Donald Trump may be making lives tough for the Canadian government, but their fear doesn’t lie south of the border, it lies in runaway housing prices in the Toronto region. Prompted by the Bank of Canada and big bank CEOs, the three levels of government got together over a weekend to discuss how to solve Toronto’s frothing housing market. The result: Brand new legislation meant to slow down the crazy demand for real estate.
Now many will say that the government should not interfere in a free market where supply and demand are the main drivers for market prices. However, speculation and individuals leveraging their life savings to get a piece of land in the GTA has created an unsustainable environment. The results of the policies will be unknown for quite a bit of time but there are some immediate impacts that will affect both renters and landlords.
One of the strange quirks in Ontario’s rent control was that it only applied to buildings built and occupied prior to 1991. The original reason for this rule was to encourage more rental units to be built, which rent control would abate. That plan didn’t work so well because developers found more money building condos owned by private investors rather than building rental apartments. This in turn led to investors raising rents by much more than inflation and in some cases doubling it.
Well not anymore! Renters of any kind of dwelling, including semis, townhouses, detached and condos are now covered by the new rent control regulations in Ontario. This means no more crazy rent increases!
The proposed rule is retroactive to April 20, 2017. This means that if the landlord did not serve you a 90 day notice prior to April 20th asking for a rent increase, they are now only obligated to raise it 1.5% for this year. That’s a huge coup for renters.
With the restrictive rent increases, it might make renting more affordable in the long term as house prices continue to rise.
The new rent control regulations imposed by the governments can now be summed in with one word for landlords: headache. Now that rent increases are tied to inflation, landlords will have to ensure their properties are priced correctly from the start of the lease.
Despite the rule changes, it still doesn’t restrict rents to just inflation. If the house were to undergo large scale renovations or there is a substantial increase in maintenance fees, then the owner can still apply for an exemption at the rental tribunal and make an argument for a larger rent increase. This takes time and effort; however, and the most likelihood is that landlords may forgo these hearings and just bite the bullet.
What this means is that investors in real estate should think seriously before buying a rental property. Is it profitable? Can the property be cash flow positive?. Whether rent control lowers the demand for real estate in Toronto remains to be seen, but some think it will lower supply instead.
One stipulation still exists in that landlords are free to increase rents without limit if the existing tenant leaves. A new lease for a new tenant is not bound by the laws of rent control. When a property is vacated by a tenant, the dwelling can be relisted for rent at whatever the market rate can bear.
Most of the new policies don’t harm nor hurt existing homeowners, but they will hurt new foreign buyers. The 15% foreign tax is meant to penalize buyers who don’t intend to live or stay in the Toronto area. The only reason for this tax is to prevent homes from being treated as commodities and being left empty.
It’s still too early to know if home prices will be impacted by these small changes that have been enacted. Given that roughly 5% of home purchases in the GTA are made by foreign buyers, there is a large chance that the real estate market will continue to stay hot. Even in Vancouver where a similar tax was applied, prices have continued to rise.
Despite the fact that the foreign speculator demand may be decreased, there is no denying that real estate remains the most favourable investment vehicle for domestic investors.
Where Will The Market Go?
The spring market still looks to be sizzling in Toronto. Even with these new measures, it’s highly unlikely that sales will slow down with so much pent up demand .
There may be some minor relief and a few less bids, but until the appetite for risk subsides we very well might see another record year for real estate in Toronto.