New Regulations Coming to Cool Hot Toronto Resale & Rental Markets?

New RegulationsThe recent federal government budget contained no new measures to curb the real estate market, however, rumours are flying that such measures might soon be coming to Ontario. For example:

  1. A vacant property tax is being considered for the City of Toronto. The number of vacant units in Toronto has recently been estimated to be as high as 65,000, though there is a lot of uncertainty around this number. A vacant property tax could be seen  by the City as a win/win: either it will encourage owners of vacant properties to sell or rent them and free up more inventory; or, if they don’t, the City will at least be able to collect more taxes. Conceptually, the tax would similar to the one recently enacted in Vancouver, which will levy an additional tax of 1% of the assessed value if the property is vacant for 6 months or more during the year. The details of a Toronto tax, of course , could be quite different.
  2. A foreign buyer tax, like the one Vancouver brought in last year, is also a possibility, though data from a recent survey commissioned by the Toronto Real Estate Board suggests that the proportion of foreign buyers in the GTA market is relatively low, only about 5%. The Vancouver tax has certainly slowed the market in Vancouver, though it is still early days to conclude how large the correction might be.
  3. There is evidence that speculators are a major factor behind the acceleration in GTA prices over the past year, based on the increasing proportion of homes that are being bought and then rented within a year. Many of these purchases are being made by speculators that are making little or no money on the rental, they are simply holding the property until they can sell it at a profit.  The Ontario government could bring in a speculation tax where, for example, homes sold within a year or two years would attract an additional tax.
  4. The rental market is almost as hot as the resale market, and the Provincial government is hinting at rent control legislation. There is an exemption from rent controls for any apartment that came into existence since 1991, and this is allowing landlords to increase rents dramatically at the end of a lease, whether because the market rent has gone up or simply to encourage a tenant to leave.

Any of these measures could help to tame the rapidly accelerating GTA market, however, past history suggests that bubbles (like the one we are clearly in) tend not to deflate benignly. For example the Ontario government instituted a land speculation tax in 1974 that led directly to a market crash. Perhaps it might be better to deliberately pop the bubble now rather than wait until it gets even bigger, when a correction could be even more jarring, but we shouldn’t be fooled into thinking that the government will be deft enough to gently tame the market.

The Toronto government has already distorted the Toronto market though the hated double land transfer tax. The transaction costs for a move-up buyer, including the commission on selling their present home plus the huge double land transfer tax, are discouraging many would-be move up buyers and further exacerbating the already tight inventory in the City. Let’s hope they don’t make another bone-headed move that hurts the real estate market (and the provincial economy that relies heavily on it) more than it helps.