With housing prices shooting to the moon over the past two years, no one was surprised when the Ontario Government announced The Ontario Fair Housing Plan to real estate in the Greater Golden Horseshoe yesterday. What everyone is really wondering is whether or not Wynn’s dog and pony show will actually have any real effect on the hot housing market.
The good news is that the market won’t crash. Some of the changes are a step in the right direction in potentially cool housing prices. I doubt that we’ll see another year of 33% growth, but I don’t see prices going down either. While a bunch of these changes look a lot like tax grabs and a way to gain popularity, some may have an impact in helping to cooling surging prices.
Let’s take a look inside Wynn’s bag of tricks:
Non-resident Speculation Tax (NRST). A 15% tax on homes purchased by non-Canadian citizens, non-residents and non-Canadian Corporations. The new measures will cover all properties sold in the Greater Golden Horseshoe, ranging from the Niagara region up to Waterloo, across to Barrie, over to Peterborough and down to the border. The tax is aimed at foreign investors looking to park money in Ontario real estate. Exceptions to the new tax include buyers who become permanent residents within four years of the sale, international students enrolled full-time (at least 2 years) or someone who has been legally working in Canada for at least one year. Non-residents can apply for a NRST rebate if the property is their principle residence.
- There has been a lot of debate on whether or not a foreign investor tax will cool the market. Well, by golly, it worked for Vancouver didn’t it? The reality is that Toronto’s foreign investment in the housing market is significantly lower than that of Vancouver — and the climate is different. Experience tells us that it’s not usually foreign buyers who are drastically driving up prices in a bidding war. This tax will have an impact on some areas of Toronto and new construction, but I don’t see it having any major or long term effect.
Rent control that protects tenants from dramatic rent increases. The move holds rent rate hikes to around inflation, capped at 2.5% per year. Until now, any property built after November 1991 has been an open market for landlords. The new measure will prevent landlords from jacking up the rent on existing tenants. Landlords can apply for special increases if they do renovations or upgrades. Once a tenant moves out, the landlord can increase the rent as they see fit. Landlords and tenants will use a new standard lease agreement (Similar to what Realtors are already using).
- While a positive move that prevents landlords from pushing out existing tenants, with lofty rental increases in order to keep up with current market demand, this change won’t impact the current housing market concerns.
Plugging the loophole on Assignments (also known as paper flipping). Buyers investing in new builds and then selling the properties before the deal closes is known as “paper flipping”. In a hot market, this unfair practice allows companies to buy up floors of new condo towers and new housing developments before families can put in bids. Prior to completion, a clause in the purchase agreement allows those companies to sell the units at a tidy profit (and increase the cost for the end buyer).
- It’s about time that this loophole gets plugged up. Until recently, it hasn’t been a concern as market demand hasn’t exceeded supply like it has over the past few years. While there isn’t much clarity around what exactly will be done, the focus will likely be on ensuring the original buyers are paying property tax and capital gains.
- While this change is important in promoting fair trade in the housing market, I don’t see it having much of an impact on housing market frenzy.
Review of the real estate rules and education standards for Realtors. Since the last revision to the real estate act in 2002, the market has changed. It’s time to ramp up Realtor’s with the skills they need in order to meet consumer demand. The province is committed to informing consumers of their rights – especially around agents representing more than one party in a transaction.
- I couldn’t agree more. There is a wide gap of experience (and ethical practices) that needs to be addressed. We have seen way too many shady moves and slippery tactics when it comes to how some Realtors are representing their own… I mean.. ahem, their client’s interests. Many consumers are being flat out lied to and manipulated by Realtors. It’s time to crack down and put measures in place to ensure fair representation for all buyers and sellers.
- A nice ‘touchy feely’ to include in the new reform, but not something that will have an impact on current market conditions.
Lower taxes to encourage builders to build more rental housing. Currently, apartment buildings are taxed at nearly 3 times that of a single-family residence. New measures will encourage builders to construct more rental housing (instead of condos).
- Supply is low and Toronto is need of more housing options. With dramatic increases in housing costs over the past few years, consumers need rental options more than ever. My concern is that by creating more incentive to build apartment buildings, we might see fewer condos being built, further contributing to the housing shortage.
Slap more tax on vacant homes and land. If a property is sitting empty (even for part of the year), it’s being categorized as an investment property. Under current market conditions, the province is giving Toronto the power to tax vacant homes.
- The number of vacant homes is still in dispute, but even with an additional tax, I don’t see it being much of a factor in an investor’s decision to buy or sell property. Given their current carrying costs, the additional tax would be insignificant. This smells like a tax grab and I don’t see it having an impact on current market conditions.
More land for affordable Housing. Tory has been “demanding” Queen’s Park make the land in West Don Lands (and other similar government owned real estate) available for affordable housing. History tells us that these types of initiatives seldom move forward and if they do, there is more red tape than we may see in our life time. Don’t hold your breathe on this one.
Creating a housing-supply team and housing-advisory group. I’m not sure how this will dramatically change current conditions, but at least the government can say that they’re taking steps to listen to consumers and keep tabs on the housing market. Sounds like a nice little make-work project that won’t have any real impact.
Conclusion: Consumers have been asking for some type of intervention to stop the madness — and the government has responded (if only to look good and pick up a few brownie points). In my opinion, perception plays a much heavier role than the actual proposed changes, while at the same time creating an opportunity for the city to pick up some extra cash.
There are many factors contributing to the dramatic price increases we’ve seen; but one of the biggest ones is FOMO (fear of missing out). Consumers are advancing their timeline to purchase and seeking alternative methods of borrowing (or gifting) money to get into the market sooner and at a higher price point. It’s human nature to become more competitive as competition increases.
I believe these changes may change the consumer’s perception that this is their last chance to get into the market, lowering some of the intensity we’re seeing in bidding wars, but I expect the market to continue to grow at a steady pace.
Now is still a great time to buy or sell property in Toronto. Stay tuned for my thoughts on what’s caused this market and why it will correct.