Yesterday the incredibly popular Premiere of Ontario (her approval rating is sub 20%), held a press conference. The purpose was not to discuss how dangerous a desperate politician is. It was to show what types of policies a desperate politician can come up with in a pinch. Fresh off of helping her predecessor cover up a Gas plant debacle that cost each and every person who lives in Ontario in excess of $1,500, she has decided to affect meaningful change in the housing market.
Let’s start off with the three policy changes that will have the greatest impact.
1. Foreign buyers: The province is implementing a 15-per-cent foreign-buyers’ tax aimed at speculators. It will be charged to non-residents and companies not based in Canada who buy property anywhere between the Niagara region and Peterborough.
2. Rentals: All apartments will now be bound by rent-control measures. Before, only buildings built before November 1991, had to follow that rule, which led to some landlords increasing monthly rents by hundreds of dollars. Now, rent hikes will be capped at 2.5 per cent a year.
3. Empty homes: Ontario is pledging to work with Toronto and other municipalities to implement a vacant-home tax. Vancouver just started the process of introducing a tax on empty homes; a recent study there found 6.5 per cent of the city’s housing stock is vacant.
Shocking but it would appear that these housing policy changes are aimed at getting votes in the upcoming election rather than affecting any meaningful change in the Ontario housing market. Let’s have a look at them one by one.
Foreign Buyers Tax
This is the same tax that was imposed in Vancouver. The response in that city was a temporary slowdown in sales activity followed by the market heading back to its pre-tax levels. We are now seeing prices heading higher again in Vancouver. Although this new foreign buyer’s tax might slow down the spring market in Ontario and give some buyers pause, the real problem in Ontario, specifically Toronto and its growing suburbs is a supply demand imbalance.
Demand for housing in and around Toronto is incredibly high. This demand is being fuelled by a few different factors, some good and some bad.
- Foreigners buying real estate. This takes two forms. The first is immigrants moving to Toronto to buy homes and start a new life, which is great. Each year 110,000 people decide to move to our amazing city from other countries around the world. Obviously some of these people will be buying homes. The second is Chinese nationals finding ways to move money out of China and into Canada. The best way they know how to do this is to buy our real estate.
- The Price of Money. Interest rates are really low, interest rates have been really low for a really long time, and interest rates will be low for a really long time to come. When money is cheap and readily available assets increase in value. With a high probability of interest rates being low for an extended period those assets will continue to increase with a direct correlation to the availability and cost of the capital.
- Greed. When your house increases by $500,000 in 3 years you have two thoughts, the first is that you should probably sell because there is no way it can increase more than that, the second is that maybe you should buy more real estate because that is an amazing amount of money for doing nothing. When your house continues to increase in value for 15 years you start convincing yourself you’re a genius and you do what you can to stay exposed to the market. Outside factors are making Toronto real estate investors look really smart, but at some point even the most celebrated genius will be proven wrong.
- Policies and Regulation. Make no mistake Toronto is not New York. One of the reasons why prices in Manhattan can reach such sky high levels is that they simply can’t make any more land on the island. Although Toronto is not bordered by water it is bordered by a green belt, a politically popular green area that prevents growth in our suburbs. If all else fails it might be time to loosen some of the unreasonable bureaucracy that surrounds the residential use of these lands.
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If we really want the government to get involved in the Ontario Real Estate market we need to make sure they understand the factors that are affecting demand. Maybe a capital gains tax on our so maligned foreign buyers? Perhaps we should ask the Bank of Canada to talk the rates up without actually doing anything, or maybe Central Bank speak doesn’t count for as much anymore?
Rentals
This one is a little scary. Clearly this is an attempt by the Liberals to get a few voters mobilized in the upcoming election. The result will be that landlords and tenants will develop a far more adversarial relationship. Investors who own a condo or two for rental purposes will be forced to sell and likely with a tenant in place, which will affect value. Developers who have plans to build new rental units around the city will be putting a freeze on the new rental units our city so desperately needs. Rent controls have really never been proven to work. All signs point to a new rental market in Toronto that will be a two class system. We will have cheap apartments inhabited by people desperately trying to hang on to a home that is deteriorating and owned by a landlord that has no motivation to make any upgrades. We will also see millennials forced to pay $5,000 a month for a shoe box in the face of low supply.
Tax the Empty Homes
Yeah, good luck with this one. Is our new mayor smoking crack too? The tax will likely cost more in taxes to enforce than it will bring in.
The Real Estate market in Toronto is overvalued. A pendulum swings two ways. Toronto is not New York or Hong Kong.
We can either try to stop the Chinese from investing their money in Toronto, or we change one of the most visceral reactions inherent in our human psyche: Greed. Perhaps we should have been collecting more data on our homeowners in Canada all this time? Making a decision to slow housing without knowing much about the demand is a bad idea.
As we continue to speculate when Mr.Creosote will eat his final wafer thin mint I suspect that we hide behind the ferns.
MorCan Direct
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