In my last blog “Our Politicians Hard At Work to Make Already Crazy Home Prices Even Less Affordable” I explained how:
“Our government officials have effectively been caught with their pants down trying their best to appear to be doing something, anything, even if it is the absolutely wrong thing to do when it comes to addressing our affordable housing crisis. All for the sake of protecting their asses and re-election chances.
Simply put, there are no quick fixes to these issues despite the sense of urgency to do something about it not only the GTA but across the entire Golden Horseshoe.
Here are the real options available to them:
1) Substantially increase supply:
Even if they were to repeal the Greenbelt Act, which is highly doubtful, and taking away some of the best farmland in the world would be irresponsible regardless, any meaningful supply increase will likely take a minimum of 3-10 years to come into affect.
2) Decrease demand:
By prohibiting all new immigrants from settling in the Golden Horseshoe Region and/or inter-provincial migration into the Region and/or restricting international students, academics, etc. from coming here as well?
All of the above are hot button topics that most politicians simply don’t have the balls to address meaningfully. After all, I highly doubt that they want to commit political suicide.”
True to form, after the meeting of our “Three Amigos” Toronto Mayor John Tory, Federal Minister of Finance Bill Morneau and Ontario Minister of Finance Charles Sousa earlier this week, today the Ontario government announced 16 new measures as their attempt in trying to make housing more affordable across the entire Greater Golden Horseshoe Region.
Before I delve into what this means to both home buyers and those renting in the region, I should let you know that you need not worry that any of our government officials will be committing any form of political suicide as none of the 16 new measures announced, alone or even collectively, will address any of the real two main drivers for our real estate market’s meteoric rise, being lack of supply and massive demand as indicated above.
So what does this all mean to the GTA and indeed the entire Greater Golden Horseshoe Region real estate prices moving forward?
There are a few new measures that I applaud the government for, as they seem to be headed in the right direction. However, truth be told, in the great scheme of things these are just “drops in the bucket” type efforts to thwart real estate speculators. These include:
a) The announcement and immediate implementation of a 15% “Non-resident Speculation Tax” for non-citizens and non-residents that are geared to decrease foreign buyer speculators even though no one knows extent of foreign buyer speculators in our real estate market. Moreover, with several exemptions available under this measure, it may very well render it largely ineffective.
In addition, just like in Vancouver where a similar tax was implemented last year, you should know that where there’s a will, “smart money” will always find a way to circumvent these types of regulatory measures, especially with Ontario’s several exemptions noted thereon.
Neither will this measure stop domestic speculators, who may very well outnumber foreign buyers by a wide margin, from doing what they have been doing.
b) New measures that will empower Toronto and other Ontario municipalities to implement municipal “vacant home taxes” as an add on to foreign buyers and other buyers whose only intent is to simply take money out of their own country and park it in our local real estate as a safe haven asset.
c) Measures announced now requiring full disclosure whether a property purchase was made via an assignment to address the problem of so-called “paper flipping” or “property scalping” and of course to collect on applicable Land Transfer Tax and taxes on any gains generated by speculators utilizing these practices.
The Ontario government will also be partnering with CRA to ensure proper tax reporting when individuals sell their properties to ensure they get their fair share of taxes payable and to try to stem tax evaders. (Read: get ready for even more tax audits and auditors)
d) New rules and restrictions on real estate professionals conduct in regards to double ended deals (for those agents who both represent seller clients and service buyers in the same real estate transaction), as well as fake bidding.
As a real estate agent specializing in investment properties my clients and I continually find the lack of clarity in such matters to be ridiculously frustrating if not outright illegal.
Unfortunately, even with the new measures announced, I suspect this will continue to be something difficult to administer and police.
a) At face value, the newly announced $125 million program, over a 5 year period, or $25 million a year in rebates for development charges geared to encourage builders to build new purpose built multi-unit rental buildings and aligning property taxes of multi-family units to residential rather than current commercial rates seems like a move in the right direction. However, $25 million in rebates per year is peanuts in the grand scheme of things and combined with further measures announced, as explained below, will likely be rendered meaningless regardless.
b) The government will also attempt to “Leverage Value of its Surplus Lands”. This means that it may wish to either sell or develop some of it’s surplus lands for purpose of building and increasing affordable rental housing stock in some areas of Toronto and Hamilton.
Problem is, targeted areas indicated, such as Toronto’s West Don Lands are currently not well serviced; no where near any of the amenities low income families require like grocery stores, schools, or rec centres – simply put these properties are located on the “wrong side of the tracks” and located on numerous brownfield sites. After all, these were previously mainly industrial lands of a by gone era where environmental oversight was no where near where it is today, that will require several months if not years and millions of dollars of environmental clean up and red tape before even putting the first shovel in to the ground.
It the government expects developers to jump on these so-called “opportunities”, especially given “The Ugly” below, they are truly clueless!
Worse, the amount of Ontario owned surplus land in urban centres like Toronto is not sufficient to address the affordable housing crises in any meaningful way and could very well lead to a renaissance of “slum like accommodations” in these very same areas.
The other problem is that these measures should have been implemented years, if not decades, ago and as will be made clear below, will ultimately prove to be meaningless and totally irrelevant.
Then there are some newly announced measures that will very likely prove to be the drivers of the very same “unintended consequences” that the Ontario government indicated it is trying to avoid when coming up with these new measures, including:
a) The government intends to expand rent control to all private rental dwellings, even those built after 1991. This alone will serve to kill any chances of any meaningful increase to the already anemic affordable housing stock in the entire Greater Golden Horseshoe Region and is the perfect example of how clueless the Ontario government really is.
b) However, the government at least got it right by maintaining vacancy de-control, which still allows landlords to increase rent to market rates for any new tenant moving in.
Sure on the face value expansion of rent control rules to all private properties may sound great to existing tenants. Rent controls previously only applied only to rental units built 1991 or earlier, but if the new rules come into affect, will now apply to all rental units regardless of when they were built.
One little hick-up to their line of thinking that the government failed to consider:
If any one of these rent controlled unit tenants ever decided to move they would still be in for a very rude awakening since they should expect to pay market rental rates, which will inevitably be significantly higher than their old rental unit, at their new digs.
We have seen the “unintended consequences” of these types of measures before – simply look at New York City where rent controlled housing is scarce and those lucky enough to live in such units do so for many, many generations. After all, what choice do they have, since moving and paying market rates is simply prohibitive?
Unfortunately, with little opportunities for landlords to increase rents and use the money to adequately upkeep and upgrade properties in a timely fashion, they will instead have no choice by to maintain the rent controlled units no better than some slums.
If they are unable to adjust rent on units by real, as opposed to posted, inflation rates then what is their incentive to do otherwise really?
In fact, the only time they would tend to upgrade a unit is if some tenant decided to vacate so that they could rent to a new tenant. However, even then, with the expected vacancy rate of nearly zero, a direct result of the newly announced measures, they really won’t have much incentive to renovate and upgrade the units in any meaningful way either and would still be able to get top market rates.
Worse, this comes at a time when developers were just getting ready to actually restart building purpose built rental buildings, for the first time in over 30 years! Now with the new measures announced, expect builders to shelve these plans and building of purpose built multi-unit housing to come to a grinding halt.
I truly hope the government has big plans to personally build, or at the very least, intends to heavily subsidize developers to build, purpose built rental units. As I have mentioned before the measures the government has come up with to do just that are meaningless to any developer in the private sector without some massive incentives.
Especially since the condo market, which has flourished as the alternative rental stock in an era where very few purpose built rental buildings have been built over the past 30-40 years, has now been largely rendered none viable immediately as a rental property asset class with this new rent control expansion.
This means less condo investors buying new condo units, which were previously exempt from rent control as most have been built after 1991, for the purpose of renting them out since the numbers simply no longer work for most investors.
This is a very important point. You see since the government has now effectively discouraged investors from purchasing new condo units and then renting them them out, they now risk the chance that this process will come to a grinding halt.
At the same time, few if any builders or investors are likely to build a purpose built multi-unit building voluntarily ever again in light these new measures.
This is especially true if inflation starts to run higher than 2.5%, which is generally the stated rent control max annual increase, with a few exception – which the new measures will now make even more restrictive – regardless of whether the CPI it is based on is running higher.
It is also true, for when actual expenses that landlords need to personally pay like property taxes and in many cases utilities too, are currently increasing at much higher rates annually than the posted CPI rates used for allowable annual rent controlled rent increases.
With these new measures, our Ontario government has relied on, what may best be described as, some form of “alternative facts” to effectively bring the creation of new desperately needed affordable rental housing units to a grinding halt.
In the meantime, as expected, since our fearless government leaders have in turn chosen to do nothing to address real supply and demand issues directly at the very root of our affordable housing crises, I predict the following for the Greater Golden Horseshoe Region Real Estate Market:
1) As indicated above, an even more severe shortage of affordable rental stock in the future (so expect even more suffering for first time home buyers, seniors, students and anyone living on a fixed or retirement income like CPP, OAS, ODSP, EI, WSIB, or welfare). This will be especially true for anyone new or anyone who has decided to migrate into the region from another country or another province.
2) A short term correction in the housing market is possible, if any at all, as the market digests these newly announced changes. The inevitable market confusion should run its course, just as it has been short-term in Vancouver when their government decided to intervene last year, yet guess what?
The “affordable homes” category real estate continue to rise in Vancouver today with prices actually up year over year, making them even less affordable than ever, even before the government intervention!
3) An even shorter correction, if any at all, for low rise housing all across the Golden Horseshoe as demand continues to outstrip supply for these highly coveted properties
4) New build condo real estate will continue to be one of the riskiest real estate asset subcategories over the short term, should a correction occur. Especially, if any meaningful correction occurs in low rise housing as first time buyers will gravitate to low rise homes they actually want rather than condos that are currently all they can afford.
That said, with the expectation of a sharp decrease in rental stock given the measures announced today, condo prices should continue rising over the mid-long term.
The reasons for this is simple.
In the absence of any creation of any meaningful new rental units, condos will continue to remain one of the few ways of residing in Toronto, assuming you have enough money and can qualify for a mortgage to buy one or rent an existing condo unit where the numbers may still work for the owner/landlord.
If not, your chances of finding affordable housing in the GTA have now become practically non-existent as a result of these newly announced measures.
I hope the government takes note of these “unintended consequences” of their making soon, as the affordable housing crisis goes from bad to even worse.
5) Over the mid to long term any government intervention should not have any material impact to rising real estate prices across the entire region, as long as those same interventions do not crash the entire economy in the wake of any significant housing correction. This still remains a very real possibility, depending on how stupid their policies and how severe their “unintended consequences” will be.
The reason for this is simple: there does not seem any talk about increasing or creating any new development land or abolishing our Greenbelt, the largest in the world.
In a nutshell, the government’s new measures are simply more short term pain for EVEN GREATER long term pain for anyone hoping for affordable housing anywhere in the Golden Horseshoe. Especially since the government’s hands are tied, with any meaningful changes requiring years to implement and even then, no meaningful changes have been announced by the Ontario government to begin with.
As expected the Ontario government has decided to impose policies to appear like they are doing something about the affordable housing crises in the GTA, and indeed across the entire Golden Horseshoe Region, but will instead more likely exasperate these problems even further while continuing to kick the “affordable housing crisis” can down the road.
For how long is anyone’s guess.
In the absence of any meaningful solutions to address both the constrained supply and massive demand matters, as they will undoubtedly continue driving the real estate market across the entire region for the foreseeable future, I expect the prices of real estate to continue moving upwards over the mid-long term all across the Greater Golden Horseshoe Area.
Perhaps a more sobering thought and hopefully a rude awakening for both our Ontario leaders and anyone still praying and hoping for affordable housing or a real estate market correction in the region should be this:
Even if the real estate market were to tank by say 50% today in Toronto, that would mean that a fully detached home today worth on average $1.5M in the GTA and about $2.4M in Toronto proper would then still be worth $750,000 to $1,200,000!
Assuming you could buy a $750,000 home in the GTA today; assuming you were able to sock away and actuall have 20% or $150,000 down plus closing costs to make your monthly payments more affordable; assuming that the mortgage rate you could get is 2.5% with a 25 year amortization; the carrying costs on a single family home purchase would still likely be in excess of $3,500 per month including mortgage, insurance, taxes and utilities.
Now consider this:
“The median total annual family income of the Toronto region is estimated at $72,830, nearly $50,000 more than half of low-income earners are making.” Source
So even if your dream came true and the GTA market were to crash today by 50%, which is highly unlikely, that would still not be considered anywhere near affordable by the vast majority of the residents who call the GTA home today, let alone any new comers.
But don’t worry. The government officials who are responsible for this fiasco will likely be out of office soon and sipping their Margaritta’s on a nice sandy beach in their retirement after doing such a great job. While their former constituents will continue to suffering for the foreseeable future trying to make ends meet.
Bravo ye government morons! BRAVO!