Welcome to this month’s edition of Dear Urbaneer. Each month, I choose one of the questions about housing, and home, posed by our clients that pertains to Toronto real estate. This month, I am tackling a timely topic: the recent introduction of new regulations for short term rentals on platforms like Airbnb, and why this became such a contentious issue in the Toronto housing market.
I’ve just received a promotion at work that will see me travelling extensively every few weeks. I'm considering renting my home out on a short term basis during my absence. I’ve heard a lot about the new rules for Airbnb hosts and wonder if they might impact my ability to do this? Why are there all these rules now? It seems like a reasonable way to help defray my costs while I am away. Just curious as to why they are cracking down.
Seeking Sort-Term Solutions
Dear Short -Term Solutions:
In recent years, Airbnb - and other short term rental platforms - have been a great way for homeowners to generate income and help offset the high costs of Toronto real estate. In fact, I’ve written about Airbnb a couple of times before, as it's become an integral part of the shelter economy over the past few years. Check out these older posts called Airbnb Regulations and Toronto Real Estate and Airbnb and the Economy of Shared Housing.
As this movement of home-sharing developed and grew, in many urban centres residents began documenting the negative impacts these platforms were having, including a dwindling supply of unfurnished housing for long-term tenants and other unanticipated social issues (i.e. challenges in community-building in neighbourhoods given the transiency of occupants, and impacts of quiet enjoyment), which began to divide the quality of life of city residents directly against the revenue potential, and profits, for short-term rental owners.
In fact, as these platforms exploded, the concept of housing as a collective right versus housing as a private commodity became a political issue. This has led governments across the globe to endeavour to find a balanced solution by introducing regulations tailored to their locations. As a realtor in the shelter industry, I've discovered this can be a rather divisive issue.
Here's a summary of the new regulations for Toronto real estate, along with a broader overview of the forces at play which resulted in new government policies.
LPAT Upholds Bylaws
After a lengthy appeal process towards the end of last year, the Local Planning Appeal Tribunal (LPAT) decided to uphold the decision to tighten Airbnb rental restrictions that had been originally passed in 2017; these were supposed to be implemented in June 2018. Although it is possible that landlord groups will continue to lobby and/or seek subsequent appeals, these regulations are widely expected to stand firm when they roll out in early 2020.
Starting soon, Toronto Airbnb hosts will need to register with the city, and current and new Airbnb hosts will have three months to comply with this licensing and registration. There is fine print (i.e. a possible grandfather clause for existing short-term rentals prior to the bylaw passing), but basically Airbnb hosts will be permitted to rent only up to three bedrooms in their primary residences as short-term rentals (which is considered durations less than 28 days). If a resident wishes to rent their entire home, it can only be rented if the host is away up to a maximum of 180 days per year. This means 'ghost hotels' - which are unoccupied dwellings used specifically as a short-term furnished rental unit - can no longer be operated in Toronto.
Also, Airbnb will be restricting the ability of guests under the age of 25 to book homes within their own communities (though they will still be able to book private rooms within homes). It's expected that exceptions to this new rule may be made for Airbnb users under 25 who have many positive reviews or meet other yet-to-be-announced criteria.
Beyond any immediate arguments in support of and against these regulations, the level of regulation is, in and of itself, a very significant milestone in housing policy.
The intention of these regulations is to strike a balance between respecting a property owner's right to generate income while ensuring there is an adequate supply of affordable rental housing in the city. In the end, the tribunal upheld the original decision, which more heavily regulates rental restrictions on short-term rental properties.
As a result of the tribunal’s decision, it is expected that 5,000 of Toronto’s 21,000+ Airbnb rental units will return to the long term rental market, which is good news for renters who have seen market rents skyrocket over the past few years.
According to the tribunal, one of the biggest deciding factors was the simple realization that for every short-term unit that is available, a long-term rental household is displaced. Even more disconcerting, is the fact that many of these short-term rental units occupy purpose-built construction, intended to assist with increasing rental supply - which was shrinking an already razor-thin vacancy rate.
And what happens when supply is out of whack with demand? Affordability takes a monster hit!
Short-Term Rental Market: The Numbers
The proliferation of the short-term rental market in Canada has had a real and meaningful impact. A study from McGill referenced in this article “Airbnb Likely Removed 31,000 Homes From Canada’s Rental Market, Study Finds” showed that, in 2018, 31,000 homes across Canada were rented out often enough through short-term rentals that they were effectively removed from the long-term rental supply pool. This works out to 1.5 per cent of homes built in Canada intended for rental units.
The study based its findings on entire-home listings that were available for rent for at least six months- and that were actually rented out for at least 90 nights. The assumption is that a long-term rental wouldn’t be able to operate in an arrangement like this.
Click here to read a similar study that was conducted in 2017 “Short-Term Cities: Airbnb's Impact On Canadian Housing Markets”.
Analysts have long purported that rental supply far lags behind demand, especially in Toronto, where strong immigration, robust local economy and continued strong employment continue to add to the rental pool.
Short-term rentals, though platforms like Airbnb and VRBO have absolutely exploded over the last few years. And it’s no wonder. They are profitable. There was an increase in Airbnb listings from 2017 to 2018 of 25 per cent; during the same time period, revenues increased by a whopping 40 per cent to $1.8-billion.
In addition to the money, one of the reasons Airbnb exploded is that hosts prefer the lower maintenance arrangements that coincide with short- term rentals, which are often far easier to manage than maintaining longer-term rental contracts under the current system. Why? Because the Residential Tenancies Act is designed to favour tenants, such that if a landlord rents to a bad tenant who is problematic, in arrears, or grifting the system, it can be very challenging, costly and time-consuming to get vacant possession. Click here to read my post about the challenges of being a landlord in The Other Side of Rent Control and Toronto Real Estate.
This issue isn’t just a Toronto problem; the growth of short term rentals has impacted communities literally across all points in this country. The rental pool in rural communities and smaller towns, which tends to be small to begin with, has also been hit hard; various other Canadian metros are feeling the pinch of squeezing supply, which has caused regulators and municipal bodies in various locales to jump into action to try to alleviate some of the problems.
The Airbnb problem is most notable in a few select cities, like Toronto, Montreal and Vancouver, which collectively host about half of the country’s Airbnb listings. Looking at the trend lines in these cities, analysts equate the jump in rentals and revenues could represent as much of 1 per cent back into the vacancy rate if this housing stock was returned to the supply pool.
Vancouver: A Case Study
We’ve had the benefit in Toronto of being able to observe and learn from Vancouver - Canada’s other white-hot housing market - in how they are dealing with the subsequent fallout and eroding affordability in their own housing market. We’ve seen how they have responded to issues like foreign ownership, speculation, supply issues and fraud. And we’ve had the benefit of seeing how effective their regulatory remedies have been in laying control into the market.
Vancouver is fascinating, in that it was the first Canadian city to react to demands from the local population to address affordability and rein in its highly-charged speculative real estate market. Click here to read, “In Vancouver, A Housing Frenzy That Even Owners Want To End”.
The challenges in Vancouver have largely been characterized by, of course, the lack of housing supply which Toronto also suffers from. In Vancouver, the creation of more housing is in part to its geography (i.e. the limitations of available land in a mountainous area), but also because fees and restrictive regulations have slowed or downright deterred new construction. What housing which is developed caters to the affluent, with only a small amount of affordable housing for the 'missing middle' being built.
Vancouver, like many other urban centres, is also resisting increasing the density of single-family neighbourhoods, by allowing more smaller units to be built on single dwelling lots. The city's archaic exclusionary zoning system - like Toronto's - could comfortably see townhome complexes of four to six units be built having the identical square footage as the new single-family McMansions have been replacing the original smaller housing stock over the past 2 decades. Citizens and politicians argue these multi-unit infill properties are not considered 'in keeping with the character of these neighbourhoods'.
In Vancouver, the issue of housing affordability also boiled when it was demonstrated that wealthy Chinese buyers (and many who had been accepted into the Canadian Citizenship program requiring they live in Canada for extended periods of time but were not) were buying the most expensive properties for precedent-setting prices, which in turn was driving up the value of all real estate. For example, in 2015 one-third of Vancouver residential properties sold to Chinese; these properties were often left vacant;
And during this time, as researched dug deeper, it was proven that all levels of the Canadian government were turning a blind eye to the veracity of all this wealth flowing into the country, despite China having strict rules on how much money one could legally withdraw. Here is a great article called Vancouver Has Been Transformed by Chinese Immigrants. With closer inspection of the Vancouver market, it was shown that money laundering, tax evasion, and loopholes like the shadow flipping of new condominiums, were having a significant impact on the Vancouver real estate market.
Meanwhile, as these factors were fueling the market, individual homeowners were also taking their secondary or supplemental rental units out of the unfurnished rental market and placing them on the new home share platforms like Airbnb where income potential was higher.
This dramatically impacted the issue of affordability, which prompted Vancouver to roll out a series of regulatory efforts in order to rein in this problem.
The BC Intervention
Vancouver (and B.C. provincially) have a good track record in policy to effect change in the housing market. Here is a timeline.
The British Colombia Government responded to the citizens' frustrations by introducing several policy interventions in August 2016 including the introduction of a foreign buyer’s tax of 15% (which was increased to 20 per cent in 2018 as part of the NDP's winning election platform). Although it did cause the Vancouver luxury housing market to plummet in sales volume and selling price, there has not been a significant drop in the values of more affordable properties that align with the working income of residents. Incidentally, foreign buyers are still open to purchasing luxury property on the West coast, but they're asking the sellers to reduce their asking price by 20 per cent to cover the cost of the new tax.
The province also levied an annual speculation / empty homes tax levy of 1 per cent of the property's assessed value (on top of the annual property taxes) for homes which are vacant for more than 6 months a year. The objective is to encourage homeowners to place their vacant (or mostly vacant) property on the rental market, in the hopes it opens up more affordable options for prospective tenants.
Here is an article from November 2018 called Empty Homes Tax Not Helping Rental Crisis, Generating Millions More For Vancouver: Report. There are some problems with this proposal, in particular, that this tax will also be applied to remote cottages and cabins that aren't really accessible, or conducive to renting to tenants. Here's Canadians With B.C. Vacation Homes To Be Hit With A New Tax
The province also negotiated with Airbnb (and other furnished rental platforms) an agreement that requires the people operating an Airbnb to pay a short-term rental licence fee of $56 plus an annual fee of $49, and to have Airbnb guests pay an 8 per cent provincial sales tax on top of the cost of their rooms/parking at the time of booking. Last year this apparently generated nearly $43 mil in revenue.
And again, trailblazing with regulation around housing, Vancouver was the first city in North America to take steps to alleviate the pressure on supply in the rental market from Airbnb. They require short-term rental operators to be registered with the city. The rental must be a landlord’s principal residence, and they can rent it out for no more than 30 days at a time.
Check out these posts: Property Watch: How Government Intervention Is Affecting The Market; B.C. Rental Crisis Goes Far Beyond Impact Of Short-Term Rentals, Say Experts; and Policies Aimed At Forcing Condo Investors To Rent Out Their Apartments in Vancouver Are Working, Report Suggests.
Toronto Should Watch And Learn
Over a year after Vancouver introduced their bylaws, reports are that there are some issues with the enforcement of the bylaws and that Airbnb hosts are identifying and using loopholes as a workaround. Regardless, policymakers say that the regulatory framework is sound. Although it’s not perfect, it has succeeded in returning a significant number of rental units back into the supply pool. This is a good cautionary tale for Toronto, facing similar challenges.
There may still be challenges for Toronto, as well. For example, a lot of Toronto homes have illegal basement apartments which owners removed from the long-term affordable rental housing supply for use as short-term furnished rentals. While there is some expectation that these might be returned to the unfurnished rental pool, the opportunity exists for Airbnb hosts to continue renting out these lower-level basement suites by simply removing the stove and calling it part of their house. The city is in no way able to force property owners to do otherwise because technically most basement apartments in Toronto are not legal secondary suites, by zoning or by building code. In fact, this situation goes for any secondary (or more) suite(s) in single-family dwellings that are not legal.
Click here to read “How Have Vancouver's Airbnb Rules Affected The Housing Market?”
It’s A Global Issue
The reason perhaps that the alarm bells are sounding is that the proliferation of the short-term rental market has created problems in numerous markets around the world. It’s a proven problem that, if left unregulated, creates havoc in the market.
In New York, the short-term rental market has been attributed to speeding up gentrification and effectively raising rents. According to this study: “The High Cost Of Short-Term Rentals In New York City”, median rents increased by $380 as a direct result of supply pressure applied by Airbnb. They estimate that between 7,000 and 13,500 units have been removed from the housing market.
Amsterdam has had its share of supply problems due to short-term rentals (it is believed that 21 per cent of Airbnb hosts here have multiple listings), and have reacted with strict measures, which some are calling a “blueprint” for other cities in similar situations to follow. Hosts are allowed to rent out their homes for 30 days a year; they are required to register with the city council and limit guest occupancy to four people.
This story, "What Airbnb Really Does To A Neighbourhood", lists what various restrictions have been put into place in various cities, like Paris, Tokyo, London, Barcelona, Singapore and more. This article has valuable insight as well: “13 Places Cracking Down On Airbnb”.
Owning real estate goes far beyond the transaction. It can be helpful when you are making decisions to play out potential scenarios for your tenure as a homeowner, like revenue generation. And, of course, good decisions are made with throughout research, patience and guidance from someone who has the experience to have solid foresight into the market. We are here to help!
May my team and I become your realtors of choice, and guide you to the best of the best Toronto real estate as it meets your wishes, wants and needs?
With a multi-disciplinary education in housing - and 27 years experience in the property market - I believe the search for a property requires aligning with you physically, mentally, emotionally and spiritually. This includes my commitment to share my opinion when I question whether a property might not be your ideal. It's how I became renown as the "realtor who mostly talks you out of buying a property until the right one comes along".
Did you enjoy this or find it helpful? Here are some of my past posts on Toronto real estate, including two about Short-Term Rentals:
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Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
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