It's Coming To Toronto For 2022! How Does The Vacant Home Tax Affect Toronto Real Estate Investors?
What Is The Vacant Home Tax?
Let’s begin by seeing what this vacant home tax is all about. In July of 2021, Toronto city council approved a plan to implement a 1 percent vacant home tax if you leave a home vacant for more than 6 months in a year. Their goal is to try to turn more vacant homes into livable units to help our city address our housing supply shortage. The city also plans to use this tax money, estimated to be $55-66M per year, and use it to build more affordable housing. Vacancies will be tracked starting 2022, and the first year that this tax is payable will be 2023.
And so after we hear this, the biggest concern for us as real estate investors is probably not that we would have to pay the tax but rather whether this will create an exodus of people wanting to sell like what happened with airbnbs, and tank property prices. But just like how you or I don’t think we actually have to pay vacant home tax, most real estate investors also do not intentionally leave their units vacant and would likely not be affected by the tax either.
40% Of Real Estate Investors Thinking Of Selling Their Investment Properties?
Now let’s go back to the headline that we talked about in the beginning of the video, 40 percent of real estate investors are thinking of selling because of the vacant home tax. This quote is based on a survey done by OREA in fall of 2020, and asked a general question to real estate investors about what they would do if there’s vacant home tax. If you’re presented with this question and at that time, nobody knew the details about this vacant home tax, most respondents would just have to give an educated answer. If there’s a bigger chance that our properties get vacant, then there’s a bigger chance that they would be subjected to vacant home tax. And if the tax is too high then it might make sense to sell.
So basically, I think this response is entirely correlated to the current vacancy rates. If vacancies are higher, then I would expect this response to be higher. In 2019, when the same question was asked the response was at 34 percent. Now given that vacancies went up by 7 percent because of COVID, I think it’s pretty normal to see a higher 40 percent of people thinking they would sell because of this tax. At the end of the day, I feel like this question is so hypothetical and without more information, the responses are pretty skewed. Remember this is a poll and not real listings or sales data, so take it with a grain of salt.
Vancouver Empty Home Tax Insights
Personally, I don’t think vacant homes tax is aimed at real estate investors who aren’t the ones that normally leave units vacant. Instead, it might be more so for speculators, but in Toronto’s market with such high real estate prices, there’s really not many of them since it gets much higher risk and potential returns don’t make as much sense given high transaction costs. And so we’re left with second or vacation homes, with the majority likely being in the luxury category.
If we look to Vancouver, we can validate this. Vancouver implemented their vacant home tax since 2017 and their latest 2019 report reveal that most of their vacant homes were also luxury homes. Their vacant condos are 59 percent more expensive than average and single family homes are 52 percent more. Their report also showed that there are more vacant condos than houses but even though the tax did reduce vacancies, the impact wasn’t that significant. Condo vacant units dropped 0.7 percent and houses only dropped by 0.2 percent, and even with more of an impact for condos in Vancouver, their condo prices still had 18 percent growth in 2017 and rents still went up 17 percent in 2017.
And maybe also because the vacant home tax didn’t do much, Vancouver had to continue to add stricter policies: increasing the foreign buyer tax rate in February of 2018, limiting Airbnb rentals starting September of 2018, and now attempting to increase the vacant home tax rate for 2021 & 2022. The interesting thing is that Vancouver is now tripling their vacant home tax to three percent starting 2022, so we will continue to keep an eye on that to see how things might change there.
How This Affects The Toronto Real Estate Market
At a 1 percent vacant home tax starting next year in Toronto, this is probably not going to change much to our Toronto real estate market. If our vacant units are similar to those in Vancouver, we can expect the major impact to be in the luxury condo market. But if these owners are willing to leave things vacant and lose out on 3 percent in rents per year, then a 1 percent tax wouldn’t be enough for them to want to sell either.
If you are new to investing in real estate in Toronto, rest assured that typical vacancy rates in Toronto are around 1 percent and it hasn’t changed much for houses. Even with the higher vacancies in condos because of COVID, vacancies right now are at 6.9 percent but dropping quickly again and nowhere close to 6 months of the year. So if you’re thinking about renting out your property, you’re likely not going to be buying a luxury property because those don’t make the best rentals and you won’t be paying the vacant home tax because you won’t be leaving your unit vacant for 6 months.
How We Can Help
On our Elevate team, we’re big believers in investing in real estate in Toronto and we’re happy to talk all about it if you want to get started! We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. After we help you buy it, our team also provides renovations guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!
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