Monday Morning Quarterback: Your Government(s) Are Lying To You About Housing!
Are there any other nerds out there?
Wait, I mean are there any other nerds like me out there, and of my generation?
Did any of you play the computer game Command & Conquer in the 1990’s?
Admit it: at least one of you smiled. You remembered. And now, for some reason, you feel compelled to see if and where you can play the game in 2024…
This was a classic 2D computer “war game,” and for high-school kids like me, it was a great way to waste time.
It was like other games out there; World of Warcraft comes to mind, where you had to build a base, play offense and defence, and eventually wipe out the enemy.
All of these games featured some sort of currency needed to build bases and weapons, whether it was cutting down trees, mining for gold, or collecting a rare gem.
In Command & Conquer, you had to mine a fictional substance called “Tiberium,” and refine it, then turn it into currency.
But there was a catch:
If you mined it all, the field would lay barren, and it would never grow back.
So you had to be strategic. You had to watch your “harvester” and ensure the field wouldn’t be picked entirely clean.
That meant slow-playing, at times. Or playing defence while you waited for the field of rare minerals to be restored.
Some of your opponents would pick the field clean. That spelled the end. Once it’s bare, it never grows back. You simply have to leave something for down the line.
Think about that, for a moment.
What would happen if you picked an entire mine, clean?
I want you to think, for a moment, of the Toronto real estate market and construction industry as a field of fictional Tiberium in Command & Conquer.
I want you to consider what would happen if “you,” or in this case, the powers that be, sucked this seemingly never-ending, delicious lake of revenue completely and utterly dry.
What then?
What would happen if the biggest cash cow this city, province, or country has ever seen, ceased to be?
Folks, that is exactly where we are, or at the very least, where we’re heading.
The three levels of government have gotten shit-rich off real estate for the last twenty years, but the game is just about over.
The proverbial “music” has stopped.
And just like it was in the 1980’s before fairness and equality took over, four children at a birthday party fought over the three remaining chairs without the musical distraction. If you don’t get the reference, ask somebody older…
My point today is very simple:
All three levels of government continue to tell the public that they need to, intend to, and are going to ensure the necessary amount of housing gets built.
Except that I don’t see it happening, and as time goes on throughout 2024, I see the conditions getting far worse.
But why is this?
More importantly, how did we get to this point, and who is responsible?
Well, today I’m inclined to argue that the perpetrators are the very same people who are telling you that we need to get housing built!
I want to connect the following dots:
We need to build housing.
The government has made it difficult to build housing.
The government has made it difficult to buy housing.
Builders are not building housing.
There.
It’s that simple.
Look around the city of Toronto right now and tell me how many “condominium launches” you see.
One? Two? Zero?
How many developers are starting new projects right now?
Name three of them. You can’t, right?
Now, why is that? And why could that be, especially in the face of incessant talk from all three levels of government of just how much housing is going to be built?
“Canada can and will solve the housing crisis,” said Housing Minister, Sean Miller, back in April.
This was said around the time that the Prime Minister’s office released their plan to “unlock 3.87 Million new homes by 2031.”
There was a great article in the National Post about this:
“Trudeau’s Utterly Daunting Promise To Immediately Build An Alberta’s-Worth Of New Homes”
National Post
April 16th, 2024
From the article:
What Ottawa has just pitched as a pre-budget bauble is one of the most mammoth promises ever issued by a Canadian federal government.
In terms of cost, effort and raw logistics, building 3.9 million homes in just seven years would easily rank as one of the most awesome expenditures of national effort outside of the world wars.
It is 552,857 new homes constructed every year for seven consecutive years, in a country that already struggles to build half that each year.
For the last 10 years, the annual rates of new homes has averaged just 197,000. In fact, as per the latest estimates from the Canada Mortgage and Housing Corporation, the most optimistic forecast is that homebuilders will be able to break ground on 232,267 homes by year’s end (the “pessimistic” scenario is that they’ll manage only 215,989).
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Am I the only one that seems irked by the federal government’s nonsense?
I get it. My glass is half-empty.
I wish I were a “half-full” kind of guy, and while I don’t want to come off as a pessimist at every possible turn in life, I am somewhat cynical. I’m borderline mistrusting.
But my mistrust comes from a place of curiosity and questioning.
I simply don’t take things at face value, especially when it’s been offered by the government.
I wish it were different.
I wish I was a person who, when told, “Don’t worry, housing is going to be built at never-seen-before levels,” would simply smile, accept it as fact, and not ask any questions.
But these three levels of government are all lying to us.
They either know that they can’t build this level of housing, and offer these promises anyways, or worse: they think it can be done.
Actually, I’m not sure which is worse.
Now, let’s ask why we’re not going to see these homes built because that’s actually what I wanted to talk about today.
As I said above, look around you; there are no new condo launches happening. Existing projects are on hold. Infill development sites lay empty.
And when it comes to buying land, trust me, developers aren’t buying.
This is a side-hustle for me. I’ve been doing this for seven years.
So far in 2024, I’ve offered three exceptional sites to two large builders, and neither was interested.
One was a downtown site where a 40-45 storey condo tower could be built. The price tag is $35 Million. Three years ago, this site would have been a goldmine.
Do you know what I was told last month?
“We’d have to get this land for free in order for this project to make sense.”
That’s where things are right now.
That’s how bad it’s gotten.
At a cost of $1,000 per square foot to build, a developer can’t afford to buy the land and pre-sell the units at a profit. It no longer makes economic sense.
So where does that leave us?
How does this affect plans to build nearly 4,000,000 homes by 2031?
Well, let’s put it all together, and I will offer up the following:
1) Real estate has been made more expensive, in part, because of the government.
2) The construction of real estate has been made more difficult and more expensive, in part, because of the government.
3) The act of purchasing real estate has been made more difficult because of the government.
4) Following up to point #3, this means the act of selling real estate has been made more difficult because of the government.
I’ll try my best to offer up these arguments without sounding like a basement-dwelling, conspiracy-theory-loving anarchist, but perhaps it’s too late.
So here goes anyway…
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Real estate has been made more expensive, in part, because of the government.
We have talked about this many, many times here on TRB, but a refresher is necessary as it plays into the next three points.
When I got into the business in 2004, there was this thing called “Ontario Land Transfer Tax.” It was a nominal fee; an unfair fee, in my opinion, since the concept of “transferring” property should probably constitute a $75 charge, or the cost of filing paperwork, but if you bought a home for $400,000 and paid $3,000 to the Ontario government, it wasn’t going to kill you.
In 2024, we now have two land transfer taxes; one provincial and one municipal.
The average GTA home price last month was $1,156,167, and that equates to just shy of $40,000 in land transfer tax!
I tried to research how many times the municipal land transfer tax has been increased since its inception in 2008, but I don’t have a figure. I would suspect that it’s been increased 6-10 times over the years.
Last year, Olivia Chow decided to increase the tax on “luxury home-buyers,” ie. anything above $3,000,000, and while I know that nobody has sympathy for the wealthy these days, there’s something extremely unsettling about the buyer of a $4,700,000 home having to shell out almost a quarter-million dollars in tax to two levels of government.
In addition to land transfer tax, we have two other major drivers of real estate prices, both coming in the form of taxes:
1) Municipal development fees
2) Federal HST
The reason that new construction is so expensive isn’t only because of the cost of building, and isn’t actually because of “greedy developers,” as the masses like to believe.
Imagine buying a new home for $1,000,000.
Wait, it actually costs you $1,032,950 because of the land transfer tax, but I digress.
Buried in that $1,000,000 price tag is HST.
So without the HST, this property would cost the buyer somewhere in the neighbourhood of $885,000.
Right.
So it’s “greedy developers” driving up the price, right?
Then, consider the municipal development charges.
Recall this blog that I wrote in 2022:
May 18th, 2022: “Increasing Development Charges Will Drive Condo Prices Higher!”
Now, recall how the development charges increased in Toronto at the time:
So again, consider that $1,000,000 property that costs $1,032,950 after paying land transfer tax.
That property could be in the neighbourhood of $885,000 without HST.
But if the property is located in the City of Toronto, and maybe happens to fall into the “single & semi” category, it could cost as little as $745,000.
Let’s spell this out just to help those without our 20/20 vision:
A new home with a $1,000,000 price tag, that requires an additional $32,500 in taxes, out of pocket, could cost $745,000 without taxation from three levels of government.
Point made.
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The construction of real estate has been made more difficult and more expensive, in part, because of the government.
Pulling a little bit from Point #1 above, I think it’s fair to say that the municipal development levies, which are charged to the developer (but passed on to the buyer) are making real estate construction more expensive.
And while I don’t want to complain too much about permits and regulations, I think we can agree that the City of Toronto is one of the hardest places on earth to actually get housing built.
The way that the OMB, LPAT, and now Ontario Land Tribunal have operated over the last two decades is absolutely archaic.
But it’s even worse at the city level where NIMBY’ism has been allowed to reign free, local city councilors block any attempt to build new housing – all in the name of pandering to constituents, and applications, rezoning, and approvals can take forever.
There are a lot of regulations to satisfy and permits to obtain!
Ever heard of an Environmental Compliance Approval?
How about a Conservation Authority Permit?
What about soil samples?
And god forbid a certain snake eats a certain bird at certain times of the year, on a certain part of the land that’s going to be built upon, and that entire site is getting shut down!
Think of the ecosystem!
But also consider how affordable housing and rental replacement units play a factor in the construction, profitability, and viability of new projects.
I’m not suggesting that affordable housing and rental replacement units aren’t warranted or aren’t part of good public policy, but I am suggesting that, as with every other tax or requirement of the government, the cost will simply be passed along to the end-user. Or in some cases, the requirement to replace rental units makes a project completely unviable.
Circle back to November of 2021:
This was in 2021.
That’s my point.
This didn’t happen in 2004, or 2009, or 2017.
This is new legislation and it’s part and parcel of this idea that the three levels of government have “picked the field dry.”
How much longer can the government rely on real estate as a top source of revenue and a solution to public sector problems?
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The act of purchasing real estate has been made more difficult because of the government.
This is where irony takes over.
We need builders to build, right?
But in order for builders to build, there has to be a buyer for the properties.
Whether we want to admit this or not, the entire downtown core was built and financed by a combination of people who are loathed by society today: foreign buyers and investors.
Remember when it was admirable to work hard, save money, and invest in real estate?
Yeah.
Today, owning a condo to rent out makes you an evil “property hoarder.”
And the Landlord & Tenant Board certainly isn’t going to have your back when your tenant refuses to vacate, doesn’t pay rent, or both.
But over the last two decades, developers only built new housing because it was pre-sold.
That’s how our system works, right?
Developers launch a project, they pre-sell units, and when they sell a certain number or attain a particular threshold, they obtain financing from a major lender, then they build!
Who is buying property that won’t be ready for 5-6 years?
Foreign buyers and investors.
Right.
So what happens when you take foreign buyers and investors out of the market?
Well, I suppose people stop buying!
We have the following disincentives to purchase real estate estate:
•Federal foreign buyer ban
•Provincial foreign buyer tax
•Municipal foreign buyer tax
•Federal “anti flipping” tax
•Federal speculation tax
•Increased federal capital gains tax
It’s absurd.
How in the world can the three levels of government talk about “building housing” when they’re making it impossible for people to buy housing, or taking away incentives to do so?
Look at THIS press release from January of 2024, offered by the City of Toronto.
“The primarily (sic) objective of the MNRST is to safeguard and enhance the availability of residential housing supply and to maintain a level of affordability in the residential real estate market by discouraging international buyers from purchasing property in the City of Toronto, particularly those buyers who do not intend to live in the property, or where the purchase is for purely speculative motives.”
Nonsense.
This is a tax. The “primarily objective,” (and yes, that’s a spelling mistake in the City of Toronto’s Action Report) is to create revenue.
But if you “discourage international buyers from purchasing property,” then new property won’t get built.
What an incredibly vicious circle!
That brings me to my last point…
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Following up to point #3, this means the act of selling real estate has been made more difficult because of the government.
Interest rates are high.
The cost of borrowing is high.
Construction costs are through the roof.
Labour has never been more expensive.
Construction labour has never been in shorter supply.
The cost of materials has never been higher.
And despite all this, builders still want to build. They have to! A builder who doesn’t build isn’t going to be in business for very long.
But nobody is launching projects, and while the costs are high, I still think that the lower demand for new construction is the real reason why nothing is getting built.
The government has taken away incentives to buy.
That means builders are going to have trouble selling.
If you want to put everything together and try to explain it in a fictional conversation, just to illustrate a point, I picture it going like this:
“We really need to build housing!”
“Yeah, but who’s going to buy it?”
“Maybe foreign buyers? They’ve bought a ton of new construction over the years!”
“Yeah, but we banned them for two years, then extended it another two years because people seem to cheer for that.”
“Right, so maybe once the ban is lifted?”
“Yeah, but then there’s a 25% foreign buyer tax from the province and a 10% foreign buyer tax from the city.”
“Right. Okay, maybe flippers then?”
“Yeah, but we have an anti-flipping tax.”
“Right. Okay, maybe longer-term investors then?”
“Yeah, but we just increased the capital gains tax.”
“Right. So maybe wealthy snowbirds then?”
“Yeah. But we have all these vacancy taxes.”
“Right. So maybe we try to sell to more end-users?”
“Yeah, but interest rates are the highest in twenty-two years, and now there are all these articles online about how projects get canceled, and there’s no consumer protection from the government, so fewer end users want to buy.”
“Right. Okay, so maybe we just don’t build for the next little while…”
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Am I wrong?
All three levels of government are talking about building housing.
All three levels of government are making it difficult to build, buy, or sell real estate.
And with every passing day, working in the real estate industry, I witness this first-hand. I bang my head against the wall as I watch the dichotomy between what the three levels of government are saying about “building housing” and their actions which make building, buying, and selling real estate more difficult.
It makes no sense to me.
Hmmm…..maybe we can solve this with a few new taxes?
That seems to have worked so well up to this point…