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Fair Housing Plan Will Help and Hurt Toronto Condo Market

Fair Housing Plan Will Help and Hurt Toronto Condo Market

Well, we got what we asked for and maybe a bit more than we wanted. Last week, the Ontario government introduced its Fair Housing Plan , a list of 16 measures that should help cool the housing market. With benefits and drawbacks on all sides, we wanted to look at the 15% foreign buyers tax and the province-wide rental control.

First off, the 15% foreign buyer tax in Toronto real estate

Known as the Non-Resident Speculation Tax (NRST), the new tax comes as a sudden setback for many foreign buyers with their eyes and hearts set on Ontario. While it’s a disappointment for legitimate homebuyers who must now rethink their purchase, as well as their Realtors®, something had to be done to control the flood of investors. The NRST is a smart move for Toronto, Hamilton, and surrounding GTA neighbourhoods to help keep these vibrant, thriving cities open for people who honestly want to live here.

In Vancouver, the 15% foreign buyer tax came a little too late. The “ghost town effect” had already settled into some neighbourhoods, mostly in the downtown core. Hopefully, the NRST will prevent Toronto from turning into that type of land-bank for investors who buy property in one place but live somewhere else, leaving the unit to sit empty. We think the NRST has come at the right time to spare Toronto and other cities of the Greater Golden Horseshoe any long-term damage from speculators. Whether the tax works to deter foreign speculators, we hope that developers will learn to cater to Canadian homeowners, whose investments they will need to bankroll new projects.

A possible loophole...

A final note on the NRST involves a possible loophole in the legislation that could allow speculators to keep playing the market. According to the Ontario government online bulletin, “The NRST applies to the transfer of land which contains at least one and not more than six single family residences.” Does that mean a speculator who purchases more than six properties is exempt from the tax? It’s unlikely that a single buyer would scoop up seven properties, but it does seem possible that several buyers could group together and make a syndicated purchase that would effectively avoid the tax.

Standby, as we’ll look into the legality of this in the coming weeks.

Rent control for all . . . good or bad for Toronto condo market?

All rental units in Ontario will now be covered under standard Ontario rental control measures. This will ensure increases in rental costs can rise only at the rate posted in the annual provincial rent increase guideline, capped around 2.5%. While this is a great peace-of-mind for tenants—especially those whose landlords were taking advantage of the pre-1991 rule —we think the new rent control cap is too low and will hurt condo landlords and tenants in the long run.

Rent control can hurt condo landlords because property taxes and maintenance fees are likely to increase more than the allowable rent cap of 2.5%. A condo building may undergo a special assessment because they want to upgrade the swimming pool or renovate the hallways, which will likely hike up maintenance fees. When that happens, an investment condo becomes an investment leech.

Along similar lines, landlords in buildings that are in the occupancy phase are often forced to list rental units below standard market rates because the building isn’t fully finished. The hallways and main lobby might still be dusty concrete. Under the new rental controls, these landlords could potentially get stuck renting below market value because they cannot raise rent above the annual cap.

Condo Pro Ross Kutisker-Jacobson came up with a possible solution to the rent control conundrum:

For condo investment landlords, the answer may be to structure a lease agreement that excludes variable costs, ie. maintenance fees and hydro, and let the tenant pay those in addition to the rental price.

In other words, if you owned an investment condo and decided to rent the unit at $1700/month, which included $400 maintenance and $200 taxes, then the rent portion would be $1100. When drawing up the lease agreement, set the standard market rent at $1100 and make the tenant responsible for paying hydro, maintenance, and taxes.

Each year, the landlord can increase the rent portion of the balance to the allowable amount. Throughout the year, however, the tenant is responsible for covering any increase in maintenance fees. The catch may be to have the tenant pre-pay several months of maintenance fees, as the landlord will still be responsible for these fees overall. Landlords can still apply for an above standard rent if they choose, but approval is based on individual circumstances.

We’ll be looking into other aspects of the Fair Housing Plan in the coming weeks, so stay tuned!