A little time has passed since the government of Ontario announced its Fair Housing Plan, so people have had a chance to really think about and analyse the proposals. As such, we thought that the time was right to look at the entire fair housing plan to see what it means for people buying and selling properties and how it might affect the housing market in Ontario.
There’s a lot to cover in the plan, so we’ll start by going through the major points that may or may not affect the market.
1) “Introducing legislation that would, if passed, implement a new 15-percent Non-Resident Speculation Tax (NRST)…”
This was the feature point of the entire fair housing plan and the most dramatic sounding: a 15% tax on “the price of homes … purchased by individuals who are not citizens or permanent residents of Canada or by foreign corporations.”
It also sounds tough – following on from the dramatic increase in house prices recently, that would add an additional $137,485 to the cost of the average house in the GTA ($916,567 in March 2017). But will it have any impact?
The first thing to note is there are no statistics available that show the number of properties bought by non-residents, although anecdotal evidence suggests that it is a relatively low number. As reported by the Toronto Star recently, a TREB report suggested that 4.9% of transactions involved non-residents, but that was based on a survey of just 3500 real estate agents, so it can be considered a rough estimate at best.
What’s for sure is that most people believe there are fewer non-resident buyers in Toronto than Vancouver, which implemented a similar tax last year. Even so, looking at the effects of that tax can give us some useful insights. According to most reports, the Vancouver tax caused a short-term slowdown in home sales, new property listings and house prices, although it has been argued that activity was already slowing before the tax was implemented. However, we now see the Vancouver market picking up again. Worse still, the Globe and Mail article linked to above suggests that “Two measures of home affordability suggest the situation… might even be worsening [in Vancouver].”
One final point to note is that any impact the tax will have on Toronto and the GTA is likely to be less significant than what happened to Vancouver because, in addition to having fewer non-resident buyers, there are more exemptions in the Ontario law, meaning it will likely affect fewer people.
Conclusion: Although this is a headline grabber, it doesn’t seem likely that it will have much of an impact, with a temporary decrease in demand the most dramatic potential outcome.
2) “Expanding rent control to all private rental units in Ontario…”
On the surface, this seems to make sense. We have all seen the headline-grabbing stories recently about Toronto landlords doubling rent overnight. It sounds outrageous and most people who read those stories would probably feel that there should be some sort of protection for the people renting the property.
However, using rent control as the solution fixes the headline-grabbing issue but causes another, potentially bigger problem. Economists disagree with each other on many things but one issue that has an overwhelming consensus is rent control, with the majority agreeing that a “ceiling on rents reduces the quantity and quality of housing available.” It might sound counter-intuitive but there are good reasons for this prevailing view. Rather than reduce prices, rent control can actually have the opposite effect because it “reduces the supply of property to the market”. Why is this? Because when a limit is put on price increases, “people have less incentive to fix up and rent out their basement flat, or to build rental property.” This only adds to the supply issue and pushes prices up for new tenants.
It’s not even a controversial view to say that rent control is a bad idea. According to this NY Times article, “Almost every freshman-level textbook contains a case study on rent control, using its known adverse side effects to illustrate the principles of supply and demand.” In more recent times, Benjamin Tal, Deputy Chief Economist of CIBC World Markets, outlined that “Rent Control is the exact opposite of what the GTA market needs. We need more rental units not less. If history is a guide, such policy will mostly hurt the people it’s trying to protect.” In his thorough report on rent control, Tal highlighted the widely-known issues and gave more examples of the agreement of economists, while also showing real-world examples of the problems created by rent control.
Conclusion: The new problems created by this part of the fair housing plan could end up being worse for supply and rental prices than the issue it is trying to solve.
5) “Introducing legislation that would, if passed, empower the City of Toronto, and potentially other interested municipalities, to introduce a vacant homes property tax…”
While the non-resident tax got all the headlines, this point probably has the potential to have the biggest impact. It’s not an easy number to define but recent census data put the number of vacant homes in the Toronto Census Metropolitan Area (which reaches as far north as Lake Simcoe) at 99,236 or 4.4% of the total number of private dwellings in the area. It must be noted that this number may actually be higher because it is only based on completed census forms. In addition to this, recent data released by the Ministry of Finance showed that over 121,100 people own two or more properties in the GTA.
Taxing these vacant properties is an idea that Toronto Mayor John Tory has spoken about recently and it’s understandable why. In theory, a vacant home tax would encourage the owners of a property to either rent it out or sell it – thus adding to the supply of either rental properties or homes for sale.
However, there are a few potential problems with the idea. Firstly, in a housing market that is seeing gains of 33% year-on-year, owners may feel it is still worth holding onto their property even with the extra tax burden. Secondly, as the province has delegated the responsibility to municipalities, we could potentially see a situation where the tax is applied in some areas but not others – or where there are differing rates applied – and that will just move the demand from one place to another. Finally, the evidence from Vancouver, which implemented its own vacant home tax recently, suggests that exemptions can drastically reduce the number of people impacted by the tax and leave the intake only slightly higher than the cost of implementing the tax.
Conclusion: Without coordination between municipalities, this is unlikely to have anything more than a localized effect, and that might be limited anyway.
6) “Ensuring that property tax for new multi-residential apartment buildings is charged at a similar rate as other residential properties…” and
7) “Introducing a targeted $125-million, five-year program to further encourage the construction of new rental apartment buildings…”
These two points of the fair housing plan fall under the same bracket, with both providing incentives for developers to build rental units, so we will look at them together.
In isolation, this is a great idea: make it more profitable for developers to build apartment buildings and that’s what they will do. However, unfortunately, it directly clashes with the rent control proposed in point two.
In a Financial Post article looking at the 16-point-plan, the president of Federation of Rental Housing Providers of Ontario said that the money offered is “not even going to come close to dealing with the shortfall created by rent control”. He added, “We did a survey of 15 builders, a small sample, and it equated to $2.7 billion of planned new construction for rental, that’s a small sample. That money is now at risk, so $125 million is a very small amount.”
Conclusion: It’s a great idea to incentivize the construction of rental units but the incentives are going to have to be much greater in order to overcome the effect of rent controls.
10) “The province will work to understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market…”
There has been a lot of talk about this after Finance Minister Charles Sousa labeled people as “scalpers” but the lack of action suggests that Sousa was a little preemptive in his derogatory comments. It seems the government doesn’t have any information to back up the accusations and they have been very vague in what they plan to do in order to “understand” the situation, so we will have to wait and see if this turns out to be more than just a headline-grabbing quote.
Conclusion: A lot of research will have to be carried out, which will take time, so we are unlikely to see any changes soon.
11) “Working with the real estate profession and consumers, the province is committing to review the rules real estate agents…”
This seems like a reasonable suggestion. It has been a long time since the rules were written and the market has changed considerably since then so it makes sense that they should be updated. Let’s wait and see what happens.
Conclusion: We’ll have to wait and see but hopefully the new rules will make the buying and selling process better for everybody without adding too much red tape.
14) “Partnering with the Canada Revenue Agency to explore more comprehensive reporting requirements…”
The idea behind this is to ensure that people are paying the correct amount of tax, which begs the question “Why have they waited so long?”. It doesn’t state how many people aren’t paying the correct amount of tax and perhaps they don’t know.
Conclusion: This shouldn’t affect you… if you already pay your taxes
15) “Making elevators in Ontario buildings more reliable by establishing timelines for elevator repair in consultation…”
As someone who lived near the top of a 30-storey building that had at least two of its four elevators out of action for several months around the time of the elevator technician strike of 2013, I can appreciate the sentiment here. However, I can also guarantee it will in no way “cool” the price of housing in the GTA.
Conclusion: A nice move but won’t affect housing prices
Ok, now that we have gone through the clear points, let’s take a look at the rest of the plan, which contains statements that are a little vaguer:
3) The government will introduce legislation that would, if passed, strengthen the Residential Tenancies Act…”
4) “Establishing a program to leverage the value of surplus provincial land assets…”
8) “Providing municipalities with the flexibility to use property tax tools to help unlock development opportunities…”
9) “Creating a new Housing Supply Team with dedicated provincial employees to identify barriers to specific housing development projects…”
12) “Establishing a housing advisory group which will meet quarterly to provide the government with ongoing advice about the state of the housing market…”
13) “Educating consumers on their rights…”
16) “Working with municipalities to better reflect the needs of a growing Greater Golden Horseshoe through an updated Growth Plan…”
There are lots of interesting soundbites in the seven items listed above but not much in terms of concrete policy or plans. They talk about future actions but don’t really outline details of how they will work. Some of the points sound interesting and could benefit people if implemented properly but we will reserve judgement until the ideas are expanded on and can be properly analysed.
What do you think? Will the government’s fair housing plan have any effect? Is it going to cool the housing market or improve the market for renters? Let us know your thoughts in the comments section below.