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Ontario to impose 15 percent tax on foreign buyers

But some economists warn rent control measures could backfire

The province of Ontario will impose a 15 percent tax on all home purchases made by foreign nationals in the Toronto area, in a surprise move that aims to combat speculation in Toronto’s red hot housing market.

In an announcement this morning, Premier Kathleen Wynne also pledged to expand existing rent control rules to cover all buildings. Currently, buildings constructed after 1991 are not subject to any kind of rent control rules, which basically means that landlords can jack up rent as they please.

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The “Fair Housing Plan” as it’s being called by the province, includes 16 measures that aim to tackle the unprecedented rate of home price increases in the Golden Horseshoe area of Ontario. Last month, the Toronto Real Estate Board released data that showed a 33 percent increase in average home prices in the mere span of a year, prompting outcry across the province and calls for the City and Province to intervene in Toronto’s housing bubble.

Non-Resident Speculation Tax

The 15 percent Non-Resident Speculation Tax (NRST) takes after the foreign buyers tax imposed in the Metro Vancouver area last August, that in fact, led to a significant cooling of Vancouver’s housing market. Experts believe that the imposition of the foreign buyers tax in Vancouver led non-resident investors to flock to the Toronto area, adding to bubble concerns.

There has been some confusion in the lead up to the imposition of new housing rules in Ontario, as to the extent to which foreign nationals were purchasing property in the Toronto area. According to data from the Canada Housing and Mortgage Corporation, purchases of homes in the Greater Toronto Area by foreign nationals were less than five percent of all home purchases in 2015 and 2016. But in the most recent federal budget, the Liberal government deployed additional resources to the CMHC, Statistics Canada and the Canada Revenue Agency, to better assess the role of foreign buyers in Toronto’s housing market.

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“The share of foreign buyers in the GTA is notably lower than in Vancouver,” said CIBC Deputy Chief Economist Benjamin Tal in a note released this afternoon. “The direct net impact of such a tax, after excluding foreign students, workers and those that are on a citizenship path, will be minimal,” Tal wrote.

Rent control measures

Ontario will also introduce legislation to strengthen the Residential Tenancies Act, with the aim of ensuring that tenants all across the province are fairly protected. Effective today, all rental buildings in Ontario, including those built after 1991, will be subject to a 2.5 percent cap on rent increases. Over the last 10 years, rent prices, particularly in newer buildings in Toronto have increased over 35 percent — the average rent of a one bedroom apartment in Toronto currently stands at $1800.

Part of this rental legislation also includes the tightening of provisions for “landlord’s own use” evictions. Right now, tenants can be arbitrarily evicted from their homes if their landlords claim they need to use the place for themselves — in many cases, no proof is presented to the tenant.

Wynne’s rent control measures, however, were met with some criticism.

“We believe rent control will have the unintended consequence of discouraging rent supply over the medium to long term,” said RBC economist Robert Hogue and Craig Wright in a note. According to both Hogue and Wright, one of the main reasons why purpose-built rental apartment space (apartment complexes that are built only for rent) has been so limited in the city over the last few decades is because it isn’t lucrative enough for developers. Recent rent increases, however have prompted purpose-built rentals to make a comeback.

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“Capping rent increases will likely put an end to the burgeoning revival of this type of investment seen recently,” said the RBC note.

Tal concurs. “By looking at many condo vs. purpose built evaluations, we know that purpose-built developers need an average of around 3 percent to 3.5 percent rent inflation to make the math work.”

Addressing Supply Woes

One of the most glaring problems in this whole housing crisis saga has been strict zoning laws in the Golden Horseshoe area that prevents developers from building on large swaths of low-density, viable land. In a move to tackle this issue, the province will establish a program that frees up land currently owned by the province to private developers. It’s not much land, but it’s a start.

If approved, the City of Toronto and other interested municipalities will introduce a vacant homes tax, which basically means that you can’t leave your home unoccupied for an extended period of time without either selling it, or renting it out.

“It’s a very reasonable and overdue move, with a marginal impact at best. This factor is simply not big enough to make any material difference in the trajectory of the GTA’s housing market,” said Tal.

Wynne also announced the creation of a new “Housing Supply Team” that will seek to identify barriers to specific housing projects and work with municipalities and developers to find solutions.

On the rental side of things (rent supply is a massive problem in Toronto), the province will introduce a targeted $125 million, five-year program that will encourage the construction of new rental apartment buildings. Most importantly, the government has pledged to target these projects in communities that are “most in need of new purpose-built rental housing”.

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