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.

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.

Chicago Address Budget Shortfall By Taxing Condos For Services They Don’t Receive

Chicago will be eliminating a $75/unit rebate given to condominiums of 5 or more units in their 2012 budget. This rebate was started in 1984 because the city taxes these condominiums yet they do not provide any garbage service to them.

Mayor Rahm Emanuel indicates:

Eliminating this garbage rebate for condominium owners, a step also recommended by the city’s inspector general, is the fair and honest thing to do for Chicagoans.

Seriously – how is charging money for nothing exactly fair and honest? Let’s see – you pay me taxes, and I’ll refuse to provide the services you pay for. Sounds like Mayor Emanuel has no idea what the words “fair” nor “honest” mean. Perhaps we should send him a dictionary – or emails with online links to the true meaning of those words.

Condo Owners Often Pay Twice For Trash

It’s nice to see a proactive city council – East Greenwich, Rhode Island – looking at city pick-up of condominium trash.

Cities extensively benefit from condominiums – each condominium unit pays property tax, but the corporation (especially in townhouse and high-rise) usually have to pay for third party services often offered to single detached housing.

This is often true with trash pick-up. Condominium owners pay municipal tax and then have to pay part of their condo fees for non-municipal trash services.

So it is always nice to see a city council look at delivering fair services to all their properties, instead of taking the property tax and “running.”

Sidewalk Responsibility: Bad Tax Effect for Condominiums

Read an article in the ffwdweekly here in Calgary where a local community identified sidewalk replacement as a cost that the local residents and businesses shouldn’t have added to their municipal tax roll – but should be a cost burdened by the entire city.

For many municipalities, Calgary included, sidewalks, alley paving and streetlights are all charged back to the “using” residents and businesses. While not universal, it’s relatively common and not an unusual process.

What I would object to, as a condominium owner, is that condominiums already are disproportionally charged taxes in Calgary under the fair market value (where all properties pay a set percentage of their value each year as tax). Fair Market Value taxation isn’t fair to many condominiums. For instance, multi-unit apartment style does not receive garbage pickup from the municipality. They have to pay for private pick up, while still paying the city for garbage pickup which they don’t deliver on.

For sidewalks, it wouldn’t be uncommon in Calgary with large lots, to have a single residence with 30 metres  of sidewalk or more. For multi-unit condominiums, that could work to as low as 2 metres/unit. As in the case of community requesting that “the whole city” pay for their new sidewalk, they are significantly underpaying their share and offloading it to more eco-friendly condominiums which have significantly smaller land and services footprints.