deconstructed: the good, the bad and the ugly of Ontario’s 16-point plan to tame housing

Deconstructed: The good, the bad and the ugly of Ontario’s 16-point plan to tame housing

Garry Marr | April 21, 2017 | Financial Post

On Thursday, the Ontario government introduced measures intended to cool the housing market in the Greater Toronto Area. Here’s a breakdown of all 16 and the impact housing market experts believe they will or will not have.

  1. A 15-per-cent Non-Resident Speculation Tax (NRST) on the price of homes in the Greater Golden Horseshoe (GGH) purchased by individuals who are not citizens or permanent residents of Canada or by foreign corporations

The tax is ultimately aimed at curbing price increases in the GTA, which the Toronto Real Estate Board said climbed 33 per cent in March from a year ago. Will it work?

“It’s a step in the right direction,” said Benjamin Tal, deputy chief economist of CIBC World Markets. “We estimate that the share of foreign buyers in the GTA is notably lower than in Vancouver.”

The problem is that if Vancouver is any example there will be a short period during which domestic buyers will sit on the sidelines before jumping right back six months later.

Shaun Hildebrand, senior-vice-president of Urbanation Inc., says if you are desperate to park your money offshore the 15 per cent tax probably doesn’t matter.

“If you are a foreign buyer with no connection to the region, you must have a pretty big motivation to move that money here,” he said.

  1. Expanding rent control to all private rental units in Ontario, including those that were built after 1991

Sources indicate this was a last minute change.

The province had been lobbied heavily by the development community, which was hoping for a change that would have given those post-1991 buildings an annual increase of 1.5 per cent plus the rate of inflation.

Builders on Thursday were already threatening to cancel projects because of the limit on rental hikes and Tal says, from his conversations with developers that they need an average of 3 per cent to 3.5 per cent rent inflation to make projects work.

“While it will be favourable for renters that get rent-controlled properties, such action incents builders to shift away from constructing new rental projects,” said Craig Alexander, chief economist with the Conference Board of Canada.

  1. Developing a standard lease for all tenants across the province

The standard lease for all tenants is being pitched as protecting tenants and providing predictability for landlords.

A key provision is tightening provisions for own-use evictions, and ensuring that tenants are adequately compensated. In the condominium market, individual investors have long used the tactic of moving into their own unit to evict tenants. The tenant leaves, the landlord temporarily moves in and then rents the unit again — this time at a higher price.

The province is keeping vacancy decontrol, which allows landlords to set rents at whatever price they want when an apartment is empty.

  1. The province will look at at its own surplus land to see what can be used for development purposes

Brian Johnston, chief operating officer of Mattamy Homes Ltd., doesn’t think this will do much to address supply problems in the GTA.

“They can look at it but are they really going to do anything with those lands?” he asked. “Let’s see. I can go look at my backyard and see if I can build a high-rise, it’s not easy to do.”

  1. Allowing 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

While Vancouver already has a vacancy tax that will go into effect this year, it is still unclear how such a levy will function in practice.

“There are very few examples of such taxes,” said Beata Caranci, chief economist with Toronto-Dominion Bank, noting that Vancouver and Camden in the U.K. are the only two jurisdictions to implement them.

“Camden’s experience with an additional 50 per cent property tax in 2013 has led to approximately one-third of vacant properties being brought to the rental market,” she said. “However, the tracking of vacant properties can be difficult and often subjective.”

  1. Ensuring that property tax for new multi-residential apartment buildings is charged at a similar rate as other residential properties

The province says the move, which applies across Ontario, will encourage developers to build more new purpose-built rental housing, but not all agree.

“It’s just nowhere near enough money. It’s an incredibly risky thing to build a $100 million or $200 million property, deliver it vacant (as opposed to pre-selling units like in a condominium) and then try to make money through all the future economic possibilities,” said Brad Lamb, a Toronto developer.

  1. Introducing a targeted $125-million, five-year program to further encourage the construction of new rental apartment buildings by rebating a portion of development charges

Jim Murphy, president of Federation of Rental Housing Providers of Ontario, said that money is not even going to come close to dealing with the shortfall created by rent control.

“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.”

  1. Allowing municipalities greater taxing tools, including a vacant land tax

With house prices rising quickly, there have been complaints about developers holding onto land and even hoarding it as they wait for prices to raise.

“It’s a step in the right direction,” said Tal. “It is not a secret that land hoarding (by land owners or developers) plays a (secondary) role in the lack of land supply in the GTA. At the margin, that tax might help to accelerate developments, but it might be very difficult to implement without a high level of co-operation with municipalities.”

  1. 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

Building industry officials noted there was nothing in the announcement Thursday about the Ontario Municipal Board, the provincial body that reviews planning issues. They say they are more concerned about changes to the OMB and maintain delays in appeals are costing time and money.

  1. Understanding and tackling practices that may be contributing to tax avoidance and excessive speculation in the housing market

Assignment clauses were specifically mentioned by finance Charles Sousa in a press conference. Generally, buyers are “paper flipping” those properties before a deal even closes.

The province seems to want to make sure it is getting properly compensated under the land transfer tax when such arrangements take place and will share the information with the Canada Revenue Agency.

  1. Reviewing the rules for real estate agents to ensure consumers are fairly represented in real estate transactions

The province wants to get tough on reports of phantom bids, whereby fake offers are used as a wedge to make people bid more. It also looking at double ending, whereby the same agent can be representing the buyer and the seller.

Phil Soper, chief executive of Royal LePage Real Estate Services Ltd., said doubling ending is legal in most provinces with some restrictions in British Columbia, but his own firm has instituted rules against it.

“We require in multiple offer situations that if an agent has their own buyer client (in addition to representing the seller), that a manager be involved to represent that client buyer’s offer,” said Soper. “The biggest issue in our industry is transparency.”

  1. Establishing a housing advisory group which will meet quarterly to provide the government with ongoing advice about the state of the housing market

What if none of the changes actually work? This group may be busy coming up with new plans. It will be made up of economists, academics, developers, community groups and the real estate sector.

  1. Educating consumers on their rights, particularly when it comes to the issue of one real estate professional representing more than one party in a real estate transaction

In most cases an agent acting on both sides of the deal is legally working for the seller. Some agents maintain this isn’t an issue when there is just one buyer — it comes down to agreeing on a price. In a multiple offer auction, the situation becomes more complex because consumers are caught in bidding wars.

  1. Partnering with the Canada Revenue Agency to explore more comprehensive reporting requirements so that correct federal and provincial taxes, including income and sales taxes, are paid on purchases and sales of real estate in Ontario

Flippers beware. The province could provide the CRA with information to follow up on capital gains taxes that have not been paid.

Through the changes to the collection of the land transfer tax, which go into effect April 24, Ontario will require buyers to declare whether a unit is being used as principal residence and therefore eligible for a tax exemption. Ontario is also demanding to know if you are leasing and the CRA could be armed with information about your rental income

  1. Making elevators in Ontario buildings more reliable by establishing timelines for elevator repair in consultation with the sector

It’s a constant complaint of some tenants in downtown condominiums that they are always waiting for elevators.

Upgrading the number of elevators after the fact would prove to be very difficult if not impossible, but hard rules on repair time lines would at least provide some relief.

  1. The province will work with municipalities to better reflect the needs of the growing Greater Golden Horseshoe through an updated Growth Plan. New provisions will include requiring that municipalities consider the appropriate range of unit sizes in higher density residential buildings to accommodate a diverse range of household sizes and incomes

This could ultimately mean more density coming to a suburb near you and potentially stall development in projects where the economics simply don’t work for the building industry.

“Higher provincial intensity targets for municipalities?” asks Mattamy’s  Johnston. “The municipalities favour low-rise over high-rise. Generally, they don’t like high rises in their bedroom communities.”

Inclusionary zoning, which requires a share of housing be dedicated to low income, will kill many projects. “It just makes some some high-rises unfeasible thus further restricting supply,” he said.

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