There was a concern from many Real Estate Industry Professionals that Provincial Government intervention designed to help alleviate the high cost of GTA housing could backfire if it was too heavy handed.
The premise being, if there were punitive taxes and regulation introduced that removed a large number of Purchasers from the marketplace quickly, and a balance between supply and demand were forced to happen too quickly, the premium currently being paid due to the imbalance in the market (seen as $100,000 to $300,000 bids over asking price on many Toronto resale homes as an example), could disappear overnight and be seen as a correction in the market.
A correction would traditionally send a shock wave through the marketplace.
Residents would likely be less motivated to buy or sell and dramatically fewer sales would take place until consumer confidence returned.
The good news is that that is not likely the case.
Here is why.
Let’s examine the more significant, of the 16 measures announced in the Ontario Fair Housing Plan by the Ontario Ministry of Finance on Thursday, April 20th.
15% Non-resident Speculation Tax
Real Estate Purchasers that are not citizens, permanent residents, or Canadian corporations will be required to pay, at the time of Purchase, an additional 15% tax.
Foreign Purchasers that become citizens within four years, become permanent residents, or students that study in Canada for two years will qualify to receive a rebate of the tax.
Since about 2% to 3% of new homes and condos are purchased by non-residents, and many will qualify for the rebate, the Non-resident Speculation Tax is not expected to have a significant effect on the market.
Future Legislation to Discourage Assignments
The Provincial Government intends to study and address the practice of flipping new homes and condos. Although there are legitimate reasons to resell a new property before it is built there are many investor/buyers who will consider Assignment as an option to maximize profits. Since Developers require proof of satisfactory financing at the early stage of the Purchase, buyers generally are not able to buy if they cannot afford to close. If the practice of Assigning Agreements to Purchase is heavily taxed, it will not have a significant effect on cooling demand, or lowering prices.
New “Vacant Homes” Municipal Property Tax
Under the new legislation, Municipalities will be permitted to introduce an additional property tax on homes and condos that are vacant with the purpose being to encourage Investors to sell or rent out their properties. If a home owner can afford to have a house or condo sit empty for a significant period of time then they will likely not be phased by having to pay an additional 1% tax, annually. In addition, since this affects a very small group in Toronto (compared to Vancouver), a Vacant Homes Municipal Property Tax will have no effect in cooling market demand or lowering prices.
The Return of Residential Rent Control
The new legislation brings back rent control to all private rental units with an annual cap of 2.5%. Most Landlords do not wish to increase rent to an amount that will be unaffordable to their Tenant. If a Tenant leaves, the apartment or house will likely be empty for one month and there will be a “one month rent” fee to a Real Estate Agent to handle the new rental. So the loss of 2 months rent will likely wipe out the benefits of a rent increase. If a Landlord introduces a large increase in rent they likely have another reason why they need the Tenant to leave. Regardless, the 2.5% Rent Control is reasonable for existing rental properties and newly Purchased rental properties can set their first year base rent at an amount that considers their carrying costs and the free market. Rent Control will not contribute to cooling market demand.
The new negative measures will have little or no effect on cooling the market, or reducing GTA housing prices.
There are positive measures in the “Ontario Fair Housing Plan” that are designed to increase the supply of homes and condos for sale and increase the number of market value and low income rental properties available for rent.
Municipalities will be permitted to:
Tax vacant land that is zoned for residential development, but not being developed, at a higher rate to encourage development;
Reduce lot levies on new build rental apartments; and
Lower property taxes on new build rental apartment buildings.
Under the new legislation the Government will consider converting surplus Provincial lands to a mix of 80% new market value housing and 20% affordable housing.
In the midterm, these measures will have a positive impact on the supply of rentals and a small positive impact on the supply of new homes and condos for sale.
There will be a committee that will study the effectiveness of the new measures and report back to the Government.
There will also be a “New Housing Supply Team” that will have government employees dedicated to identifying barriers to specific development projects by working with Developers and Municipalities to find solutions.
If the “New Housing Supply Team” is successful, the number of applications to the Ontario Municipal Board could be reduced drastically, and more new homes and condos could be available for sale sooner, and without the need for a Developer to recover the large expense associated with that trip to the OMB.
The “New Housing Supply Team”, again, if effective, could have the most impact to increase the supply of new homes and condos for sale, and be the most important of the new measures.
Since the negative measures will have little or no impact on the demand of new homes and condos, and there will be more market value and affordable rentals introduced to the market in the midterm, we can breathe a sigh of relief that there will not be a negative impact on the GTA Real Estate Market due to the “Ontario Fair Housing Plan”.
Prices should continue to rise until more supply is introduced.
Since the increase in supply will be gradual, and spread out over time, the prices will slowly level off when equilibrium between supply and demand returns to the GTA Real Estate market.