How Do We Solve Toronto’s Rental Crisis?

TorontoRealtyBlog

Or if you prefer a debate before the debate, let's start with, "Does Toronto have a rental crisis?"

Friday's blog about the compensation paid to tenants upon legal eviction from a landlord resulted in a few different conversations about the state of the rental market, so I'd like to continue on that theme today.

There has been a lot of press lately about the "crisis," and I'd like to draw your attention to one group who is actively lobbying somebody to fix the problem…

There's a bit of a "chicken and the egg" phenomenon when it comes to the intersection of rental prices in Toronto, and the increasing price of downtown condos.

Despite the constant talk in the media of an unstable Toronto real estate market, my investor clients are coming back in droves.

Specifically the clients who are looking to purchase 1-bed, 1-bath condos, and rent them out long-term.

You might think that with the recent legislation, much of which we discussed last Friday, that many investors would be turning the other way, or even downright scared of becoming a landlord.  But there's one thing that's keeping them in the market, and making many want to become even more active: the increasing rents in Toronto.

I'm absolutely shocked at the rents out there right now.  Just flabbergasted.

A 495 square foot, 1-bed, 1-bath, with a balcony, no parking, and a locker.

How much?

Any ideas?

How about $2,150 in King West.

It's just shocking.

And thus my investor-clients see the increasing rents, which increases the capitalization rate and return on investment for any given property, and the investment becomes even more attractive.

So are the condo prices going up in response to the higher rents, as demand surges among investors?

Or are the rents increasing as prices go up, since investors need to cover their costs?

Because of the recent implementation of rent controls, I don't think investors are able to increase rents, freely, to cover their costs.

Ironically, I think if I had to choose the chicken, or the egg, I'd say that more people are buying because the rents are so high, than charging higher rent because of the price they paid.

And if that's the case, then why are rents going up?

Call me predictable.

Call me naive.

Call me simple.

But once again, the answer is, our good old friend, supply and demand.

The demand part, we know.

People want to live downtown, whether it's because they're working longer hours and have less time to travel, or they want to ditch the car and avoid the commute, or there's a movement among millennials to get out of their parents' homes sooner than the previous generation.

The city population is growing, especially downtown, and the demand has never been higher.

But the supply has also never been lower.

And it goes without saying that increasing demand, and decreasing supply, is a recipe for disaster in any market.

The unintended consequences from the Liberal government's "Fair Housing Plan" announced in April were many, but interestingly enough, the one that was the least predictable, and seems to be having the most effect, is the decline in rental units coming onto the market.

Instituting rent controls, theoretically, at least, should massively increase the time that the average tenant stays in one place, meaning there are fewer units coming back onto the market.

But more importantly, the rent controls make developing purpose-built rentals far less attractive to developers.

I've been saving articles on the rental market in Toronto for the last few months, and I find the trend rather interesting.

*June 13th, 2017 – "Developers Call For Changes To Ontario Rent Control Measures"

This was when we first started to hear about developers maybe looking at their purpose-built rental projects, and wondering whether or not it would be worthwhile to convert them to condos.

Ironically, it was the CEO of the Federation of Rental-housing Providers of Ontario (FRPO), Jim Murphy, who spoke out against the rent controls.

You would think the FRPO would be in favour of rent controls, but they can actually see the fores through the trees.  They know what can happen if the government institutes a cap on rent increases that makes it unattractive for long-term investments among REITs looking to build rentals.

Mr. Murphy actually suggested that the cap be somewhere in the 10% neighbourhood, rather than 2.5%.

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*September 13th, 2017 – "Toronto To Get 2,000 Market-Rent And Affordable Units"

This was a Toronto Star article about the City of Toronto's decision to sell four pieces of land – two in the West Don Lands, one on Grosvenor Street, and one on Grenville Street, and mandate that they must be used for market rent and affordable housing.  The city seems to be patting themselves on the back, making it known that they would sell for more if there were no restrictions on the use of the lands.

600 of the 2,000 units will be "affordable," and the other 1,400 would be market-rent.

1 in 10 of each unit will be "designed for large families."

It's important to note that there are 181,000 people on the wait list for affordable housing.

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*September 25th, 2017 – "1,000 rental units cancelled because of Ontario rent control, new report finds"

Here's where we started to see actual evidence of would-be, purpose-built rentals, changing course and becoming condominiums instead.

The "report" referenced gave us this headline about cancelled rental units, but perhaps an even more alarming stat, which the next story shows.

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*September 25th, 2017 – "New study finds Ontario's rental housing supply is facing a shortfall of over 6,000 units per year to meet annual demand"

This story appeared everywhere, and was picked up by every online news outlet.

With a headline like that, who doesn't want to read it?

The report, completed by Urbanation, was commissioned by the Federation of Rental-housing Providers of Ontario (FRPO), who I'll tell you more about shortly.

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*October 9th, 2017 – "Rising Prices And Evictions: Toronto's Housing Market Has 'Gone Bonkers'"

This was a Globe & Mail piece with some "faces and names" to put to the stories we hear so often about just how expensive rents are getting.

One of the people profiled in the article is a "normal" 39-year-old woman, who spends 46% of her salary on rent.

Expect to see a lot more of these types of stories.  Just as we saw this kind of angle when the housing market for sales was red-hot, this makes for a great read among a host of people who can relate to the topic.

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*October 12th, 2017 – "Toronto's Rental Market Is Downright Scary Right Now"

This isn't really an "article" per se, but rather 150 words on BlogTO about a very important study released last week by Ryerson University.

The study is called "Getting to 8,000" with a subtitle of "Building a healthier rental market for the Toronto area."

If you're wondering why that 8,000 number is significant, it's because you saw the number "6,000" per year a few articles ago.

Recall that the Urbanation study showed a housing shortfall of 6,000 units per year.

The Ryerson study is recommending that the city and province strive to see 8,000 new rental units built per year.

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If you have time, read the Ryerson study, which you can find HERE.

It's 40 pages long, but a really interesting read, with a lot of stats and figures you'd be quoting while in line at Tim Horton's to get your coffee.

Let me give you the Coles Notes on this.

The report offers seven public policy recommendations:

Making better use of land and existing housing

1. Municipalities introduce vacant unit taxes throughout the Toronto Area

2. Municipalities regulate short-term rentals throughout the Toronto Area

3. Municipalities adopt land-use changes to permit more residential development

Incentivizing new purpose-built market rental units

4. Province of Ontario expands and increases the proposed development charge rebate program

5. Municipalities expand incentives to all rental developments

6. Province of Ontario or the Federal Government develops an agency to provide a "one-window" service to offer development incentives

7. Federal Government makes changes to HST policy including implementing a zero-rating system to claim HST credits and the CRA's exclusive use of the "Lending Value" and "Cost" approaches to determining fair market value when calculating self-supply HST.

There's a lot of other good nuggets in there, such as their "Barriers" section, which references the barriers to building rentals in the city, but I need to move on here…

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I mentioned the Federation of Rental-housing Providers of Ontario (FRPO) a few moments ago, and I'd like to draw attention to their public policy ideas as well.

The FRPO launched a website last month: www.rent-on.ca

Be forewarned about the blinding, bright-pink background of the website that's made my eyes sore for the last hour.

The FRPO launched this site in response to the Urbanation report (which they commissioned) back in September, but now that Ryerson has released their own report, I wonder if they'll implement those findings as well.

Just as was contained in the Ryerson report, the FRPO's "Rent-On" campaign offers several policy approaches to increase the supply of rental housing in Toronto:

1) Implement a new rolling exemption for purpose-built rental buildings from rent control, i.e. units after a designated date would not be subject to rent control to encourage new investment. The NDP government of the early 1990's first introduced this concept.

2) Modify the rent increase guideline applicable to new purpose-built rental buildings (i.e. not condominium registered) to inflation plus a certain percentage. This formula, will provide the modest investment return necessary to ensure continued growth in the supply of new, purpose-built rental housing, while respecting the Ontario Government's intent to assure tenants have reasonable, predictable rents they can afford. • Rental housing needs fairness in property taxation.

3) Rental buildings can be assessed at up to 3 times a single-family home. The government of Ontario has introduced property tax fairness for new purpose-built rentals, but all multi-res rental units need to be assessed at the same rate as single family homes province wide. By legislation, savings would be passed along to tenants.

4) Some municipalities have introduced municipal licensing fees for rental units. There should be no new taxes on industry that could act as a disincentive to build new supply. Further, Ontario municipalities should implement programs that waive development charges and building permit fees for new purpose-built rental. Vancouver has a similar program already in place.

•Rental housing providers should be given the option to sub meter electrically heated units like they already can for other forms of hydro so that high energy users bear the increased cost of usage, while energy-efficient tenants would be rewarded with lower bills.

5) Maintain vacancy decontrol. Since 2012 in Ontario over $5.2 billion in renovations of rental units have taken place as a result of this measure to improve living quality and maintain our purpose-built rental housing stock much of which is 35 years or older.

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Some of the same ideas, and some new.

But I think you're getting the picture here: put enough people in a room, and you can come up with a list of ideas on how to increase the supply of rentals in the city.

So my obvious question at this point: what do you think?

And before we get to the conversation about how to increase the supply of rental units, feel free to take a step backwards and offer an opinion on whether or not this is even an initiative that needs undertaking.

The post How Do We Solve Toronto's Rental Crisis? appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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