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.

Safe Deposit Boxes Sold As Condominiums

I have already blogged about the use of condominium designation for storage facilities (here, and here for super luxury) – so it seems a natural evolution to offer really really tiny storage. SafeBox Condominium Vaults (Parallax Investment Corporation is the developer) will be opening up the first (world wide) condoized safe deposit box facility in Toronto, with further development in most large cities across Canada.

On a square foot basis, the units go for either $2160/sq. foot (for 3” ceilings), or $3300/sq. foot for the luxury 8” ceilings.

I’m all thinking this is a phenomenal idea, until I checked out their website and see they are marketing the purchase as “the ability to own a prime piece of real estate at an affordable price.” This is not an investment opportunity, this is a different way to manage and secure valuables. That the company is even marketing 1.67 sq. foot condos as a real estate play is not only inexcusable, it makes that plan feel a little scammy to me. Now I’ve got a little of that “buyer beware feeling.”

More Fallout to Toronto’s Falling Glass: $20 Million Lawsuit

In 2010 and 2011 two recently built condominium – the Murano Towers (731 units) and Festival Tower (378 units) literally rained down glass on the ground below. 13 panes of glass balcony railing released and fell.

Since then the glass from all those balcony units (somewhere short of 1000 units) has been removed and the owners forbidden from utilizing the space.

Yesterday the owners launched a $20 million dollar class action lawsuit. That’s about $18,000 per unit – to cover loss of use and to have the issue fixed in a timely manner.

Condos Can Equal Free Fuel for Electric Cars

Three years ago, when I was president of a 107 unit condominium, I suggested that we may have to take steps to regulate the electrical outlets in the underground parking. I was assuming that at some time an owner would buy an electric car and plug in at night. As electric charges for all common AND titled spaces were paid out of condominium fees (no individual meters) for that condominium, I wasn’t about to have someone freeload their “gas” off the rest of the owners.

I was scoffed and laughed at (awww, poor me!).

Well, Mike Nemat of South Keys condominium, Ottawa Ontario, was doing just that – slipping his power cord into a common property wall socket for his 2012 Chevrolet Volt. Now, once he got caught, he’s been offering to pay $50/month for the right to plug in (he estimates the actual electric bill is about $24/month).

The board is having nothing to do with it, and requires Mr. Nemat to install a $2000 meter to continue his siphoning ways. That’s not going well with Mr. Namat.

The board is within their power to demand a separate meter. Indeed, they’re well within their rights to deny Mr. Nemat access to any electricity served through the common property – and unless the condominium’s by-laws are really poorly written, they should back up the board on that fact.

While I am all for getting off the monkey’s tail of fossil fuels – older, and even newer condominiums – aren’t designed for electric car charging. All new construction moving forward though should have parking stalls that, at minimum, have the wiring and sufficient grid to power every car at once – even if they’re not activated or metered till sometime in the future. Retrofitting will be a pain.

Mr. Nemat should in all honesty have approached his condominium board first before buying his car. It’s much like new owners who buy a condo already possessing a vehicle that’s longer or taller than the by-laws allow, and then complain about the board preventing them from using their titled parking spot. Too bad.

Boards Can Enforce Parking Restrictions Even After Years of Not Doing So

There’s a recent ruling by the Ontario Superior Court of Justice between Toronto Standard Condominium Corporation No. 1737, and Farrah Hakim and Jaffar Kayyali, regarding board enforcement of owner parking.

Jaffar and Farrah bought a unit – with titled parking – and proceeded to park, according to by-laws, an overheight vehicle there for 3 years before the board informed them they were in violation. The couple fought the board and demanded the right to continue to park their vehicle in their titled spot. After 3 years of dispute the court ruled that the couple’s claim was invalid and ruled in favour of the board.

It’s important to note – because this comes up ALL (all!) the time with boards I deal with – that the court ruled the board didn’t have to grandfather the vehicle because the board issued and started enforcing the overheight violation on all deliquent owners (there were 7 at that time in violation) in a fair manner.

Many owners often argue that there is a “timeliness” requirement to be caught in their bylaw infraction. That requirement doesn’t exist. A board needs not be omniscient, nor perfect, in their application of the bylaws. They do need to show fairness when enforcing them, and that the board enforces bylaw infractions as they become aware of them.  That’s about it.

So, if you’re an owner raging against a board claiming that they “ignored the situation for years” and that should invalidate any restrictions listed in the bylaws, you might not find that a convincing approach to gain favor from a judge.

Why Toronto Condo Prices Will Absolutely Totally Go Down in 2012

Because I say so. And I’m only being partially facetious.

The base creation of property value is supply and demand. As long as demand exists beyond supply then the value of condominiums will remain static or grow. But that’s only part of the story for Toronto.

In Toronto the super vast (some reports over 80%) of pre-construction condos are investor purchased. Investors, versus homeowners, are looking for fiscal return. Cash. Money. Income. The Jackpot. The Dream. Investors are looking for a growth in their financial portfolio.

As long as there are three factors in housing their investment is good: (1) demand over supply and (2) revenue exists between purchase and sale (3) the perception of “need” to buy now exists in the market.

Let’s look at point 1: Toronto is about to bring on more units in the next two years than ever before. It is unknown if there will be enough population growth (and demographic movement) to create demand for all those units. While condo prices in Toronto have “always risen”, we have never seen this much inventory come on line over 3 years.

Point 2: Rents in Toronto have topped out at the moment. While the costs of condos have continually grown, the ability to rent them at a reasonable percentage of purchase price (about 6.25% of value per year) has not kept up. Rent levels are well below this ratio. This means its great value for renters, but returns for investors don’t exist on rental income.

Point 3: Perception of “need to buy” – and this one is important. If buyers think the market is hot (whether this is the Toronto area in total, or just the building they are interested in) they will pay the bucks and pay them now. Buyers who see competition for their “perfect” home will often become irrational about the purchase price. Investors and sellers love that. But as people like me (and I’ve blogged several times about my worry about Toronto prices),the Globe and Mail, the Financial Post (indicating a 15% Toronto correction), banks, and economic reports all start talking about an economic slowdown in condo prices – then buyers start believing that. Not only do they start believing it, they start acting on it. They start thinking at they might just be able to wait, or another awesome condo may come on sale slightly cheaper. Perception slows the market. That’s why in part Real Estate Boards always issue the most positive statement about demand. They are in the business of supporting good housing valuations – meaning larger commissions to their agents.

So when I say Toronto housing prices will go down because I say so, it’s because I’m part of the group of people writing about the downturn in prices. The more people writing with this opinion, the more housing prices will stagnate and likely drop. And I think there are going to be a lot of people writing about a downturn.

And those people who believe foreign investors will save housing prices – as foreign investors believe that Toronto is reaching a peak, or just growing slowly, they will sell and move their investment to the US for better returns. After years and years of depressed housing prices, newspapers and pundits are starting to whisper “the long US housing burst may be bottoming”. If there’s one thing that a good investor knows – buy low and sell high. So even if there is still growth in Toronto – there’s likely bigger growth south of the border.

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.