Ontario’s Government Intervention Bonanza
Thursday April 20, 2017
By Ben Myers, Senior Vice President of Market Research and Analytics, Fortress Real Developments
In the Spring 2017 Market Manuscript report, I dedicated an entire section to government intervention in the housing market, little did I know that the Ontario government would implement just about everything I discussed, and just about every other tool in their political toolbox. You can read the backgrounder on Ontario’s Fair Housing Plan HERE.
One of the biggest announcements is the implementation of rent control on all private rental units, regardless of the year they were built. Rental control had only previous been in place on apartments built before 1991. There is plenty of evidence on the downside of rent control, the Economist has a great summary that you can read HERE.
For our purposes at Fortress, rent control could deter investors from buying pre-construction condominiums and it could also deter first-time buyers from jumping into the ownership market because they know their rents are not going to skyrocket. But if there are less buyers, there are more tenants for those investors! We don’t know how that relationship will eventually shake out.
Rent control typically discourage the development industry from building new rental apartment buildings as it puts a cap on your upside, and we’ve discussed how rent control would change our plans for a couple of high-rise sites we have downtown. Realizing the problem, the Ontario government announced a $125 million dollar plan to rebate developers on municipal development charges to incent them to continue to build. In some GTA municipalities, development charges on a two bedroom apartment unit can be over $50,000 (see rates HERE). On a 300 unit project that is $15 million dollars!
Keeping rents affordable was a key theme woven throughout the announcements, with a housing “SWAT” team being put together by the Ontario government to help and encourage municipalities to approve not only rental apartment projects quickly, but other housing developments. A standard lease contract will also be introduced to protect tenant’s rights. Supply is a major issue with rental vacancy rates have hitting record lows, and unsold new home inventory is down 75% annually (just 1000 units available as of February).
It was reassuring to hear Minister of Finance Charles Sousa call for more housing supply. The government will unlock some of their lands for development and will allow municipalities to tax land owners with property approved for servicing to boost housing supply and add a disincentive to land speculation. Note that just 1.7% of developers surveyed for the last Market Manuscript indicated that they were hoarding land.
Last year the frenzy over foreign investment in the Vancouver market was at an all-time high. I dedicated an entire section to offshore real estate buyers in the Fall 2015 Market Manuscript. Just as I finished that report, Vancouver implemented a 15% tax on foreign buyers. This immediately resulted in a major drop in resale transactions, however, it likely had more to do with uncertainty from domestic buyers. Nine months later, the price declines seem to be confined to the ultra-luxury market. In March, average house prices in the Great Vancouver Area increased 1.4% over February. Respondents to my recent Twitter poll do not think the Vancouver tax was successful.
Despite the lukewarm results of the Vancouver tax, Ontario is implementing a very similar tax for the Greater Golden Horseshoe area. Having witnessed the mistakes out west, there are several key differences: the tax does not apply to foreign citizens residing in Ontario, there are exemptions for foreign students, refugees and those in the skilled immigrant program, and full rebates are available for foreign buyers if they become citizens within four years of their purchase. The key message was to not discourage foreign investment in our businesses, discourage top talent from moving here, or discriminate against residents that are contributing to our economy. The target was foreign speculators looking to park money here, especially those that keep units vacant. Sousa said there were 6,000 vacant units in Toronto. Not sure if he was referencing the City of Toronto or the Toronto CMA, but that is a far cry from the 65,000 that John Tory quoted a couple weeks ago.
The point I have made several times is there is plenty of foreign capital fueling the purchases of new homes in the Greater Toronto Area, but not that many foreign buyers – that is a key distinction. Locals with financial backing from overseas are buying units, not foreigners. Construction lenders insist on 35% deposits for non-Canadian citizens, so it discourages offshore buyers. This measure will deter some foreign buyers, but as I’ve said before, it’s like putting a BandAid on a stab wound.
The Ontario government is also allowing municipalities to tax vacant homes. I’ve never thought this was particularly a problem in Toronto and I wrote about the misinterpretation of the Census data on unoccupied homes a month ago in the Huffington Post.
Sousa also discussed cracking down on investors that assign their new home purchases prior to completion and don’t pay a land transfer tax. He referred to these buyers as “property scalpers.” I attempted to track this assignment market in conjunction with CMHC in 2012 when I headed up Urbanation, but was forced to cancel this survey due to a lack of responses. There was definitely an active assignment market at that time, but it died down significantly when the Canada Revenue Agency started cracking down on the practice in 2013 at the same time that the pre-construction condo market slowed.
Lastly, changes to the process of buying a resale home will be altered. Real estate agents will no longer be able to represent both the buyer and seller, and the elimination of “fake bids” will be priority. The goal is to make the resale home buying process fair and transparent.
Despite the enormity of the list of changes, my initial reaction is that I don’t think it will have an enormous impact on the market. It may result in a short-term blip in activity, as prospective buyers and sellers hold-off making any real estate decisions until they see how the market responds to the myriad of changes. But like Vancouver, expect to market to come back in short order.
From the Fortress perspective, it may result in less buyers at our condominium projects looking to be long-term investors, but given the fact that most project are selling 60% of their units in one or two months and there has been a noticeable increase in end-user buyers in the market, I don’t expect absorption to be a problem at our future projects coming soon.