Ontario’s Fair Housing Plan – Real impact or photo op?
April 23, 2017, by Jenny and Justin Wu
By now, many of you have already heard or read the Ontario Provincial Government’s “Fair Housing Plan” – a 16 point plan to ostensibly deal with the current housing issues in the province. In our opinion, the government did not adequately address one of the key underlying problems which has been supply. As we have discussed in our past updates, supply has been confined by geographical constraints (the Greenbelt, Lake Ontario, etc.) and by provincial policies – the Places to Grow Act. What was addressed with the announcement was the collection of the government’s fair share of tax revenue – and rightly so. The one policy that was a bit of a puzzler relates to rent control which we discuss below.
Here are some of the key highlights of the announcement:
Non-Resident Speculation Tax (NRST):
a 15% tax will be applied to any residential property purchases (1 to 6 units) for entities (individuals or corporations) who are not Canadian Citizens or permanent residents of Canada. It will apply to properties purchased in the Greater Golden Horseshoe (see map adjacent). This tax is not retroactive but effective for transactions as of April 21, 2017. It excludes commercial (including multifamily with 6+ units), industrial and agricultural properties.
We believe this measure will impact a small group of buyers and will have little long term impact on the market. In addition, there were a number of exclusions to this policy which included certain immigrants, and refugees. A foreign nationals that purchase a property with their spouse who is a Canadian permanent resident or citizen is also exempt. A rebate is available to certain groups including foreign buyers who become citizens or permanent residents within four years, foreign students enrolled in an approved educational institution, and foreign nationals legally working full time in Ontario.
The government is proposing expanded rent control to all private rental units built after 1991. Previously, rent control only applied to units built before 1991. Going forward landlords can only raise annual rents based on a posted rate which is set each year by the Province, and cannot exceed 2.5%. Over the past ten years, the average posted increase was 2%. There are some instances where above guideline increases will be allowed but require an application/permission.
Overall, while this will have some benefit to existing tenants, we believe it will do more damage than good in the long run. For one thing, we expect this policy will become a disincentive for the development of purpose built rental units which are needed to expand affordable rental housing stock in the province. Secondly, we anticipate the policy to cause street rents (in vacant units) to increase dramatically, as landlords look to lock-in higher rents now or as tenants move out.
The announcement included several policies that ostensibly address housing supply, although we are somewhat skeptical of their intended impact. First, the Province plans to use surplus provincial land assets, by mandating 20% of these lands be allocated towards affordable housing rental and 5% towards affordable ownership. Some of these areas include the West Don Lands (Toronto) and 27 Grosvenor/26 Grenville St in Toronto. To us this seems somewhat limited in scope, although other land assets could be included in the future.
Second, the Province will provide municipal governments authority to apply additional property tax on vacant homes/units to encourage increased rental or sale. While this should help supply, it’s uncertain how many vacant properties currently exist, although some estimates suggest around 100,000. In addition, its uncertain how this will be enforced.
Third, the Province plans to set aside $125 million over five years to encourage purpose built rentals by rebating a portion of the province’s or city’s development charges. We see this having limited impact given the larger potential negative of rent control, as discussed above. Plus, $125 mm over five years spread across multiple projects may not be a great enough incentive for developers to take on the increased risk.
The province announced that it will get tougher on the enforcement of tax collection on assignment sales – this is a transaction that occurs (typically) for new build condos, where the original purchaser sells the rights to own the property to another buyer before the transaction closes. Some view this as paper flipping, and while there are specific taxation rules already in place, the new policies are targeted to enforce proper reporting and increased transparency by participants of the transaction.
There were a number of other announcements including reviewing the practice of double-ending or multiple representation, among others. You can see the full details here.
Overall, while we believe some of these policy announcements will have their intended impact, others will have little or negative impact in the longer run. We will watch and wait to see if these policies are refined or improved on to have a more meaningful and positive impact on the housing market in Ontario.
Jenny and Justin Wu