A recent article in The Globe And Mail called Toronto Eyes Vacancy Tax To Rein In Real Estate Speculation put the number of vacant properties in Toronto at 65,000.
Yikes! That's a lot of empty properties!
The article goes on to say that "while anecdotes about 'dark condos' and oddly empty luxury homes are common, little reliable data exist on just how many empty units speculators are sitting on in Toronto. That number comes from census data, meaning that owners at those addresses did not answer their doors on census day or on two follow-up visits over the next six months."
If this is the case, would a vacancy tax be helpful?
Here's my thoughts.
First, to give some context to this piece, in April 2017 the Government of Ontario introduced the Ontario Fair Housing Plan, which contained a number of new taxes and policies intended to slow real estate price appreciation and to make housing more affordable in general.
The Provincial Government’s plan addresses among other market drivers, the impact of speculative property investors. There is a belief that some of these speculative investors are keeping their properties vacant, with the intention of riding the wave of price appreciation to realize their profits without the constraints of a tenant. There are a few problems with this investment philosophy, especially in a city like Toronto, where housing is unaffordable for many. Housing loses its function as shelter, and becomes completely commodified for investment purposes alone. This - consequently - pushes prices up, and limits shelter opportunities in a city where vacancy rates are very tight.
The Government is introducing legislation that will allow municipalities to levy a vacancy tax; mirroring the tax recently introduced into the white-hot Vancouver property market, where similar investment activity was sending prices up at breakneck speed. The working theory here is that such a tax will cool the market by limiting foreign investment, where empty homes serve as 'holding tanks' for investment capital. Also, the hope is that affordability levels will be increased if a greater housing supply enters the market, serving to bridge the gap between supply and demand.
The primary concern is that vacant dwellings are not functioning residences, but 'shells' for investment portfolios that should be taxed at rate that is comparable to business activities. This is essentially what property speculation is.
Vancouver’s Vacancy Tax
In Vancouver, the vacancy tax looks like this: if properties are not owner-occupied, unoccupied by family, or haven't been rented out for 6 months, owners will be subject to an additional 1 per cent of a home’s assessed value in tax, starting with the 2017 taxation year.
While this kind of tax could certainly act as a deterrent in holding properties vacant, there is belief that it may not do much to cool an overheated market. If a speculator is holding a home awaiting price increases, there are carrying and operating costs involved, which can be substantial (in particular if it is a luxury home in question) that would erode the return on the investment at a greater rate than comparable investments, meaning that they may not be as many people doing this as suspected.
It’s too soon to say what impact this will have on the Vancouver market, but let’s look at some other scenarios.
Vacancy Tax Has - And Hasn't - Worked Before
Vancouver modeled their vacancy tax in part on Camden, UK’s (a borough just north of London) success, which they’ve coined the “ghost-house tax”. In 2013, they introduced a hefty 50 per cent tax on homes that were unoccupied for two years.
Part of Camden’s success is the accuracy of their data collection (which is a challenge that I’ll address more below). They relied on a combination of tax records, site inspections and a hotline that gathered tips on empty homes. In past few years, they claim to have brought 176 homes back into circulation as a result. Other cities like Melbourne Australia are trying to transfer Camden’s success to their city by implementing a similar task and using funds raised to assist with creating affordable housing.
Vacancy tax is not without its challenges though. In France in the late 1990s, a vacancy tax was implemented for homes that had been empty for more than 30 consecutive days over the prior two years (assuming they weren't in serious disrepair or on the market for sale). The tax increased year-over-year if the property in question remained vacant. There was a significant drop from the first year to the second in people paying the tax, which some thought that it was proof that it worked, but there were many more that believed that this indicated that people found a way to manipulate the system.
This reflects one of the inherent problems with vacancy - its vague definition. It was hard for authorities to enforce the conditions and verify the facts around vacancies.
Pros and Cons
In cities with low vacancies, the benefits could be numerous, in that more housing would be available. This injection of supply into the market could also help to cool rising prices.
But one must consider the potential downside of a vacancy tax too. To start, it is very hard to define “vacant”. For instance, if snowbirds are gone for half the year from their home, does that make it vacant? The Airbnb argument has been presented as well. If you rent your place out through Airbnb or similar arrangement, is it really considered vacant? What about students - domestic students who usually live elsewhere in Canada, foreign students who study abroad? Even though their residence may be vacant temporarily because of their studies, is it fair that they get taxed? Furthermore, it negates the right of the owner who does use the property on occasions throughout the year, but not full time because they're working elsewhere. After all, we live in a changing global economy where people do work in multiple locations, whether that be in finance, technology and even the arts.
Another factor is that many Toronto condominium have Rules and Regulations restricting the term a place can be rented. Most complexes have a minimum one year lease requirement, or six months at best, but rarely have I come across condominiums that allow shorter rental periods. Here's a piece I wrote called Airbnb And The Economy Of Shared Housing which shares how my team and I only found five buildings in the downtown core which allowed short term rentals. The assertion that if there are substantial sums of vacant condominiums being held by speculators which should be taxed, the condominiums own policies may protect them, rendering the objective's result minimal at best.
The problem here is that are a myriad of exceptions and how do you introduce a vacancy tax that will have the intended impact on curbing speculation, without taking all these other homeowners along as collateral damage?
The other problem is that it’s really hard to physically determine whether or not a home is actually vacant. There a scarcity of hard data to determine whether a property is actually empty. A homeowner may travel often or work shift work, so the property may appear vacant to neighbours, but it’s not. One idea put forth is to use utilities data, but that’s a challenge because the information in many cases is protected by privacy laws.
There is using census data, as Stats Can has done to estimate numbers of vacant dwellings, but that method isn’t empirical either. It's all a bit of an educated guess. There are also problems too with asking homeowners to volunteer this information as well, because in doing so, they will open themselves up to taxation.
Vacancy Rate Optics and Actuality
The most recent stats from CMHC indicate that apartment vacancy is at 1.6 per cent and condominium vacancy is at 1.8 per cent. Renters are challenged to find suitable, affordable accommodations.
Many pundits blame a lack of new buildings for the supply issues, but there is a sense though that it isn’t a lack of physical supply is creating challenges for renters. Rather property investors (particularly condo owners) are either leaving units vacant or charging very high rents to offset high debt loads. Canada has one of the highest price-to-rent ratios in the world, actually; either way, these units are out of the market for renters. Click to read this article from Macleans that explores the difference between what some believe are true condo vacancy rates and what is being reported in Toronto: "The Vacant Truth About Rental Condos”.
While encouraging those investors to introduce their units to market to avoid a vacancy tax will increase supply and therefore options for renters, it is important to remember that the delicate balance between supply and demand has serious impact on the market - in both directions.
Also potentially complicating this supply-demand dynamic is the introduction of rent controls for landlords. While this is meant to help protect tenants, some feel that this move is prohibitive for property investors. This may encourage more investors to sell their properties, which may push more units onto the resale market, in addition to those being built.
There is also debate around the continued building of condominiums. There are those who argue demographically there will be enough demand to absorb new stock. There are those as well who feel that population growth isn’t keeping pace with new building, and that we may be faced with a supply glut in the future. Click here to read “Toronto Has Too Much Housing Despite Overall Population Growth: Report” that discusses a recent Ryerson report that shows that population is actually stagnating and/or declining in key areas in the GTA.
This Canadian Real Estate magazine article, “Is Now the Time to Sell?”, also suggests that Toronto is overbuilt, and that over-supply threatens the market in the future.
The idea is to alleviate price pressure by introducing supply, but if you introduce too much supply concurrently, you are at just as much danger in snapping the market back before it has time to adjust. This effect threatens financial well-being, just as in today’s market homeowners are vulnerable because of huge debt loads and eroding affordability.
In a nutshell, you’ve got to think longer term about these implications, not just introducing supply to satiate today’s demand. As a homeowner or as a property investor, there is a lot to consider when you are looking for a home because the market is so multi-layered. Want more insight on the Toronto real estate market? Be sure to read my recent accompanying blogs that explain several of the market trends at work:
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