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Toronto Rental Cost (& AirBnB) Issues

jje1000

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This is an issue that has been slowly bubbling up over the last year. Rents are shooting up beyond the ability of the middle-class & young people to pay them:

http://www.cbc.ca/news/canada/toronto/no-fixed-address-these-are-your-stories-about-renting-struggles-in-toronto-1.3998487

And there is a big risk that Toronto will miss out on the skills of the younger population who (who are not nearly as weighed down by obligations & are highly mobile). This affects not only the quality-of-life of Toronto, but also the economy & culture of the city.

This means that our tech, cultural and startup industries will be operating at a disadvantage compared to cities like Montreal which offer low rents across the board and can attract better talent. We could always compare ourselves to New York, LA London, etc., but cities like those are draws upon themselves and usually offer better wages & more prestigious companies in comparison to Canada.

Same goes with the cultural scene- which is at an even greater disadvantage due to the lower income that those working in the sector take in.


High rent could make Toronto a 'generational ghost town'

[...]

What's the cost for Toronto?
Cherise Burda, executive director of the Ryerson City Building Institute, said that young people opting to leave Toronto over rent prices is a bad sign for the city.

"It's not good for the city to lose diversity, otherwise we just hollow out the city," she said. "Right now is a really unaffordable time — we are in a peak of housing costs."

Ryerson City Building Institute’s executive director Cherise Burda says rising rents are driving out young people and 'hollowing out' the city, cauing it to lose valuable diversity. (Ryerson City Building Institute/Dominic Ali)

Burda said that she's most concerned about young people who would otherwise start families in the city being funnelled to far-away communities in order to afford to live.

"We can't just keep sprawling out. That just creates more environmental problems, more congestion. And for the families and the individuals themselves, those are huge social costs and huge environmental costs."

Kershaw agrees, pointing to the Metro Vancouver Area as a "canary in the coal mine" for what happens when a city's young people can't stay.

"Right now, in Vancouver — and soon it will be replicated in Toronto — it's hard for companies to recruit talent," he said, giving the example of a tech employee offered a job in his city.

"Why would you come to do it in Vancouver when the salary [you're offered] doesn't get you into a single detached home?"


He argues that the rise in housing costs can have dire implications, and hopes that a federal housing strategy could take on the problem nationally.

"Metro Vancouver is becoming a generational ghost town," he said. "If Toronto is not careful, it is not that far off now."
http://www.cbc.ca/news/canada/toronto/high-rent-could-make-toronto-a-generational-ghost-town-1.3999022

Indeed, this is one of the factors why companies in Ontario (especially around Toronto) aren't expanding- they can't find the people they need.

But hydro isn’t Ontario businesses’ biggest self-identified problem. That’s finding the workers they want to hire. “A critical threat facing OCC members is that of staffing, and the difficulty (or even outright inability) of hiring the right people for the right job,” the report says. Highly skilled workers are retiring and they’re hard to replace.

Expensive housing makes it tough for workers to move around. Integrating new immigrants so they’re work-ready quickly and connecting students to jobs are also challenging, though they’re “evidently a priority for the federal and provincial governments,” the chamber acknowledges.
http://ottawacitizen.com/news/local-news/reevely-ontario-must-help-businesses-be-less-risk-averse-chamber-of-commerce-says



As a backgrounder- buildings built after 1991 are not subject to rental controls- meaning that landlords have complete control over rent increases. This was intended to increase the supply of rental units in Ontario but it has a secondary undesirable effect due to the high demand at the moment. Furthermore, if tenants vacate a unit, the unit loses its rent controls. This is something landlords will desire.

Rent Control Rules (And The Lack Thereof) In Ontario

When a tenant vacates an apartment, the landlord is permitted to set the rent at any price they feel the market will bear. The landlord may even change what services and utilities are included in the rent between tenants.

[...]

Real estate investment is a business, and landlords want to see a return on their investment. The landlord may choose to keep up with market rent and be willing to take the chance that they will have to find a new tenant -- it depends on their priorities. Often though, what renters find is that leaving due to a large rent increase is not a solution -- that market rent has increased to about the level of rent that their landlord is charging and that it won't much help to move because prices have gone up across the city.

In fact, in Toronto they've gone up rapidly. According to a report by the Toronto Real Estate Board, in the first quarter of 2016, rent went up by 8.9 per cent over the same period the year prior for a two-bedroom condo rental. The landlord has to decide if they want to capitalize by keeping up with market rent, because going by the guideline, they would, year over year, lose out on maximizing the return on their investment.
http://www.huffingtonpost.ca/ypnexthome/the-rent-control-and-abse_b_14725538.html


Any ways the city & province can fix this? Would be it be up to the city to find ways to increase supply? Or should the province look into revising rent control laws?

Or are we going to sit back and enjoy the ride?
 
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rbt

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Any ways the city & province can fix this? Would be it be up to the city to find ways to increase supply? Or should the province look into revising rent control laws?
Rent control rules won't increase the amount of stock available and we know from NY that 1st years rent actually goes up significantly to compensate for long-term tenants. There are a few things the province could make easier by loosening building code (fire escape routes, allowing wood construction, etc.) on mid-rise buildings (5 to 8 floors).

Massive public transit expansion would benefit this group; while it won't decrease rent rates it might help reduce transportation expenses and prevent rent rates from increasing as quickly by greatly expanding the number of options a person has to live at.
 

jje1000

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I agree with the notion that increasing housing stock would be the best method going forward. Unfortunately it takes time for new standardized stock (i.e. new midrises, co-op housing) to go online- and it doesn't come cheap for public housing these days.

What immediate solutions might there be to alleviate the issue in the short-term? Would allowing more of the existing housing stock (i.e. single family houses) to be subdivided work in bringing additional capacity on within months to a year? Perhaps a province-wide cap on rental increases (cap it at 5%, with a written agreement & reason required for additional increases)?
 
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torontologist

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An empty unit tax- foreign buyers' taxes only decrease demand AND supply, but forcing them to rent out their units would avoid this, and have the added benefit of boosting supply.
 

Northern Light

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There are a few options to address this; some noted above.

I'll offer these.

A portion of the rent cost is attributable to the multi-res property tax rate, which is roughly triple the single family home/condo rate. (lumped in as 'commercial)

Compelling a re-set to the single-family rate; AND compelling the landlord to pass through the full savings to the tenant would likely lower average rents by in/around $125 a month, I think.

Second, rent control does need to apply to more units; while one wants to be careful not to remove incentives to new supply. Given that the measure of exempting buildings after 1991 did not
produce substantial new supply, one might infer that this is/was not the intergral issue affecting new rental construction. As such, I would consider rescinding the exception. I might
suggest a non-fixed de-control period. ie. A newly built rental would be exempt for 5 years after construction, allowing the owners to 'feel out' the market and make adjustments w/o
fear of rent control; but at 5yrs of age, rents lock in.

Third, I'd consider an incentive program for landlords to address a large fixed cost that many have, (window replacement), which can produce significant energy cost reductions.

Tie to the incentive, (ie. a gov't grant) to passing on a portion of the savings to tenants. (as an example if gov't covered 1/2 the cost of new windows in a building, then 1/2 the savings would
go to the tenants).

Fourth, I would address the problem that there is no market-housing aimed at low end of market. This occurs, in part, because of ultra-low rents in public housing (as low as 30% of social assistance income or $240 per month for a single person). No landlord can hope to compete w/that rent, so why bother?

At the same time, the rent is that low, in part, because social assistance provides a shelter allowance for single people of a whopping $435 a month. Again, a sum no landlord can possibly meet.

While at the same time, minimum wages have in no way kept pace w/the rental market, such that a full-time minimum wage earner would need to seek public housing, as they likely couldn't afford the most entry-level accommodation.

Market-reset would provide a shelter allowance under social assistance equal to the very cheapest private sector housing, let's say $900 per month.

But public housing, would raise its rents to that level; and collect $900 per month.

From the public purse perspective there is not a substantial new net expenditure.

However, by allowing that a private landlord might be able to serve the low-income market, more may consider it; and the waiting list for public housing would also drop significantly, allowing those who truly need it much quicker access.

At the same time, the minimum wage must be bumped. If one were FT min. wage earner, you would earn about $1,800 a month gross, and about $1,450 net per month. Meaning an RGI (rent geared to income unit) would likely cost you around $500 per month right now. Under my scenario, that rent would rise $900 and necessitate an extra $400 in income at month's end. That would be equal
a min. wage increase of $2.40 per hour to a wage of $13.80. One could easily argue for more, but I think that's close to enough to allow for market adjustment.

Finally, I'd look at a material incentive to new construction of rental supply if/where it delivers rents that are 10% below the current average (or less).

Such incentives, for private, for-profit, developers, could include an agreed upon period of being exempt from provincial corporate income tax on the applicable building, for a set period (say 10 years from date of first occupancy). Of course said build would have to be rent controlled from day one.

For non-profits, the incentive to build could include free or below market land (there are a lot of closed schools), and/or loan guarantees.
 

freshcutgrass

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We need to distinguish between what is the real estate free market and what is subsidized housing.

Supply and demand will always determine pricing, and having the government try to make private landlords into quasi social workers is simply pawning off their responsibilities. They don't have the guts to raise the revenue to build the proper government subsidized housing for those who need it and are trying to get the private market to do it for them by forcing below market rents on them. The result is the rental market is a mess and so is affordable/subsidized housing.
 

Northern Light

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We need to distinguish between what is the real estate free market and what is subsidized housing.

Supply and demand will always determine pricing, and having the government try to make private landlords into quasi social workers is simply pawning off their responsibilities. They don't have the guts to raise the revenue to build the proper government subsidized housing for those who need it and are trying to get the private market to do it for them by forcing below market rents on them. The result is the rental market is a mess and so is affordable/subsidized housing.
You and I differ here.

I'm simply not a fan of social housing; as its existence, in its current form is very market distorting.

My choice for addressing the issue is to ensure that income, be it private or public is sufficient to afford entry-level market housing (rental).

That has the added bonus of stimulating supply.

Other ideas are based on simple fairness (property tax); as well as minor market distortion to address the issue more quickly than the market can or will, even with the change I propose.
 

Avenue

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Foreign buyers tax will conflict with the developer interests. The mayor would never push for that.

As for people who rent, they are not considered an important enough constituency by the old boys club so I would be shocked if any policy improvements were made a priority. It's the same people who think nobody cycles in this city.
 

freshcutgrass

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You and I differ here.
Not really. Subsidizing can be in what ever form you like. It all boils down to the same thing...raising the revenue to do it.

Unfairly taxing the real estate market to subsidize low income people has obviously not worked. Lowering tax rates on multi-res rental buildings is simply passed on to the tenant with no net benefit to the landlord, so no incentives there. Above guideline increases are capped at a measly 3%, so older structures requiring $million renos don't benefit either.

What seems to work is mixed-income buildings where market rents subsidize the below market rents of the building. There's nothing wrong with the gov't getting in on the housing market and taking advantage....the market can handle a bit of competition from a certain amount of not-for-profit development. Mixed-income buildings also don't look like public housing ghettos with stigmas.
 

freshcutgrass

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Also, the province controlled Landlord Tenant Board and Residential Tenancy Act legislation are highly unfair to landlords, further discouraging matters. You should be able to get rid of a deadbeat tenant without losing your shirt.
 

Northern Light

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To clarify an above point, AGIs are maxed out closer to 10% for any one project, at 3%, 3%, 3% over 3 years (increases are cumulative, hence it adding up to more than 9%).

One can also apply for a further AGI as soon as the last one is off the books.

I'm familiar w/many applications; and this structure can and does raise a wack of cash.

A typical rent roll for a mid-sized, mid-ranged building - 100 units, is in the range of $140,000 per month, or about $1.7M per year.

At year 3 you're looking at raising $170,000 annually towards major renos, and the AGI remains in effect until the amortization period of that asset has concluded. (in theory it is then rolled back, but tenants have to know to ask)
 

freshcutgrass

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To clarify an above point, AGIs are maxed out closer to 10% for any one project, at 3%, 3%, 3% over 3 years (increases are cumulative, hence it adding up to more than 9%).

One can also apply for a further AGI as soon as the last one is off the books.

I'm familiar w/many applications; and this structure can and does raise a wack of cash.

A typical rent roll for a mid-sized, mid-ranged building - 100 units, is in the range of $140,000 per month, or about $1.7M per year.

At year 3 you're looking at raising $170,000 annually towards major renos, and the AGI remains in effect until the amortization period of that asset has concluded. (in theory it is then rolled back, but tenants have to know to ask)
But people make this out to be some kind of money grab by greedy landlords. when in fact, it isn't something landlords net out ahead with. Same with the annual increase allowed by the prov every year that is supposed to cover inflation, when in reality, it rarely does.
 

Northern Light

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But people make this out to be some kind of money grab by greedy landlords. when in fact, it isn't something landlords net out ahead with. Same with the annual increase allowed by the prov every year that is supposed to cover inflation, when in reality, it rarely does.
Obviously this will vary by landlord, by building, by project. etc.

But in the case of many older, large, multi-res sites; the original mortgage/finance costs were paid off decades ago, and the free cash flow and profit are quite healthy. Typically something like a 10-12% ROI.

I think what aggrieves many tenants is that AGIs are typically granted for what appears to be predictable, routine maintenance that one might reasonably assume would be paid for through normal rent payments.

A comparison w/condos would show that condos are required to withhold a certain amount in fees every year for future maintenance, and the common assumption is landlords should be doing this too; and only come back for extra if the project exceeded the available set-aside.

Another key point of contention is the way in which AGIs are calculated.

Assuming your familiar w/them, a landlord is required to build into their cost assumptions financing the entire project at commercial interest rates, even if they funded the project entirely from cash flow.

Amortization is another matter; the 'useful' life in the regulations for many items is unreasonably low. Balconies for instance show a life of 12.5 years (averaging the railing and the concrete); my own experience indicates they typically last 40 years w/no major repairs.

As a legal principle I actually has a problem with the calculations, because they assume, as a tenant, one should finance the entire cost of acquiring an asset for a landlord. I must confess, as someone who invests, if I were to finance an entire purchase; I expect to be the owner at the end of the day, and derive the financial benefit of the asset.
 

freshcutgrass

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But in the case of many older, large, multi-res sites; the original mortgage/finance costs were paid off decades ago, and the free cash flow and profit are quite healthy.
You are assuming buildings have never been sold or refinanced, and contain good tenants paying market rents. In other words, you are obviously not a multi-res landlord. :p


I think what aggrieves many tenants is that AGIs are typically granted for what appears to be predictable, routine maintenance that one might reasonably assume would be paid for through normal rent payments.
Tenants think all kinds of interesting things...generally they think they would just like to pay below market rents. he he

Back on planet earth though, AGI's have to be approved by the LTB, following strict guidelines, which include costs that are not part of normal ongoing maintenance.


A comparison w/condos would show that condos are required to withhold a certain amount in fees every year for future maintenance, and the common assumption is landlords should be doing this too; and only come back for extra if the project exceeded the available set-aside.
Comparing condo act to RTA is apples to oranges....kinda pointless. Maintenance fees are calculated into the rental price of condos. Are you suggesting we create a monthly maintenance fee for tenants to cover costs rather than deal with them as they arise?



Another key point of contention is the way in which AGIs are calculated.

Assuming your familiar w/them, a landlord is required to build into their cost assumptions financing the entire project at commercial interest rates, even if they funded the project entirely from cash flow.

Amortization is another matter; the 'useful' life in the regulations for many items is unreasonably low. Balconies for instance show a life of 12.5 years (averaging the railing and the concrete); my own experience indicates they typically last 40 years w/no major repairs.

As a legal principle I actually has a problem with the calculations, because they assume, as a tenant, one should finance the entire cost of acquiring an asset for a landlord. I must confess, as someone who invests, if I were to finance an entire purchase; I expect to be the owner at the end of the day, and derive the financial benefit of the asset.
Hey...if people don't like the deal, then stop renting and start owning.
 

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