A large proportion of the city’s real estate investors have said they would offload their units if the City of Toronto moves forward with implementing a vacant home tax, according to recent polling data. But how quickly and strongly the city’s beleaguered rental and condo markets recover this year could play a critical role in determining the impact of the tax.
In a Toronto Regional Real Estate Board (TRREB) 2021 Outlook report released in February, 40 percent of real estate investors surveyed said that the prospect of a vacant home tax for Toronto would prompt them to sell their investment properties.
A couple months prior to the report’s publication, the City of Toronto approved an implementation plan to introduce a new tax on vacant Toronto homes starting in 2022 in an effort to grow the city’s housing supply. By taxing non-occupied units, the City hopes to encourage investors to either sell or rent out their units while raising revenue for affordable housing projects. If successfully implemented at a one percent rate, the tax could generate $55 million to $66 million in annual revenue.
“The vast majority of Toronto residents will not pay this tax but our entire city will benefit from more housing and more affordable housing,” said Toronto Mayor John Tory in a press release. “City staff will now do the work to make sure this is implemented in the right way.”
John Pasalis, founder and president of the Toronto-based Realosophy Realty, explained to Livabl that the strength of the rental market will play a role in determining what investors do with their units as much as the vacancy tax itself. If the rental market has strengthened and prices are trending upwards again by the time the tax is applied, more investors may be inclined to lease their properties.
“If the rental market looks sluggish and prices are sluggish, you’ll probably see more sellers,” said Pasalis. “But if the market is doing well by the time the City introduces this, we’re probably going to see more investors just list out their units for rent and hold onto them.”
“I think the market conditions play as much a role on what people are going to do as the actual policy itself,” he later added.
While the Toronto region’s housing market has been on fire since summer 2020, the city’s rental market and downtown resale condo market have been sources of weakness while the strength is concentrated in suburban single-family homes. Changes to rules around short-term rentals and a pandemic-induced sharp drop in tourism and international students have resulted in supply piling up in both the resale condo and rental markets. Prices in both markets have recorded significant declines since the beginning of the pandemic.
Rental rates are expected to grow again within the first half of the year and condo sales have already started rebounding at a fast pace. That said, the strength and speed of this recovery remains a source of uncertainty and adding another headwind to the recovery in the form of a new tax may be counterproductive.
For its part, TRREB has said that it’s unclear what type of impact a vacant home tax may have on the market.
In a recent statement, the board pointed out that while a vacancy tax could persuade some investors to list their units in the rental market, others may simply list for sale, especially if their property has experienced a significant gain in value. If this occurs en masse, the number of potential rental units could shrink, TRREB says.
“TRREB is not opposed to a vacant home tax, and we understand the rationale behind it; however, it is
unclear whether it will add rental housing that is affordable or affordable home ownership to the market,
at this time,” said Lisa Patel, President of TRREB.
In 2017, Vancouver introduced a home vacancy tax which has since generated $61.3 million in revenue for the city and led to a 25 percent decline in the number of vacant properties. Pasalis says that he doesn’t know if the Toronto vacancy tax would have as significant an impact as it did in Vancouver, as West Coast investors are required to pay both the municipal vacancy tax and the provincial speculation tax.
“When you have two taxes going at you as an investor, you’re going to respond quite differently than if it’s just the one,” said Pasalis. “I don’t know if it’s going to have the same impact, because in some ways, investors [in Vancouver] are paying double the taxes [that] Toronto investors would.”
Pasalis notes that the vast majority of investors appear to already rent their units out, and he doesn’t believe that the vacancy tax will discourage real estate investment in Toronto.
“My instinct is that anyone who is leaving their unit vacant is probably a much smaller subset,” he said. “Even if those people disappeared, I actually don’t even think it would have much of an impact on the market as a whole because there’s enough demand for end-users and domestic investors for renting to keep the market pretty active.”
The City of Toronto says it will report back to council later this year on how the vacancy tax will be implemented, including on any potential tax exemptions.
