Toronto Municipality: The Big Tax Loser with a Condo Bubble Burst

While the biggest losers in a Toronto condominium bubble collapse would be the owners of the property – there will be fallout to other stake holders (looking to the US for clear examples) including banks, federal insurance programs, and the condominium complexes (abandoned units which don’t pay their condominium fees).

But owners that decide to simply bunker down and hold on to their properties until they rise once again will face an additional burden for their trouble: higher taxes.

Toronto has a Municipal Land Transfer Tax (MLTT) – on top on the provincial land transfer tax – which accounts to about 300 million dollars a year. This tax takes place when a property changes ownership. For a cost example, on the average cost of a condo ($369,892 – Toronto Real Estate Board) the Toronto MLTT works out to $3074.52.

If property prices fall 20% the drop in city taxes isn’t the same because the rate varies based on the price of the property. This is important to realize when the cost of detached homes in Toronto averaged $650,147, and the blended value of all property types  in Toronto averaged $517,556 – a 20% reduction in property value would result in a 34% reduction in the MLTT – or about $105 million in reduced revenue for the city.

A collapsed bubble market coupled with a MLTT will result in even further loss in property values. It will be bad enough when values naturally drop in a bubble, but with Toronto scrambling to make up 100+ million in taxes, there will be dramatic raises in property tax (or other service costs) that will continue to put a downward pressure on housing values.

People who hold on to under-water equity homes will get punished for riding out the loss with new and greater taxes that were previously funded by an addiction to the MLTT.

I’m not a big fan of MLTT – I much prefer a fair market taxation rate (which is nice – more expensive properties pay more taxes) as a single, primary, tool of municipal taxation. The MLTT seems too variable, too addictive in certain markets, and especially too difficult to deal with when a municipality has to go cold turkey on a collapsed housing bubble.

Colorado Looks to Legislate HOA and Condominium Transparency

Imagine living in a jurisdiction where the HOA or condominium corporation can deny your document requests with impunity. If you live in Colorado, that is exactly what can, and does, happen. State legislation indicates the association can deny providing documents unless there is “proper purpose” for the request.

There is absolutely no way to determine proper purpose, and owners are being forced to hire lawyers in order to get the documents they need. That is totally ridiculous.

Thankfully it looks like HOA regulations in Colorado are going to get a huge overhaul. In 2011 the state started tracking complaints voiced against HOAs – and the information is amazing. Complaints are not focused on pets, parking, and paint – which most people have always assumed. The complaints are about board and associations being closed for review, tightly controlled, and abusive in the use of their power.

From the 2011 Annual Report of the HOA Information and Resource Centre:

An additional and perhaps one of the more troubling complaint types the Office heard was that
the HOA board or manager was harassing, discriminating or retaliating against homeowners.
Many homeowners felt that their boards had singled them out and were arbitrarily fining them
for violations, when they were not in violation; engaging in selective enforcement of covenants;
and precluding them from participating in meetings.

The 2011 Report is a great read – and truly eye opening about the nature of a person’s relationship with their HOA. It’s a well suggested read for anyone involved in condominium and HOA work.

Anyways, it’s always nice to write a blog post about how a group or organization “gets HOAs and Condominiums” and a big, positive, tip of the hat to the Colorado State Legislature in drafting new legislation to address some well needed change.

Toronto Condo Market – Boom, Bust – Banks Divided

Toronto. Again.

The question is – will the growth continue, even with 21,000 units coming on-board this year and the same scheduled for next. The Greater Toronto Region has about 5.2 million people in it, and a growth rate of about 0.4%. That would suggest about 21,000 new people (including births) – if we average it out to the 2.1 people/family, that’s about 10,000 new units required. So we have an oversupply of 11,000 units/year in just condos alone – not including low-density housing.

To this the Bank of Canada, in regards to Toronto, has indicated:

The supply of completed but unoccupied condominiums is elevated, which suggest a heightened risk of a correction in this market.

In July of this year, the RBC said:

We believe that the attractiveness of investing in condominiums will gradually diminish … [and the overall housing market will be] mainly flat in 2011 relative to 2010, with some wakness emerging next year.

If you’re pro about market growth (average unit cost in November was up 8% from last year), National Bank Financial analyst Stefane Marion indicates that the current inventory of Toronto units could sell in 19.3 months – well below market lows of up to 48 months historically. You can also see in that Montreal, a reasonable close major metropolitan, condominium construction is up 68% year over year. It is unclear if this is added competition or an additional indicator that growth continues in Canada – especially the eastern heart.

I still think it’s due for a correction – earlier reports this year indicated 70% of new condominiums are investor funded. With world markets still tumbling (down 2% yesterday in financial sectors) investors will start limiting their exposure to a housing bubble. This in itself will start the downward trend on cost.

 

City of Cambridge Punishes Condominiums with Fire Hydrants for $9000/Year

Cambridge, Ontario, has placed a $9000/year charge on condominiums with a fire hydrant or other “big pipe”, a cost which is charged on top of the water and sewage costs each owner individually bears. The water and sewage, up 10% in January, are scheduled to almost double by 2019.

Condominiums offer great boons to a municipality – they create a high density residential area, forming an environmentally responsible, affordable and sustainable municipality. Edward Glaeser sets out this argument in his February 2011 The Atlantic article “How Skyscrapers Can Save the City”

Eric Jaffe points out in his article “The Case for a D.C.-Baltimore Mega-Region” that higher density will save about $1.5 billion a year in spending on roads, schools, and other infrastructure. Residents would also save about $400/year if only 1/4 of the region’s planned low density becomes high-density.

Calgary, Alberta, Canada has recently completed a study that shows dense city development moving forward will save 33% in total capital costs, and 14% less in operating costs, then current density levels.

It is without argument that condominiums contribute significantly to the fiscal wellbeing of municipalities. But instead of rewarding owners in such developments, municipalities punish them with additional costs – often to the benefit of unsustainable low-density zoning and development.

Regarding water, sewage, and condominiums – the municipal cost for supplying and maintaining kilometres and kilometers of piping are saved with high density living. That should be recognized by the municipality, not punished.

Kudos for Cities That Get It: Ottawa and Condo Footprints

It’s always nice to drop kudos here and there (in between most of my posts which focus on the negative). In this case, Ottawa, Ontario, Canada has updated a tree-protection bylaw that was only two years old.

The by-law itself, in purpose and thought, rocks. Trees would need municipal approval before cutting: 10 centimeters or greater diameter on hectare and larger size land parcels; and 50 centimeter or greater diameter for any property. This should ensure those old and gorgeous trees remain rooted, and allow for younger trees the opportunity to grow into fantastic groves.

Condominiums are unlike either individual houses (protecting those gorgeous granddaddy trees – 50 cm. and greater diameter) or undeveloped green space (1 hectare or larger plots). Condos are kind of both – a group of individual residents on a large shared property.

Given that, Ottawa has updated the by-law to place condominiums under the 50 cm. and greater diameter part of the by-law, and made them not subject to the 1 hectare or larger plots section. It’s a nice, simple, and easily rolled out change to a rule that overlooked the large footprint of condominiums.

Kudos Ottawa for a small, but important law change that recognizes the nature of condominiums and removes inappropriate regulation.

Bad News – Toronto Has Become a Developer

I wrote an article about how the Collingswood NJ municipality decided to become a condominium developer and ended up holding the bag because the condominium market crashed. I restate that municipalities should never be residential condominium developers.

The role of a municipality is to direct the desired developments through zoning and legislation, and to leave the risk associated with the project with the developer (see recent crash in US housing to confirm risk exists).

Municipalities should never be in the business of risk. They should be in the business of service and infrastructure, not gambling – as in “gambling if the condo market will still be good in six years”.

Six years is the projected timeframe it will take to complete the – now largest residential planned condominium – development.  The project, which will be 20% city owned and 80% Tridel owned, is a 75 story development at York and Harbour, near the railway tracks.

Mayor Rob Ford said the new joint venture represents a creative way of solving the city’s financial problems. Cities don’t need creative – they need solid and sustainable. Rob’s brother, Doug Ford – who also is elected to council – sits as vice-chair of the Build Toronto, the city arm that is spearheading this initiative. He says the opportunity represents a cash windfall:

When there is that much profit sitting on the table, we wouldn’t be very prudent business managers if we turned our head on this opportunity

To add, the Build Toronto’s chief executive Lorne Braithwaite is quoted as saying:

The market is hot as a pistol and we are about to generate funds for the city and create a fantastic new development

So now we have “a creative response” that “represents a sure thing” that relies on a condominium market that in six years remains “hot as a pistol”

I haven’t heard such a combination of positive will and high risk since friends told me to buy RIM at $140/share just three years ago. Thankfully that sure thing in a hot as a pistol telecom market panned out. In only three years it’s lost 88% of its value. One can only hope it keeps performing as well for the next three years!

I didn’t buy any RIM, and I don’t buy into a municipality becoming a developer.

Florida Looks to Ban Condominium Raising Fees to Cover Delinquent Owner Shortfall

Senator Chris Smith for Fort Lauderdale has proposed a Florida senate bill that would make it illegal for condominium associations to cover delinquent owner payment by raising assessments on owners who pay their fees regularly.

To start with, it’s very important that a condominium raises the funds required to maintain the property, utilities, and safety of the building. That’s the primary purpose of the board, and performing proper maintenance and paying bills ensures that owners retain property that has (within the market) maximum resale value and opportunity.

When a large amount of delinquent owners exist in a condominium, the board fails to collect the revenue required to meet their duties to maintain the building and pay the bills. As corporations have limited powers to generate funds, they raise the contributions until the responsible, paying, owners meet the financial needs of the condominium corporation.

This can mean, where we see some condominium with 2/3 delinquency – that the responsible owners are paying 3x the condo contributions they should be. This is a great hardship.

Historically, this issue of non-payment hasn’t been an issue. But the combination of the housing crash, high unemployment levels, and most importantly – a foreclosure process in Florida that is now taking 12-24 months (gaaahhh!), is leaving a significant number of condominium raising fees on owners to cover costs.

Traditionally, non-payers would be foreclosed on, and the corporation would get the outstanding sums in 30 to 90 days from filing. That, with only a few delinquent at any one time was fiscally manageable. Now, with the lack of ability to collect in a timely manner, corporations are facing massive debts, shut off of services, and dangerous buildings.

At some point, even if it is two years, the corporation will get paid. The question is what to do in the meantime. If the Florida legislation moves forward – preventing responsible owners from paying for non-payers – the question still arises: where does the corporation get the money it needs now.

Corporations taking out loans works well in great economies because the corporation can back the loan with their ability to levy condo contributions. But when the debt issue arises from the very issue of being unable to collect contributions, there is no ability for a corporation to find money.

The legislation sounds all good and dandy to protect the responsible owners from directly paying more while the state courts take so long with the foreclosure, but that just puts the costs onto the building and services. Non-existent or reduced maintenance can have as great or greater cost on residents trying to resell as an increase in their condo contributions.

It’s a tough position, but the answer is not to limit the hands of the condominium corporation is sourcing the funds needed to maintain and operate the condominium corporation.

The real answer is for the Florida legislature to properly fund a court process that addresses the insane time it takes to foreclosure. Instead of responding to the substantial increase in foreclosures they have let the current system drown. It’s bad form to write more laws when the problem lies with the underfunded court system.

Move In, Have Money, Demand Change

Having just congratulated the Ministry of Sound for proactively participating in local redevelopment, and successfully preventing a 41 floor condominium from being built too close to their business of “being noisy”, I have a great example of the reverse.

Miss Lin Yu Yang, of the Rivergate Condominium in Robertson Quay, Singapore, is successfully getting the attention of local government officials to cut out local street drinking and early morning use. The Rivergate is located in the Robertson Quay, an extremely popular night club, hotel and restaurant area. The very famous, huge, nightclub Zouk is located there.

Having recently purchased a ~3.2 million USD condominium, Miss Lin has become distraught over the level of night life noise. It’s too much for her, and she wants the first Singapore no-alcohol zone to surround her home.

Seriously. You’re going to spend that huge amount of money on a condo, and not do your research if it is suitable for your living needs? Drive by at night?

If I had enough to buy an expensive unit like that – I would definitely require a week long residency – even if I had to rent the unit out for that week.

As Miss Lin is quoted:

If we ask them to stop, they may say: ‘You think that just because you are rich, you can tell us what to do?

Well, yeah. I think they would.

Ministry of Sound – Proactively Being Loud

I’ve never liked the type of person that moves into a new neighbourhood and then complains about the noise, traffic, prostitution, smells, sound and vagrants. They’ve always seems like arrogant pricks to me. When you’re buying into an existing neighbourhood, you are buying into the neighbourhood. The good (hopefully, I mean there must have been something good that would have attracted the person to the block) and the bad.

When it comes to the bad, a big complaint of these new residents is sound.

The Ministry of Sound, a hugely successful nightclub and record label resides in an area of London that in undergoing revitalization and new development. Instead of waiting for the developments to go up, and the new owners’ complaints to come in, the nightclub has – for 2 years – been very active with petitions, leafleting and advertising against the new developments.

This last week Southwark council’s planning committee against the development proposal – a 41 story tower block, proposed by developers Oakmyne, that would have been built near the club.

I’m very excited about this development. It reaffirms that existing businesses (and the Ministry of Sound is a landmark and cultural icon as well) can continue to flourish, and councils recognize that when new development is erected is often has a significant negative impact on existing business. In almost every case the new developments force out old business. This time that whole battle is avoided, and the existing business is respected.

Follow Up To Post “Toronto Condo Sales Are Freaking Insane”

While the post was just two days ago, there have been two great articles that back up my concerns, and add a few more. For good reading (what I see) on the likelihood of a Toronto condominium bubble burst – check out the following:

Troubling Signs for Toronto’s Condo Market

Absorption Rates

While I do shout concern about a correction in Toronto, I don’t think it’s anywhere near Miami’s folloy, where prices dropped 50% from their peak. While Toronto shows the same investor levels for pre-construction purchase (70-80% in Toronto, and then in Miami) – Toronto has two things that would help mitigate some drop: it is a financial centre (financial center condos will always outperform the rest of the market), and it’s not a snowbird getaway – it’s a primary residence location.

The bigest take away from all these articles recently – $800+ psf is definitly already gone, and it looks like reasonable top end cost is about $700 at the moment, and a 20% reduction or bubble pop would put top costs at $560-$600 psf.