
Creating a standard lease available to every individual investor will be helpful for most new investors. I don’t know if the OREA lease is available to individuals, but one certainly does not need an MLS listing or an agent to rent his/her condo. When I started out my lawyer happily provided me with a lease and it didn’t cost me a month’s rent, or is it 10% of the annual rent these days?
I agree with comments in the media that the most effect these control may have is a short term pause in price appreciation or maybe even a slight pull back before charging ahead if buyers decided to sit back and watch the dust settle thereby either eliminating multiple offers or reducing the number of offers on a single house/condo.
I just feel sorry for people who have already bought a place and haven’t sold the old one yet. This may be an interesting topic for a future blog post.
Daniel
at 11:17 pm
Can you clarify why “Anyone who is relying on future rent increases to make his/her investment workable should find other ways to invest their money.”
Are you suggesting that an investment with a low going in yield that you anticipate will rise is a bad investment?
Jason
at 8:30 am
I think he’s suggesting that it can be a very bad investment. If you invest in real estate with negative monthly cash flow because you expect if will be positive at some point in the future or you expect to cash out with a large capital gain in a few years, I would consider that to be a risky investment. It may turn out ok for you, but if you keep repeating that same formula, at some point, the results are going to be disastrous!
Daniel
at 10:41 am
what if i invest in a RE project with very low free cash flow initially on the expectation that the cash flow will rise over time? Is that OK?
Jason
at 11:38 am
There’s no right or wrong answer. If you invest in real estate and it has positive monthly cash flow, it allows you to weather the real estate cycle and put some money aside for unforeseen expenses. It is easier for you to hold the real estate without being spooked by a change in market conditions. Generally, most investor will model an increase in rents over time of 3-5% in their cash flow projections. The concern is with investors who invest in negative cash flow properties and are relying on 10-15% rent increase to hopefully become cash flow positive 5 to 7 years down the road. This doesn’t allow for the investor to build a fund for unforeseen expenses or vacancies. If the investor is forced to sell in a down market, losses could be substantial.
Condodweller
at 1:38 pm
@Daniel. Jason has answered your question. Everything hinges on your plans. It is perfectly feasible to carry a cash flow negative property however you have to be comfortable with the risks and need other cash flow to support it. Let’s say you are currently saving $1,000 each month and you purchase a property that is $500 cash flow negative. You are now diverting $500 of your savings towards the property and you have another $500/month buffer should rents decline/property taxes increase/maintenance fees go up more than the allowed rent increase. This sounds like a reasonable plan for the long term. Keep in mind that both RE prices and rents are cyclical. It may not seem like it to those who joined the party during the last 20 years but that doesn’t change the fact. When I was in school I rented a place for about $700/month which had a maximum rent of around $1,400/month as the RE market tanked. The worst part is that RE market cycles and rent cycles usually tied together i.e. just as house prices go down that’s when your rental income is going to go down. The question you have to ask yourself is will you be able to weather the storm.
BTW I have been reading comments about how you can kick out a tenant and increase rent for the next one to get around rent controls. Back in the 80’s I don’t believe it was possible. It may be different this time around but don’t be surprised if they do the same again.
Condodweller
at 1:54 pm
To answer your second question, no, I don’t think it is Ok to rely on future cash flow increases especially with current high rents and the specter of rent control. Even without rent control how are you going to get higher than market rates for your average condo? But like I said, if you have cash flow from other sources or you think you can flip the property for a quick capital gain than go ahead. It depends on your entire financial situation including whether a long term capital intensive investment is the most suitable one for you.
Ralph Cramdown
at 2:30 pm
You just have to know that this is the well-known formula used by just about everyone who has ever gone bust in real estate investing. Lots of people have also done great using this formula, but it’s a lot harder to go bust with an investment that has good cash flow from the start.
Ralph Cramdown
at 2:36 pm
Why doesn’t it cash flow? Debt service.
Why do we need debt? Leverage.
Why do we need leverage? Poor ROI.
Why do we invest in things with poor ROI?
???
Profit!
Condodweller
at 3:50 pm
Absolutely, you won’t find me buying in this market. However people in this forum tend to be RE bulls, like leverage and don’t like alternative investments even if the return may be higher and at lower risk. People are high on the price increases over the past 20 years and either don’t know how leverage works both ways, or don’t believe prices can go down.
Carl Warner
at 4:30 pm
“Mumbo-jumbo. Gobbledygook. Hocus-pocus. Blather.”
Fair enough. But would you rather they’d opted for substantive policies/interference/meddling? I thought not.
Matt
at 12:56 pm
I do think that the government can and should tax their way out of this problem. There’s a pretty broad academic consensus that land taxes (not property taxes, but taxes on the unimproved value of land) are among the most efficient taxes. Given that so much of the appreciation in property prices relates to positive externalities associated with the build up of social capital in a city, it’s more equitable, and creates better work incentives, if land is taxed at a higher rate, and the level of reliance by government on income and consumption taxes is reduced. A higher land tax will be capitalized into housing prices, and most likely bring housing prices down, in equilibrium (although higher net after tax incomes may partly offset by shifting demand for housing higher). At a bare minimum, higher land taxes will ensure that the social benefit of infrastructure spend paid for by all taxpayers, doesn’t disproportionately benefit a small group of landowners who won in the real estate lottery.
Steve
at 4:31 am
Agree 100% . Municipal and provincial governments would likely then be better positioned for surpluses and then can use the money to fund the infrastructure, build affordable housing and improve the lives of people within society at large . Right now , too many people have been left behind and you have entire generations who are unable to improve their lives living pay check to pay check .
People born after 1990 who don’t have parents who can fund their home ownership dreams in Toronto really have no option but to move to another city or live as a “have not” if they choose to stay in Toronto .
JCM
at 4:14 pm
Contrary to much of the spin, including the above blog post, the NRST is in fact VERY STRONG. It is administered through Teranet, so a lawyer needs to sign off on every transaction, and it contains strong anti-avoidance rules to prevent avoidance using corporations or trustees. The only real “loophole” is for foreign students, but that’s justifiable from a policy perspective and relatively difficult to abuse. The Toronto NRST is much stronger than the Vancouver FBT.
Freddie
at 9:42 pm
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