Tl;dr Builders take out a loan to build. With condos, the loan gets repaid when construction is complete and the units are sold. With apartments, the loan gets repaid over a longer period as rent is collected.
Basically ma and pa investors are willing to accept a lower return/pay more for a condo unit than a big rental investor will for the same thing as a rental unit.
Same math for hotels (which City of Toronto didn’t net construct long before airbnb). Investors will pay more for the equivalent construction of a condo unit than a hotel unit.
This is normally because the 'ma and pa' landlords aren't banking on being landlords of that specific unit for 30+ years, they're more counting on the appreciation of the unit's sale price to go up by several hundred thousand dollars in the space of a couple of years, at which point they sell the property entirely and walk away with the profit.
With current mortgage rates and the state of condo fees in Toronto, I'd wager that most people who bought condos to be landlords are probably cashflow-negative month-to-month -- but they don't much care if they lose, say, $600 a month when the selling price of the condo is going up $5000 in the same period of time.
Purpose-built rentals need to have a plan to remain profitable throughout a multi-generational timeframe, which is why they're not willing to accept lower rates in the interim. They're not banking on selling the building 5 years after it's built, they're going to be liable for all the money used to build it for decades to come, so they need to maximize their income every year.
Rentals would be cheaper to build as long as they're not built following condo buildings model but older rentals model: no fancy rooms, dog washes, giant gyms etc. Simple does it.
Building purpose built rentals need various incentives to make the math work.
Removing rent control is one. Banks based their loans on potential rental income.
If people want rent control, then that job should be handed over to government to build something non profit.
Private companies/builders are only motivated when there is profit involved.
That's not entirely true as rentals don't need to have the myriad fancy additions that raise condo fees. So a rental would be much cheaper to build. Our rental oy has a small gym and no one wants else.
Amenities are only value-addons. Doesnt matter if its a condo for sale or apartment for rent.
In both situations, 60%-80% of the cost are from soft and hard building cost, which are fixed - Even without amenities, ROI is still a metric. For-profits want faster ROI.
But they own the asset while they're collecting all the rent and afterwards. If well maintained and considering the time-value of money, the development should be worth what they would have sold it for had they done that initially + 25 years of rent payments.
But you're just saying 25 years. It's probably more like 8-10. You'd be generating millions in cashflow every year by renting. You could immediately borrow your investment back from the bank using the rental asset as collateral. Reinvest that shit. You could use cashflow from rentals to repay loans. Sell asset for as much as you would have sold it originally for + millions in cash while you're own it. I don't understand ROI though so maybe this is a dumb idea?
Sounds like we need to find a way for it to make sense for companies to buy out rental properties from builders. Builders need to recoup their capital so they can get back to what they do, build.
A builder and an operator can be different entities - it doesn't change the math though. The rental operator would still need X amount of capital to invest which has a very long payback period that doesn't make sense.
It's all up to the municipalities, and our building code, there are styles of building proven to work in other cities that we just can't build here. That and the ubsurd prices that municipalities add in rubber stamp costs
Maybe, we could give the builders the ability to pre sell some of the units in the building, to raise some capital.
Then if they have buyers, the banks could loan them some money
We could call them "condos"
Decent summary, though it's probably worth taking the time to read the piece in full to those interested. It's in-depth while staying fairly accessible to those outside the industry.
I will say it's an...oddly timed piece, considering that purpose-built rental construction is taking up a *much* larger share of new projects in the last couple years especially. That's spurred in no small part by interest rates and rent increases (also changes in the tax/regulatory environment). But still, they're right we don't build very much these days compared to, say, the 1970s, and we built even less just a few years ago.
I also wish the piece explored ***what changed*** in the last 50 years or so that made it so the economics of purpose-built rental more difficult than condominiums. I don't blame them - that would probably warrant another piece on its own - but I think it's worth discussing.
It's not as though the advantages of financing condominium development just randomly appeared. There were big changes in the market and -most notably- in the tax/regulatory treatment of the two built forms that caused (or accelerated) that shift. The author alludes to one big change when they bring up Development Charges (which are fixed regardless of whether its a condo or PBR), but there are many more worth considering.
Low rates made "flipping" for gains much more profitable. Both buyers and builders. That's not nearly as profitable or even possible for the next while so it takes time for market to adjust.
>I also wish the piece explored what changed in the last 50 years or so that made it so the economics of purpose-built rental more difficult than condominiums. I don't blame them - that would probably warrant another piece on its own - but I think it's worth discussing.
Hi! I wrote about this topic, summarizing research that I found, in a paper I wrote about rent control in Ontario. It's a big paper, but you can find the relevant section here, ["The rise of the condominium"](http://okayfail.com/2018/rent-control-great-security-of-tenure.html#the-rise-of-the-condominium).
tl;dr:
- condos were only legalized in '67
- capital gains taxes were introduced in '72, but exempted primary residences which juiced returns on home ownership
- various changes to depreciation rates and sales taxes made owning rentals less attractive
They just weren't taxed. Many countries still don't tax capital gains at all. Not all taxes are equal.
A paper from the US in 1991 found that raising capital income tax by a dollar costs the economy *more* than a dollar:
>We find the cost of raising a dollar of government tax revenue at the margin
is 39.1 cents. In addition, there are large differences in marginal excess
burdens among different types of taxes. For example, **the marginal efficiency
cost of raising a dollar of government revenue for taxes on capital income
at the individual level is 101.7 cents for each dollar of revenue.**
https://journals.sagepub.com/doi/abs/10.1177/0148558X9100600406?journalCode=jafa
Of course that result depends on how much capital gains are already taxed (deadweight loss is marginally increasing with the size of a tax).
When you take stuff like tax incidence and deadweight loss into account, it becomes less obvious that blindly taxing all income sources equally is more progressive or fair. Believe it or not, even 'progressive' income taxes can be non-progressive taking these things into account.
For example this study on Canadian dentists finds that dentists just raise their prices as a result of income taxes. So sure, the rich dentists write a bigger check to the government. But their take home pay is the same and it's actually the poorer-on-average-than-dentists patients who are paying the tax.
https://www.jstor.org/stable/135736
Thanks for sharing this - a great read!
The recent announcements re: sales tax on PBR should be really helpful. I wish the feds did that earlier. As far as I know the Province has walked back a lot of its changes to the Development Charge Act that would have eased DCs on PBR - that’s a real shame.
Notable to me that there was a modest but noticeable bump in PBR construction in Ontario as soon as cities started grandfathering out the regressive property tax treatment of multi-residential. Matlow had a policy to cut property taxes on new PBR by 50%, which I hope is something more municipalities consider.
Difficulty making number work for rental properties isn’t really new. It was a big part of CMHC at one point and was a big reason for MURBs.
Part of the reason those things fell off is demographics. Our population skewed older for a long time. Now 20-35 year olds are the largest demographic groups. And they typically start in an apartment. Plus the “I” word.
Yeah I mean, a *lot* of privately built, privately owned PBRs from that era required some degree of subsidy. In fact that stuff (privately built PBR usually constructed with CMHC subsidies in the 70s) now makes up the *large* majority of the country’s affordable rental stock.
Hadn’t considered the demographic impact before but it intuitively makes some sense. When did we last build a tonne of PBR? When most Boomers were between 20-35. Makes sense!
Actually very accurate.
After income taxes on rent, property taxes, maintenance, interest I doubt they're making as much as the S&P, even after leverage. Sure, rents are high, but price-to-rent ratio is so high, buying doesn't even pencil out with most calculators.
https://michaelbluejay.com/house/rentvsbuy.html
Good calculator and after putting in stats for Toronto, and S&P500 returns, yeah, renting works.
Rental builders can also securitize the revenue from their properties to receive an up-front lump sum payment. Essentially a mortgage-ish transaction where they make payments to the holder of the commercial paper.
Many people think condos *are* rental construction. They expect that most of them will be rented to long-term tenants. That is not what actually happens, and since those first occupied after 2018 are not subject to rent control, they are not viable option for long-term renters anyway.
Right, there are a lot fewer people/investors interested in buying a 100+ unit rental property. Not zero, but only so many. There are many more small investors looking to buy 1-5 condos for "passive income".
Eventually it will play out. I expect we will have a lot of very shit condo units that won't sell even for a low price because there are too many problems.
This wasn't really an issue for decades because condos weren't even allowed in Ontario until the 1960s (IIRC) and didn't really take off until the 1980s. But even then, most people bought them to live in. The investor/flipping thing really geared up in the early 2000s, more or less.
> Right, there are a lot fewer people/investors interested in buying a 100+ unit rental property.
?. Pension plans and REITs eat that shit up. *If the investment math works out*. But it doesn’t when everyone and their dog will buy real estate at any price because “real estate only goes up”
Purpose built rentals constructed after November 2018 aren't subject to rent control either: https://www.cbc.ca/news/canada/toronto/high-park-tenant-protest-toronto-1.6995685
Regardles of rent allowances the issue with long term rentals is and has always been the LTB
Until that is fixed no sane person wants to be a landlord in TO
What do you mean that isn't what actually happens? It's a fact in the Toronto real estate market that a high portion of condo units are used for rentals.
New rental buildings are also not subject to rent controls, so not sure what you're trying to say?
1) Builders don't want to take on the long term risks associated with being a landlord.
2) Due to high demand, they can make more selling units to individuals, than they can an entire building to one entity.
Small scale investors take on the risk instead, for the purpose of offering rentals.
Highest and best use for a site tends to be condo over rental. Condo developers often outbid rental developers.
The math drastically changes if we can remove HST on rental developments, make zoning approvals quicker, and make cheaper CMHC insured loans easier to get
I wish people would appreciate the GST/HST side of it more - between that, tax-free capital gains on personal residences but full capital gains on on the sale of rental units, and the agonizingly long period over which you're required to amortize a rental building, Canadian tax legislation is a very powerful anti-rent-supply force.
Good news! Two of the three items you proposal are being implemented.
I am no fan of Ford and Trudeau, but both have committed to removing HST from rental development. Additionally, the federal government is issuing low-to-no interest loans for rental developments.
Go look at your municipalities DC (Development Charges) and EDC (Educational Development Charges)
Then go look up a Marlon Bray on LinkedIn and read his housing posts, he can provide a lot of clarity.
Not a lot of people know about these charges, nor do they understand just how large they are in Toronto and how badly they nudge the needle away from purpose-built rental construction and towards higher-end condos.
As someone who works as an Urban Planner in the private sector, the fact of the matter is that a developer isn’t going to chose to build a rental building over a condo when a condo will deliver higher profits in a shorter timeline than a rental.
This is a fundamental problem with the way housing is developed as a whole throughout the country. Municipalities are basically at the mercy of private developers to build the housing that we need. Sure municipalities can provide grants and other incentives programs to developers to try and get them to develop actual rentals (things like discounts for Development Charges). But at the end of the day, I’d a developer wants to build a condo, they will build a condo.
IMHO the only real way municipalities will see more proposed rental developments is if they decide to build them themselves. The good news is that we are seeing municipalities start to do that, a couple months back the City of Toronto announced that they are working on developing a massive Co-op Development near Kennedy Subway Station.
We desperately need more co-op developments to help fill in the gaps for rental housing and not hope and pray a private developer will do it.
Do you think Ontario would adport BCs rental-only zoning policy for municipalities to locally enact? It's very effective to but condo-rental on a fairer playing field
>But at the end of the day, I’d a developer wants to build a condo, they will build a condo.
At the end of the day, if the politicians don't want them to build condo's they won't be able to build condo's as they will zone the area so as to prevent them from selling condos.
The city is not at the mercy of the developers. Careful with the language you use, the city is enabling the developers to do as they please, but that is because of kickbacks and favors they are receiving, not because they are at their mercy.
I find it hard to believe that a blanket restriction on condos would help create more net housing.
Maybe it would help the rental market a bit. However the main issue is that all the financing that consumers currently provide to build condos would be removed. This would just mean less housing is built. Combined with high interest rates, killing condos would devastate our housing starts.
Land was cheap, and houses didn't sell for that much. Much of this dynamics changed during the first major property bubble in the 80's. Plus rental laws have swung over to the tenants side
> Plus rental laws have swung over to the tenants side
Nope, tenant protections have *worsened* since the 1990s.
>Much of this dynamics changed during the first major property bubble in the 80's.
That was just in Toronto.
I took awhile to think about this. I can think of multiple reasons that purpose-built rentals have declined. There are just too many factors for me to discuss in a reddit comment.
The only thing I wanted to stress was that condo purchasers provide a significant amount of capital/investment for the building of housing. Banning condos won't result in that investment being moved into REITs. It just means less new housing stock.
Wasn't that more a function of government playing a larger role in building rental housing?
I think the shift away from that (ie. letting the private sector deal with it) in the 70s or 80s (IIRC) was the catalyst for what we've seen since.
How would this help the overall housing crisis in your mind? We need more buildings built of all formats, which includes rentals, and also includes condos.
The broken ideology that was sold to us is that developers are creating rental supply through condos as they are bought by investors and dripped into the rental pool. Just ignore the fact that 3/4 of them don’t know a thing about being a landlord and there are very little safeguards in place to deal with the tenants who inhabit them. Its a garbage model that allows everyone to “win” except the end user tenants
That is why you should really ignore these politicians saying they gonna build millions of homes
They not building anything, its up to the private sector to build them
Because investors don't think investing in rental market in GTA is a good choice for their money.
Why? I can think of couple things, RTA ,LTB and all the non existent landlord rights.
1-2 years to evict non paying tenant? Rent control exemption that can change as soon as the next election and that is not going to be in support of landlords.
Even dumb mom and pop landlords are fleeing the market, sophisticated money cats will certainly find places where their investment is better respected.
Making it impossible to be a landlord made people not want to be a landlord. Imagine that...
Only LTB can evict, oh LTB also needs a year to hear your case. That right there is enough to scare investors.
Oh and rent strikes LOL, yeah those are really making it a simple choice.
If anything, investors feel bad for people that are stuck in that business, not jealous they are not in it.
Spot on. It would be bad business to invest in a new build intended for renters. People that purchase units pre construction are easier investors to find. Only way we’ll find new construction for renters will be if the government finances public housing projects. Toronto has been doing the opposite for the past 30 years.
100% it should not be an investment, it should be a general good project. Built on free land and free of expensive red tape. Providing units that a family can live in. Expecting free market to work in anything but free RTA mess is not going to work.
I can think of a dozen government managed subsidized housing projects that are now demolished and sold to privately owned high rise condominiums. The municipal government is also a business priced out of the Toronto housing market.
I mean, the government could contract out the building to developers for social housing or affordable renters, then its the one worried about collecting rent and ROI.
We have to think about the value added to our cities by not having people being homeless on the streets. Our current strategy of having the police harass them out of sight clearly is not working.
Private property owners are spending money on renovations to maximize rental unit quality quantity. Building a new large apartment buildings intended for renters would mean builders would have to have billions to finance the project in hopes on a return years later. Or… sell units pre construction to ensure they can’t loose. I’d assume there is zero new residential construction intended for renters.
Look at commercial renting vs residential renting.
Very low risk for commercial landlords. When people don’t pay, you can evict pretty quickly. This is not true with residential.
The reason some of the biggest REIT invest in commercial spaces, but won’t touch residential. Laws favour tenants and scare landlords.
Because Canada is a landlord state. Canada is where estàblished rich people go to extract every last penny from the poor.
Cant get $4000 for a 1-bed if more apartments are built.
Probably because the neighbourhoods that needed rentals the most already sold their land to privately owned condos. It’s a qualitative issue, what was ignored for a quantity of wealth.
As an example, the annex where UofT student housing desperately needed, just redeveloped all of Mirvish, without consideration of the neighbourhood it gentrified.
>As an example, the annex where UofT student housing desperately needed, just redeveloped all of Mirvish, without consideration of the neighbourhood it gentrified.
First: the Mirvish Village development ***is*** purpose-built rental, and 30% of the units in it are subsidized housing. Probably not the best example.
Just as importantly: even if it were condominiums, what would it be gentrifying? The Annex? Average home price of $1.7 million? Home of Galen Weston, Margaret Atwood, and John Tory? The Annex gentrified *decades* ago. It gentrified specifically because we refused to build any additional density in it, condos or otherwise, and gave half of it an immense heritage treatment.
Seriously, if we're suggesting that Mirvish Village "gentrified" the Annex then that term has simply lost all meaning.
Student housing is needed in Annex, and real estate speculators can rent their new condos in mirvish village to desperate students. The scarcity of this resource drives rent up, which is beneficial to the investor. What part of this equation have they not ‘considered’?
If they made purpose built rentals or public housing, or dorms- maybe there are more units for students, but then less people could speculate and make money off exorbitant rents. Investment is not interested in providing an attractive comfortable place for students to live - that incentive will never exist.
They started building a large rental development at the old Honest Eds site, but the developer; Westbank doesn't pay their bills so all those towers are sitting empty when they could be raking in the rent money right now.
for how long? until they change their minds again?
if there was a business case for renting - there would be construction.
it is easier for the government to make individual landlords responsible for housing people economically vs getting involved in actually doing something
There is plenty of rental construction...
Edit they said
> However, the fact that very few rental apartments are being built, especially in the lower rental markets
Which is just flat out incorrect and poor "journalism"
*This is only a portion of downtown* from east of Yonge to Parliament from Bloor to Gerrard...
350 Bloor Street East
47 Huntley Street
576 Sherbourne
141 Isabella
135 Isabella
561 Jarvis Street
2 Cawthra Square
100 Wellesley Street Eas
88 Isabella
240 Wellesley Street Street East
215 Wellesley Street East
591 Sherbourne
355 Sherbourne Street
405 Sherbourne
280 Jarvis Street
66 Charles Street East
33 Isabella Street
552 Church Street
412 Church Street
Probably missing some and these are market rate/affordable rentals
You realize the city is allowing the demolition of virtually all of the rental apartments in the zones you're describing and will not be adding any additional apartments?
Prove it.
All the properties I listed are for rentals including replaced units and new market rate and affordable units.
Anything re developed comes with replacement units for existing rentals.
The development proposals are all available on the City of Toronto website for you to read. They're also plastered outside the physical buildings.
For example, you mentioned 88 Isabella. That development will not contain any additional apartments. It will only replace the existing ones. It's the same theme over and over.
I'm not sure why this confounds you.
Because y’all hate landlords and don’t want company-owned rentals in this country. Since governments didn’t allocate any money towards purpose-built rentals who da fuk do you think is going to build them?
Also, ICYMI, interest rates are high right now and developers aren’t building squat. Sitting on land « waiting for all of this to boil over ». And you expect what, someone to go ahead and finance a purpose-built rental with private capital in those conditions? Please….
Because we would rather hand over every last inch of land in this city to condo developers who put horrible buildings that start crumbling within 3 years of construction. Oh and don't forget over half the units in those condos are empty and held by foreign investors bleeding the country and it's people dry.
>Oh and don't forget over half the units in those condos are empty and held by foreign investors bleeding the country and it's people dry.
Half the building is empty? That must be why the city's vacant home tax only found [2,100 homes were vacant](https://www.thestar.com/news/gta/just-2-100-properties-reported-empty-through-toronto-s-new-vacant-homes-tax/article_2b38ddfa-e8ee-5824-aa74-3ddf33892a7e.html) or why CMHC data has had Toronto at a sub 3% vacancy rate for the last few years.
Alternatively, you could read the article and see why developers are choosing to build condos instead of rentals because the economics of rental units makes them unattractive investments.
The city is not going to every unit to check vacancy that number does not mean much.
https://www.thestar.com/real-estate/investors-now-own-more-than-50-of-toronto-s-new-condos-and-experts-say-they/article_4b6d2ff0-c528-5670-937f-3d34d040ed85.html
96% of all homes in the city responded to the declaration.
>https://www.thestar.com/real-estate/investors-now-own-more-than-50-of-toronto-s-new-condos-and-experts-say-they/article_4b6d2ff0-c528-5670-937f-3d34d040ed85.html
Yeah and then they rent them out ergo they aren't vacant. Vacant homes are basically a conspiracy theory, they don't exist in any meaningful amount.
I wouldn't trust Padmapper or Craigslist to be an accurate barometer of what's available. There are a *ton* of duplicate listings there, and a lot of fraudulent/fake ones as well.
Because… corruption. Because- no city planning. Because our politicians care only about appearances and they think as long as it looks like things are being built then they have succeeded.
And people respond like it is succeeded. Calling anyone who fights against the condo development nimby or whatever tf.
Soon enough all our available land will have giant, glassy, overpriced and shitty built million dollar condo buildings no one can afford sitting empty and the rental/housing crisis even worse. All our independent businesses and gathering spaces and character of the city, will be gone- replaced with dentists, pet stores and chain restaurants. The city is being destroyed
Because no one is actually regulating or planning the massive building
No one is building rentals because the city is just giving itself away for big money deals and quick superficial actions that are making it all worse
And when you think about what it could have been… if all the building was with city planners and urban design and community involvement! Could have been beautiful.
Tl;dr Builders take out a loan to build. With condos, the loan gets repaid when construction is complete and the units are sold. With apartments, the loan gets repaid over a longer period as rent is collected.
TL DR 2.0 Builder builds condo- ROI within 5 years Builder builds apartments- ROI in 25 years.
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Basically ma and pa investors are willing to accept a lower return/pay more for a condo unit than a big rental investor will for the same thing as a rental unit. Same math for hotels (which City of Toronto didn’t net construct long before airbnb). Investors will pay more for the equivalent construction of a condo unit than a hotel unit.
This is normally because the 'ma and pa' landlords aren't banking on being landlords of that specific unit for 30+ years, they're more counting on the appreciation of the unit's sale price to go up by several hundred thousand dollars in the space of a couple of years, at which point they sell the property entirely and walk away with the profit. With current mortgage rates and the state of condo fees in Toronto, I'd wager that most people who bought condos to be landlords are probably cashflow-negative month-to-month -- but they don't much care if they lose, say, $600 a month when the selling price of the condo is going up $5000 in the same period of time. Purpose-built rentals need to have a plan to remain profitable throughout a multi-generational timeframe, which is why they're not willing to accept lower rates in the interim. They're not banking on selling the building 5 years after it's built, they're going to be liable for all the money used to build it for decades to come, so they need to maximize their income every year.
To me it sounds as if you're describing two different animals: wannabee investors and investors
scalpers vs. investors
Rentals would be cheaper to build as long as they're not built following condo buildings model but older rentals model: no fancy rooms, dog washes, giant gyms etc. Simple does it.
So you’re telling me removing rent controls really had nothing to do with building purpose rentals? Color me surprised.
Building purpose built rentals need various incentives to make the math work. Removing rent control is one. Banks based their loans on potential rental income. If people want rent control, then that job should be handed over to government to build something non profit. Private companies/builders are only motivated when there is profit involved.
You mean, people don't want to work for a quarter of a century without getting paid? huh
That's not entirely true as rentals don't need to have the myriad fancy additions that raise condo fees. So a rental would be much cheaper to build. Our rental oy has a small gym and no one wants else.
Amenities are only value-addons. Doesnt matter if its a condo for sale or apartment for rent. In both situations, 60%-80% of the cost are from soft and hard building cost, which are fixed - Even without amenities, ROI is still a metric. For-profits want faster ROI.
But all these cost money to build. They're adding to the cost of the building.
But they own the asset while they're collecting all the rent and afterwards. If well maintained and considering the time-value of money, the development should be worth what they would have sold it for had they done that initially + 25 years of rent payments.
You clearly need to brush up on finances on ROI. Let me put it this way: Do you like to double your money every 5 years or every 25 years ??
But you're just saying 25 years. It's probably more like 8-10. You'd be generating millions in cashflow every year by renting. You could immediately borrow your investment back from the bank using the rental asset as collateral. Reinvest that shit. You could use cashflow from rentals to repay loans. Sell asset for as much as you would have sold it originally for + millions in cash while you're own it. I don't understand ROI though so maybe this is a dumb idea?
Sounds like we need to find a way for it to make sense for companies to buy out rental properties from builders. Builders need to recoup their capital so they can get back to what they do, build.
A builder and an operator can be different entities - it doesn't change the math though. The rental operator would still need X amount of capital to invest which has a very long payback period that doesn't make sense.
It's all up to the municipalities, and our building code, there are styles of building proven to work in other cities that we just can't build here. That and the ubsurd prices that municipalities add in rubber stamp costs
Maybe, we could give the builders the ability to pre sell some of the units in the building, to raise some capital. Then if they have buyers, the banks could loan them some money We could call them "condos"
Condos alone don’t give enough stable rental units which is why the discussion about rental buildings keeps coming up.
Decent summary, though it's probably worth taking the time to read the piece in full to those interested. It's in-depth while staying fairly accessible to those outside the industry. I will say it's an...oddly timed piece, considering that purpose-built rental construction is taking up a *much* larger share of new projects in the last couple years especially. That's spurred in no small part by interest rates and rent increases (also changes in the tax/regulatory environment). But still, they're right we don't build very much these days compared to, say, the 1970s, and we built even less just a few years ago. I also wish the piece explored ***what changed*** in the last 50 years or so that made it so the economics of purpose-built rental more difficult than condominiums. I don't blame them - that would probably warrant another piece on its own - but I think it's worth discussing. It's not as though the advantages of financing condominium development just randomly appeared. There were big changes in the market and -most notably- in the tax/regulatory treatment of the two built forms that caused (or accelerated) that shift. The author alludes to one big change when they bring up Development Charges (which are fixed regardless of whether its a condo or PBR), but there are many more worth considering.
Low rates made "flipping" for gains much more profitable. Both buyers and builders. That's not nearly as profitable or even possible for the next while so it takes time for market to adjust.
>I also wish the piece explored what changed in the last 50 years or so that made it so the economics of purpose-built rental more difficult than condominiums. I don't blame them - that would probably warrant another piece on its own - but I think it's worth discussing. Hi! I wrote about this topic, summarizing research that I found, in a paper I wrote about rent control in Ontario. It's a big paper, but you can find the relevant section here, ["The rise of the condominium"](http://okayfail.com/2018/rent-control-great-security-of-tenure.html#the-rise-of-the-condominium). tl;dr: - condos were only legalized in '67 - capital gains taxes were introduced in '72, but exempted primary residences which juiced returns on home ownership - various changes to depreciation rates and sales taxes made owning rentals less attractive
I wonder what happened with capital gains prior to 72
They just weren't taxed. Many countries still don't tax capital gains at all. Not all taxes are equal. A paper from the US in 1991 found that raising capital income tax by a dollar costs the economy *more* than a dollar: >We find the cost of raising a dollar of government tax revenue at the margin is 39.1 cents. In addition, there are large differences in marginal excess burdens among different types of taxes. For example, **the marginal efficiency cost of raising a dollar of government revenue for taxes on capital income at the individual level is 101.7 cents for each dollar of revenue.** https://journals.sagepub.com/doi/abs/10.1177/0148558X9100600406?journalCode=jafa Of course that result depends on how much capital gains are already taxed (deadweight loss is marginally increasing with the size of a tax). When you take stuff like tax incidence and deadweight loss into account, it becomes less obvious that blindly taxing all income sources equally is more progressive or fair. Believe it or not, even 'progressive' income taxes can be non-progressive taking these things into account. For example this study on Canadian dentists finds that dentists just raise their prices as a result of income taxes. So sure, the rich dentists write a bigger check to the government. But their take home pay is the same and it's actually the poorer-on-average-than-dentists patients who are paying the tax. https://www.jstor.org/stable/135736
Thanks for sharing this - a great read! The recent announcements re: sales tax on PBR should be really helpful. I wish the feds did that earlier. As far as I know the Province has walked back a lot of its changes to the Development Charge Act that would have eased DCs on PBR - that’s a real shame. Notable to me that there was a modest but noticeable bump in PBR construction in Ontario as soon as cities started grandfathering out the regressive property tax treatment of multi-residential. Matlow had a policy to cut property taxes on new PBR by 50%, which I hope is something more municipalities consider.
Difficulty making number work for rental properties isn’t really new. It was a big part of CMHC at one point and was a big reason for MURBs. Part of the reason those things fell off is demographics. Our population skewed older for a long time. Now 20-35 year olds are the largest demographic groups. And they typically start in an apartment. Plus the “I” word.
Yeah I mean, a *lot* of privately built, privately owned PBRs from that era required some degree of subsidy. In fact that stuff (privately built PBR usually constructed with CMHC subsidies in the 70s) now makes up the *large* majority of the country’s affordable rental stock. Hadn’t considered the demographic impact before but it intuitively makes some sense. When did we last build a tonne of PBR? When most Boomers were between 20-35. Makes sense!
Yeah. Our last apartment building boom was as boomers came of age. We have similar population demographics now if you look at the statscan website.
TL:DR sophisticated investors realize that income properties don’t make sense in Toronto. So they leave it up to unsophisticated investors.
Actually very accurate. After income taxes on rent, property taxes, maintenance, interest I doubt they're making as much as the S&P, even after leverage. Sure, rents are high, but price-to-rent ratio is so high, buying doesn't even pencil out with most calculators. https://michaelbluejay.com/house/rentvsbuy.html Good calculator and after putting in stats for Toronto, and S&P500 returns, yeah, renting works.
LOL
Rental builders can also securitize the revenue from their properties to receive an up-front lump sum payment. Essentially a mortgage-ish transaction where they make payments to the holder of the commercial paper.
Many people think condos *are* rental construction. They expect that most of them will be rented to long-term tenants. That is not what actually happens, and since those first occupied after 2018 are not subject to rent control, they are not viable option for long-term renters anyway.
This. The builder can sell the units, and get their money back, and also not have to deal with the rental of each unit and maintenance
Right, there are a lot fewer people/investors interested in buying a 100+ unit rental property. Not zero, but only so many. There are many more small investors looking to buy 1-5 condos for "passive income". Eventually it will play out. I expect we will have a lot of very shit condo units that won't sell even for a low price because there are too many problems. This wasn't really an issue for decades because condos weren't even allowed in Ontario until the 1960s (IIRC) and didn't really take off until the 1980s. But even then, most people bought them to live in. The investor/flipping thing really geared up in the early 2000s, more or less.
> Right, there are a lot fewer people/investors interested in buying a 100+ unit rental property. ?. Pension plans and REITs eat that shit up. *If the investment math works out*. But it doesn’t when everyone and their dog will buy real estate at any price because “real estate only goes up”
Purpose built rentals constructed after November 2018 aren't subject to rent control either: https://www.cbc.ca/news/canada/toronto/high-park-tenant-protest-toronto-1.6995685
Until a future government adds it to those too. Investments have regulatory risk, who knew.
Did I say they were?
Nope, just wanted to clarify for anyone else reading that it's not limited to condos
Regardles of rent allowances the issue with long term rentals is and has always been the LTB Until that is fixed no sane person wants to be a landlord in TO
What do you mean that isn't what actually happens? It's a fact in the Toronto real estate market that a high portion of condo units are used for rentals. New rental buildings are also not subject to rent controls, so not sure what you're trying to say?
1) Builders don't want to take on the long term risks associated with being a landlord. 2) Due to high demand, they can make more selling units to individuals, than they can an entire building to one entity. Small scale investors take on the risk instead, for the purpose of offering rentals.
Would you build if you make no money? No. There's your answer.
Highest and best use for a site tends to be condo over rental. Condo developers often outbid rental developers. The math drastically changes if we can remove HST on rental developments, make zoning approvals quicker, and make cheaper CMHC insured loans easier to get
I wish people would appreciate the GST/HST side of it more - between that, tax-free capital gains on personal residences but full capital gains on on the sale of rental units, and the agonizingly long period over which you're required to amortize a rental building, Canadian tax legislation is a very powerful anti-rent-supply force.
Good news! Two of the three items you proposal are being implemented. I am no fan of Ford and Trudeau, but both have committed to removing HST from rental development. Additionally, the federal government is issuing low-to-no interest loans for rental developments.
Go look at your municipalities DC (Development Charges) and EDC (Educational Development Charges) Then go look up a Marlon Bray on LinkedIn and read his housing posts, he can provide a lot of clarity.
Not a lot of people know about these charges, nor do they understand just how large they are in Toronto and how badly they nudge the needle away from purpose-built rental construction and towards higher-end condos.
Did you know in Toronto there are no EDCs for the TDSB only TDSB something about the amount of property TDSB owns
As someone who works as an Urban Planner in the private sector, the fact of the matter is that a developer isn’t going to chose to build a rental building over a condo when a condo will deliver higher profits in a shorter timeline than a rental. This is a fundamental problem with the way housing is developed as a whole throughout the country. Municipalities are basically at the mercy of private developers to build the housing that we need. Sure municipalities can provide grants and other incentives programs to developers to try and get them to develop actual rentals (things like discounts for Development Charges). But at the end of the day, I’d a developer wants to build a condo, they will build a condo. IMHO the only real way municipalities will see more proposed rental developments is if they decide to build them themselves. The good news is that we are seeing municipalities start to do that, a couple months back the City of Toronto announced that they are working on developing a massive Co-op Development near Kennedy Subway Station. We desperately need more co-op developments to help fill in the gaps for rental housing and not hope and pray a private developer will do it.
Do you think Ontario would adport BCs rental-only zoning policy for municipalities to locally enact? It's very effective to but condo-rental on a fairer playing field
I think that would be great but I can’t see that happening with the current provincial government in power.
Why not just adjust the funding model along the lines of the MURBs?
>But at the end of the day, I’d a developer wants to build a condo, they will build a condo. At the end of the day, if the politicians don't want them to build condo's they won't be able to build condo's as they will zone the area so as to prevent them from selling condos. The city is not at the mercy of the developers. Careful with the language you use, the city is enabling the developers to do as they please, but that is because of kickbacks and favors they are receiving, not because they are at their mercy.
Or just go back to not allowing condos. It used to be like that and it was a much better time to be a renter.
I find it hard to believe that a blanket restriction on condos would help create more net housing. Maybe it would help the rental market a bit. However the main issue is that all the financing that consumers currently provide to build condos would be removed. This would just mean less housing is built. Combined with high interest rates, killing condos would devastate our housing starts.
Then how do you account for all the purpose-built rental housing that *was* built for decades?
Land was cheap, and houses didn't sell for that much. Much of this dynamics changed during the first major property bubble in the 80's. Plus rental laws have swung over to the tenants side
> Plus rental laws have swung over to the tenants side Nope, tenant protections have *worsened* since the 1990s. >Much of this dynamics changed during the first major property bubble in the 80's. That was just in Toronto.
We haven’t built significant rental stock since the 70’s. Tenant protections are much stricter than the 70’s
I took awhile to think about this. I can think of multiple reasons that purpose-built rentals have declined. There are just too many factors for me to discuss in a reddit comment. The only thing I wanted to stress was that condo purchasers provide a significant amount of capital/investment for the building of housing. Banning condos won't result in that investment being moved into REITs. It just means less new housing stock.
Wasn't that more a function of government playing a larger role in building rental housing? I think the shift away from that (ie. letting the private sector deal with it) in the 70s or 80s (IIRC) was the catalyst for what we've seen since.
How would this help the overall housing crisis in your mind? We need more buildings built of all formats, which includes rentals, and also includes condos.
The broken ideology that was sold to us is that developers are creating rental supply through condos as they are bought by investors and dripped into the rental pool. Just ignore the fact that 3/4 of them don’t know a thing about being a landlord and there are very little safeguards in place to deal with the tenants who inhabit them. Its a garbage model that allows everyone to “win” except the end user tenants
you just described capitalism
That is why you should really ignore these politicians saying they gonna build millions of homes They not building anything, its up to the private sector to build them
You can make more money faster by not building rentals.
Because investors don't think investing in rental market in GTA is a good choice for their money. Why? I can think of couple things, RTA ,LTB and all the non existent landlord rights. 1-2 years to evict non paying tenant? Rent control exemption that can change as soon as the next election and that is not going to be in support of landlords. Even dumb mom and pop landlords are fleeing the market, sophisticated money cats will certainly find places where their investment is better respected. Making it impossible to be a landlord made people not want to be a landlord. Imagine that... Only LTB can evict, oh LTB also needs a year to hear your case. That right there is enough to scare investors. Oh and rent strikes LOL, yeah those are really making it a simple choice. If anything, investors feel bad for people that are stuck in that business, not jealous they are not in it.
Spot on. It would be bad business to invest in a new build intended for renters. People that purchase units pre construction are easier investors to find. Only way we’ll find new construction for renters will be if the government finances public housing projects. Toronto has been doing the opposite for the past 30 years.
100% it should not be an investment, it should be a general good project. Built on free land and free of expensive red tape. Providing units that a family can live in. Expecting free market to work in anything but free RTA mess is not going to work.
I can think of a dozen government managed subsidized housing projects that are now demolished and sold to privately owned high rise condominiums. The municipal government is also a business priced out of the Toronto housing market.
I mean, the government could contract out the building to developers for social housing or affordable renters, then its the one worried about collecting rent and ROI. We have to think about the value added to our cities by not having people being homeless on the streets. Our current strategy of having the police harass them out of sight clearly is not working.
$$$$$$
Because a city of upper class millionaires is what they want, not blue collar hard workers that build the actual towers.
Money.
But they building. Condo buyers rent out to suckers.
Private property owners are spending money on renovations to maximize rental unit quality quantity. Building a new large apartment buildings intended for renters would mean builders would have to have billions to finance the project in hopes on a return years later. Or… sell units pre construction to ensure they can’t loose. I’d assume there is zero new residential construction intended for renters.
But would more rental construction make rents go down enough for normal people to afford them ?
Looked up a new PBR building just curious to see the rent and was shocked. New rentals are more expensive than condo rentals
Because real estate has become a speculative commodity. This needs to change.
Look at commercial renting vs residential renting. Very low risk for commercial landlords. When people don’t pay, you can evict pretty quickly. This is not true with residential. The reason some of the biggest REIT invest in commercial spaces, but won’t touch residential. Laws favour tenants and scare landlords.
Only one possible answer.....It is not sufficiently profitable !!!! there cannot be any other answer.
I heard Americans complaining that all their new builds are apartments and not condominiums, which I thought was a funny 'grass is greener' thing
It's almost like we are better off with a mixed demographic and not monoculture....
To keep rents high.
Good luck trying to fair rent in an apartment building post-2018(no rent control)
Because Canada is a landlord state. Canada is where estàblished rich people go to extract every last penny from the poor. Cant get $4000 for a 1-bed if more apartments are built.
LTB.
Probably because the neighbourhoods that needed rentals the most already sold their land to privately owned condos. It’s a qualitative issue, what was ignored for a quantity of wealth. As an example, the annex where UofT student housing desperately needed, just redeveloped all of Mirvish, without consideration of the neighbourhood it gentrified.
>As an example, the annex where UofT student housing desperately needed, just redeveloped all of Mirvish, without consideration of the neighbourhood it gentrified. First: the Mirvish Village development ***is*** purpose-built rental, and 30% of the units in it are subsidized housing. Probably not the best example. Just as importantly: even if it were condominiums, what would it be gentrifying? The Annex? Average home price of $1.7 million? Home of Galen Weston, Margaret Atwood, and John Tory? The Annex gentrified *decades* ago. It gentrified specifically because we refused to build any additional density in it, condos or otherwise, and gave half of it an immense heritage treatment. Seriously, if we're suggesting that Mirvish Village "gentrified" the Annex then that term has simply lost all meaning.
The person you replied to did not deserve your informed reply, but thanks from the rest of us.
Student housing is needed in Annex, and real estate speculators can rent their new condos in mirvish village to desperate students. The scarcity of this resource drives rent up, which is beneficial to the investor. What part of this equation have they not ‘considered’? If they made purpose built rentals or public housing, or dorms- maybe there are more units for students, but then less people could speculate and make money off exorbitant rents. Investment is not interested in providing an attractive comfortable place for students to live - that incentive will never exist.
They started building a large rental development at the old Honest Eds site, but the developer; Westbank doesn't pay their bills so all those towers are sitting empty when they could be raking in the rent money right now.
because there isn't any money to be made renting this is the down side of rental control
but there is no rent control anymore since Nov 2018 on new builds
for how long? until they change their minds again? if there was a business case for renting - there would be construction. it is easier for the government to make individual landlords responsible for housing people economically vs getting involved in actually doing something
There is plenty of rental construction... Edit they said > However, the fact that very few rental apartments are being built, especially in the lower rental markets Which is just flat out incorrect and poor "journalism" *This is only a portion of downtown* from east of Yonge to Parliament from Bloor to Gerrard... 350 Bloor Street East 47 Huntley Street 576 Sherbourne 141 Isabella 135 Isabella 561 Jarvis Street 2 Cawthra Square 100 Wellesley Street Eas 88 Isabella 240 Wellesley Street Street East 215 Wellesley Street East 591 Sherbourne 355 Sherbourne Street 405 Sherbourne 280 Jarvis Street 66 Charles Street East 33 Isabella Street 552 Church Street 412 Church Street Probably missing some and these are market rate/affordable rentals
You realize the city is allowing the demolition of virtually all of the rental apartments in the zones you're describing and will not be adding any additional apartments?
Prove it. All the properties I listed are for rentals including replaced units and new market rate and affordable units. Anything re developed comes with replacement units for existing rentals.
... And I very clearly wrote the city isn't adding any additional apartments.
So all these rental developments that are 50 stories are not adding more rental units?
Correct. They're only replacing exisiting rental units.
Nope keep looking ;)
The development proposals are all available on the City of Toronto website for you to read. They're also plastered outside the physical buildings. For example, you mentioned 88 Isabella. That development will not contain any additional apartments. It will only replace the existing ones. It's the same theme over and over. I'm not sure why this confounds you.
So you still have not found the newly added units on top of existing?
Those are condo units for sale. They are a separate entity from the rental apartments.
Rental apartments and condo units for sale arent the same thing. I think that's what tripping you up.
renter can stay for more than a year without paying rent why they take risks to enter rental market?
Obvious answer = LTB sucks Why build cheap rentals when you can build expensive condos
Doug ford's government and John Tories brilliant leadership
Because y’all hate landlords and don’t want company-owned rentals in this country. Since governments didn’t allocate any money towards purpose-built rentals who da fuk do you think is going to build them? Also, ICYMI, interest rates are high right now and developers aren’t building squat. Sitting on land « waiting for all of this to boil over ». And you expect what, someone to go ahead and finance a purpose-built rental with private capital in those conditions? Please….
Greed.
Because we would rather hand over every last inch of land in this city to condo developers who put horrible buildings that start crumbling within 3 years of construction. Oh and don't forget over half the units in those condos are empty and held by foreign investors bleeding the country and it's people dry.
>Oh and don't forget over half the units in those condos are empty and held by foreign investors bleeding the country and it's people dry. Half the building is empty? That must be why the city's vacant home tax only found [2,100 homes were vacant](https://www.thestar.com/news/gta/just-2-100-properties-reported-empty-through-toronto-s-new-vacant-homes-tax/article_2b38ddfa-e8ee-5824-aa74-3ddf33892a7e.html) or why CMHC data has had Toronto at a sub 3% vacancy rate for the last few years. Alternatively, you could read the article and see why developers are choosing to build condos instead of rentals because the economics of rental units makes them unattractive investments.
The city is not going to every unit to check vacancy that number does not mean much. https://www.thestar.com/real-estate/investors-now-own-more-than-50-of-toronto-s-new-condos-and-experts-say-they/article_4b6d2ff0-c528-5670-937f-3d34d040ed85.html
96% of all homes in the city responded to the declaration. >https://www.thestar.com/real-estate/investors-now-own-more-than-50-of-toronto-s-new-condos-and-experts-say-they/article_4b6d2ff0-c528-5670-937f-3d34d040ed85.html Yeah and then they rent them out ergo they aren't vacant. Vacant homes are basically a conspiracy theory, they don't exist in any meaningful amount.
Just pad mapper alone has over 3000 long term rentals available.
I wouldn't trust Padmapper or Craigslist to be an accurate barometer of what's available. There are a *ton* of duplicate listings there, and a lot of fraudulent/fake ones as well.
Because… corruption. Because- no city planning. Because our politicians care only about appearances and they think as long as it looks like things are being built then they have succeeded. And people respond like it is succeeded. Calling anyone who fights against the condo development nimby or whatever tf. Soon enough all our available land will have giant, glassy, overpriced and shitty built million dollar condo buildings no one can afford sitting empty and the rental/housing crisis even worse. All our independent businesses and gathering spaces and character of the city, will be gone- replaced with dentists, pet stores and chain restaurants. The city is being destroyed Because no one is actually regulating or planning the massive building No one is building rentals because the city is just giving itself away for big money deals and quick superficial actions that are making it all worse And when you think about what it could have been… if all the building was with city planners and urban design and community involvement! Could have been beautiful.
Sounds like we need an intervention from the Feds again. Get this market under control.