Market Trends – Kiley Bollenberghe

Laneway Housing – Does It Work For You?

Kiley Bollenberghe — Wed, 05 Dec 2018 21:46:32 +0000

The City of Toronto is getting closer to approving a change to the Planning Act which would allow homeowners to convert garages accessed by lanes into living units. These units would be self-contained, and the government is hoping they will be used as rental stock thereby easing the shortage of rental housing in the city. Its impact can be significant considering there are 250 kilometres of rear laneways in Toronto.

In the last few weeks, we’ve received many inquiries from our clients who are curious or seriously considering building a laneway house. Most were questioning the impact of this on the value of their property. Could they recoup an investment like this which could run into hundreds of thousands of dollars?

There are two obvious and overriding concerns that should matter:

If the laneway structure takes away all the parking for the main house, or if it significantly shrinks the backyard of a single-family home, it would more than likely lower the value of your property. Given the cost of buying a single-family home in Toronto, most buyers want parking on their own property, as well as a backyard to enjoy. Another issue would be a likely increase in property taxes

On the opposite side of the argument, there are many purposes for, or reasons why home owners would consider building a laneway house. Here’s who could benefit the most:

1. Parents may consider building a laneway house for their grown children who are ready to move out but don’t have the funds required to buy the average priced house or condo in Toronto. This would be a much cheaper alternative per square foot than either a house or a condo.

2. Adult children can choose to build one for their elderly parents, to keep a close eye on them without travelling distances. This would save time and give everyone peace of mind while retaining privacy. In the past we have found that children are reluctant to place their elderly parents in basement apartments, usually because of lack of enough light, so this would be a great alternative.

3. As home owners age, they often find the maintenance of their property too much to handle. Yet they have difficulty parting with their house, their garden and their neighbourhood. A laneway house would allow them to move into it when life is simpler, and they need less space. Essentially, they could “age in place”. An added bonus would be the ability to supplement their income by renting the main house.

What about those who need to draw on the equity of their house to live on? A reasonable possibility could be to sell your house, get your equity out, while retaining an option to rent the laneway house from the new homeowner.

4. Another great use is that it allows you to expand your livable space. Moving is expensive so if you need more space, whether it be to use as a home office, a teenager’s space or for elderly parents, laneway houses can be the solution to your space problem.

5.Homeowners could consider building a laneway house for rental income. In this case you would have to weigh the cost to build versus the rental income generated to determine whether it makes economic sense. For example, a laneway house could cost $300,000 or more to build. Let’s assume you’re passing the utility costs to the tenants, you still have to pay for the mortgage, insurance and increased property tax. Therefore. if your mortgage cost is about $1,500 a month plus insurance and property taxes (estimated at around $250 per month), your rental income would have to exceed $1,750 a month for this to pay off as an investment.

In my opinion, considering that renovated basement apartments are renting for higher than $1,500 per month, a nicely done laneway house could rent for well over $3,000, a month making it an economically smart investment.

Furthermore, because of the many uses for laneway housing, it is entirely possible that buyers looking for more space outside of the main house will pay a higher price for your property.

I am very excited to see this policy come to fruition. I think that in the long term it will:

increase the rental supply in established neighbourhoods that have access to transit and key amenities;
increase the viability of home ownership making it more affordable just as basement apartments have already done;
increase tax revenue for the city; and
make our laneways safer by bringing lighting infrastructure and more pedestrians into the laneway

The post Laneway Housing – Does It Work For You? appeared first on Kiley Bollenberghe.

The T.O. Real Estate Market: Something Needs To Happen, But What?

Kiley Bollenberghe — Wed, 05 Dec 2018 21:39:30 +0000

This post by Melanie Piche, real estate agent at Sage Real Estate in Toronto, was originally published on www.getwhatyouwant.ca.

Prices for March are up 33.2% since March 2016. Talking about real estate has long been Toronto’s favourite pasttime…but as the spring 2017 market gets into full swing, the conversations have taken on a new tone. The 2017 real estate stats are mind-boggling:

The average detached house in Toronto now costs almost $1.6 million.
The condo market – which has seen price appreciation of 4-5% for the last few years – saw price gains of 33%. Wowza!!!

It’s true madness out there, and almost everybody agrees that something needs to be done to calm the market. Between panic buying, greedy Sellers and FOMO (Fear of Missing Out), there’s a serious imbalance of supply and demand.

So what can be done? Below, my thoughts about some of the strategies being considered:

Foreign Buyers Tax

There’s so much talk about implementing a foreign buyer’s tax in Toronto!

The Vancouver experience: Last year, Vancouver implemented a foreign buyer tax equal to 15% of the property’s value. Suddenly, non-residents of Canada were required to pay an extra $150,000 in taxes on a million dollar home – not an insignificant amount of $$. Almost overnight, the market slowed – in fact since it began, sales volume in Vancouver is down a whopping 45%.

Does that mean that 45% of the Buyers in the Vancouver real estate market were foreign? Of course not. But it shows that markets are driven by the psychology of the people, and the foreign buyer tax made Vancouver Buyers pause (“Are lower prices on the horizon?”) and made Sellers nervous (“Better list my home now before prices go down!”). Result? A rebalancing of supply and demand.

Nobody has any idea what percentage of the Toronto real estate market is fueled by foreign money. Ridiculous as this may seem, nobody tracks that number. Making a big decision without any real facts or information is undoubtedly dangerous and can easily result in intended consequences.

In a city like Toronto – where 46% of the population was born outside of Canada (2011) – foreigners are the fabric of the city. Did you know that 30% of Toronto residents speak a language other than English at home? Amazing. Toronto’s population is growing at one of the fastest rates in the country, and that’s a great thing for our economy – it also means all those people need a place to live.

Fact: There aren’t a lot of ‘good’ investments out there, and foreigners have long considered Toronto’s real estate market a safe place to park their money. While a new tax will slow the foreign money coming in, it certainly won’t eliminate it.

Would a foreign buyer’s tax work here in Toronto?

My guess, based on our team’s experience and the anecdotal experiences of other top agents, is that non-residents account for 3-5% of the market in Toronto. A tax would certainly give pause to some of those Buyers – but not all of them.

A non-resident tax would, however, shock the system and psychology of ALL of the Buyers, resulting in a lower volume of sales…at least in the short term. Would that translate to lower prices? It would hopefully slow down the pace of growth (33% per year is clearly not sustainable) – but it’s hard to imagine prices decreasing much. Toronto has proven itself to be resilient to a lot of government intervention over the years. People want to live in Toronto, just like they want to live in New York, London, Tokyo, and Paris.

Vacancy Tax

Vancouver has recently implemented an annual $10,000 vacancy tax to discourage homeowners from leaving their homes empty, and there’s talk of a vacancy tax coming to Toronto too. The hope is to financially penalize those owners in the hopes that they might sell their empty properties.

Problem #1: Nobody has any idea how many condos and homes are vacant here and if this is an actual problem or not.

Problem #2: If an owner is already paying tens of thousands of dollars per year in taxes and maintenance on a vacant property, would an extra tax really change anything? It seems like an easy way to make a little extra tax money for the City, from people who don’t get a vote in the next election.

Changes to Financing Rules

In the past, government intervention has focused on making it harder for people to buy (with the hope of reducing demand). They’ve changed downpayment rules, CMHC rates, qualifying requirements and in October 2016, they announced a new stress test that reduced the amount of mortgage many people could qualify for.

The problem? None of these changes have ever had much of a long-standing impact in Toronto, beyond the first few weeks of implementation. In fact, I’d argue that the 2016 changes moved many buyers from the house market and put them into the condo market (thus increasing demand for condos and bidding wars), and it forced a lot of would-be-condo-sellers to stay put because they couldn’t afford a house, thus further reducing supply.

Double whammy….higher demand, lower supply.

Changes to Capital Gains Exemptions

Before the federal budget was announced, there was a lot of talk about whether or not they would change the capital gains exemption amount.

Currently, only 50% of the gain on the sale of an investment property is taxable, meaning that if you bought a condo for $500,000 and sold it for $600,000, you’d only pay tax on 50% of the $100,000 increase in value (less expenses of course). If capital gain exemptions were to change – for example, an investor would be taxed on 65% or 75% of the gain instead of 50% – that would certainly impact Toronto’s real estate market (while hurting other communities across the country too).

There’s a real risk that the result of an increased gain exemption would be investors holding onto their properties to avoid the tax…thus further reducing supply. Savvy investors do think about tax implications when they buy – but most people who own 1 or 2 investment properties, don’t think about it until they sell – so we might not see much of a change in demand anyway.

Nonetheless, the budget did not contain a change to capital gains, so this isn’t likely something we’ll see anytime soon.

Rent Control

In Ontario, properties built after 1991 aren’t subject to the usual caps on rent increases, meaning that a landlord can theoretically increase a tenant’s rent by as much as they want at the end of someone’s lease. Truth: this doesn’t happen very often and is usually a tactic used to get rid of a problem tenant without going through the painful eviction process. But nonetheless, the rule exists as a way to encourage investors to add to the rental pool and sway builders to build purpose-built rental properties which are in significant short supply in Toronto.

One of the tactics being discussed to reduce speculative investor buying is to make all properties, irrespective of construction date, subject to the usual rent controls (which are equal to the Consumer Price Index).

Will more rent control work?

I don’t think most investors are buying properties to take advantage of the 1991 rule…in fact, most investors didn’t even know about it until the media started reporting it in the last 6 months. More importantly though, discouraging more rental units will only make Toronto’s rental situation worse – rents have increased by 11.7% in the last year and vacancy has been hovering around 1% for years. If the goal of slowing Toronto’s rental market is to make Toronto liveable and affordable, penalizing tenants seems ill-advised. We need MORE rental stock, not LESS.

Changes to Bidding War Rules

A lot of Buyers and REALTORS have been lamenting the current lack of rules dictating bidding wars and noting the impact on prices. Truth: the current bidding war wild-west is painful and unpleasant and blind bidding likely does increase prices. In the heat of a bidding war, it’s not uncommon for multiple bidders to be sent back to ‘improve their offers’, thus driving up prices.

While I have a lot of ethical issues with how bidding wars are often run in Toronto, I have to wonder: should the government really be able to tell Sellers that they can’t push Buyers in the hopes of getting the highest possible price for their home? In a free market, the value is set when a buyer is willing to pay X, and the Seller is willing to accept X. I know the current situation is terribly frustrating for Buyers – but if they are willing to pay X price for a property, why shouldn’t they be allowed to do it? Do Buyers need protection from themselves? And let’s face it: the market isn’t always going to be like this. There will be a day when it’s a buyer’s market. Would the government then change the bidding rules back?

Note: I think the bidding war process needs an overhaul and more oversight…but not because the practice is the reason for Toronto’s overheated market. I wrote about that here.

Increase Supply?

Most of the tactics being discussed are aimed at decreasing demand, which yes, is part of the problem. But there are strategies that could help increase supply too:

Simplifying the process for permits, severances, and approvals
Easing the rules on development of the greenbelt
Reducing land transfer taxes in the hopes of encouraging more move-up buyers (lol, who are we kidding, the Toronto and Ontario governments are addicted to these taxes)

What Next?

Is Toronto’s market spiraling out of control and in need of government intervention? Or are we witnessing the Manhattanization of Toronto where ‘normal’ people with ‘normal’ jobs are simply priced out of living downtown?

Will the government intervene to slow down Toronto’s real estate market or let the market work itself out? In the last week, we’ve already started to see the signs of the seasonal slowdown, with fewer showings and fewer Buyers bidding on houses.

What do you think is going to happen?

The post The T.O. Real Estate Market: Something Needs To Happen, But What? appeared first on Kiley Bollenberghe.