Yesterday, April 20th, the Ontario Government announced the Fair Housing Plan; a series of 16 proposed measures aimed to cool the “red-hot” real estate market. In this post, we’ll examine two of the key measures proposed and determine what that means for investors, prospective purchasers and renters.

15% non-resident speculation tax

The new legislation, if passed, would implement a new tax on non-resident purchasers on the price of homes in the Greater Golden Horseshoe. This closely mirrors the Foreign Buyers Tax that was implemented in Vancouver in 2016, however there are a few key differences to consider. Firstly, the Ontario tax doesn’t affect foreign buyers who reside in Ontario and full rebates are available for foreign buyers if they become residents within four years of their purchase. The goal of this new tax is to target foreign speculators looking to park money in Toronto Real Estate, particularly those who leave such units vacant.

To best anticipate the effect of this new tax, we look to Vancouver. By August 2016, Vancouver home sales volume plunged 26%. In January 2017, the average price of a home in the Greater Vancouver Area was $878,242, down 18.9% from a year earlier when it was at $1.03 million. However, it appears that with the exception of high end luxury homes, the effects of the new tax is waning as the number of units sold in Vancouver in March 2017 was up 48% compared to February.

It’s difficult to determine if we will experience the same reduction in volume in Toronto and we eagerly await the market data to see the full effects of the proposed tax.

Rent Control

In 2000, economist Paul Krugman wrote in the New York Times rent control is “among the best-understood issues in all of economics, and –among economists, anyway-one of the least controversial”. The general consensus among economists is that when rents are capped, landlords are less incentivized to rent out their homes causing a scarcity of rental properties and an increase in demand for the few available properties.

19 years ago, when we saw the last change to rent control in Toronto there was a halt in the development on new purpose built rental buildings and the creation of the shadow market of condominium rentals. After nearly 2 decades of no new rental apartments, Toronto was just beginning to see new rental buildings being developed, however with expansion of rent control to new buildings this is expected to halt once more. Many in the development community said it was difficult before to justify the investment of building new rental properties and with this new legislation, it will now be impossible.

With landlords afraid of tenants refusing to move, many may choose instead to focus on short-term rentals or AirBnB. Also, typically condominium fees, utility bills, and maintenance expenses go up by more than the legally allowed increase in rent, making it more difficult for owners to maintain a cash flow positive position. This will likely cause landlords to be less vigilant in maintaining their rental properties, which is ultimately bad for both tenants and landlords.

In Conclusion

The proposed measures will have a greater impact on those with a short term focus than a long term focus. Ultimately, the growing population, growing employment and lack of supply will continue to lead to long term returns for Real Estate Investors. However, public perception causes uncertainty in the short term and we would never advise an investor looking at Real Estate for the short term gains. New rent control legislation highlights the need for landlords to work with a professional property management company in order to ensure that quality tenants are awarded new leases to avoid potential squatters who intend to take advantage of the new rent control.

We will continue to watch the market as this legislation passes and examine its affect.

As always, speak with a qualified Real Estate Professional when looking at investment properties to best determine the potential financial rewards.