The Problem With Vacant Housing Taxes When Trying To Address Housing Supply Problems

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The City of Toronto has proposed a vacancy tax in the belief that landlords faced with the prospect of paying it will either sell or rent the unit, thereby improving housing supply.

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The motivations behind the Vacant Housing Tax are understandable, but it is uncertain whether a tax will make a significant difference in increasing the city’s housing supply.

Not much is known about the prevalence of vacant units in Toronto, not even the number of currently vacant units. Some estimates suggest that around one percent of homes could be empty. The city estimates that the proposed 1% tax on the assessed value of unoccupied homes could raise $55 million to $66 million per year, based on approximately 6,500 to 9,600 units likely to be subject to the tax.

The tax would be imposed on properties that remain unoccupied for more than six months from 2022. Vacant primary residences are exempt from the tax. Other exemptions take into account snowbirds, dwellings being renovated or sold and the death of the owner.

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Toronto is certainly not the first major jurisdiction to tax owners of vacant homes. For example, Vancouver imposed a similar tax in 2017 and estimates that the tax reduced the number of vacant homes by 25%.

The federal government also plans to impose “Canada’s first-ever national tax on non-resident residential real estate owned by non-Canadians that is considered vacant or underutilized” starting in 2022. While the federal government intends to target foreign investors, the municipal government’s version of the tax does not discriminate by citizenship status.

Housing affordability advocates estimate empty homes to be far more than one percent of the housing stock. Downtown Toronto resident Jaco Joubert used a light-detection camera to snoop around nearby skyscrapers. He estimates that 5.6% of the homes in his neighborhood are vacant.

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The question is whether these units had been vacant for more than six months. During the pandemic, downtown condominium vacancy rates increased, causing some units to sit vacant longer. Additionally, some downtown residents have temporarily moved to second properties in the cottage country in order to have more space than a one- or two-bedroom apartment offers for teleworkers.

But let’s see what lessons we can learn from the Vancouver experience. Vancouver’s annual empty home tax report for 2019, the latest available online, identified 6,025 vacant units, representing 3.1% of housing stock. About 4,132 vacant dwellings were exempted from the tax, which was imposed on the remaining 1,893 vacant dwellings, or just under 1% of dwellings.

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Some vacant properties are likely to become occupied over time. In Vancouver, 41% of the 1,989 vacant properties in 2018 were occupied in 2019.

Perhaps curiously, the assessed value of vacant properties was significantly higher than that of others. For example, the average vacant condo was valued at $1.5 million compared to $900,000 for all condominiums. Similarly, the assessed value of vacant single-family homes was on average 52% higher than that of all single-family homes.

A key takeaway from Vancouver is that most vacant homes were eventually exempt from the tax. Additionally, the number of units subject to the tax decreased to 1,893 in 2019 from 2,538 in 2017. Additionally, revenue generated from the Vacant Housing Tax and associated penalties in Vancouver decreased to 27.9 million in 2019, compared to $33.6 million in 2017.

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The vacancy tax has increased supply in Vancouver, but not much for the homeownership stock. A report by Canada Mortgage and Housing Corporation documented an increase of 5,920 condominiums in the city’s long-term rental stock in 2018 and 2019.

Toronto is not alone in considering a vacancy tax. Ottawa is planning a similar initiative for 2022. The tax, however, should not be an excuse to shy away from facilitating the construction of thousands of new homes of varying sizes and types to properly close the gap between supply and demand. .

Murtaza Haider is a professor of property management at Ryerson University. Stephen Moranis is a veteran of the real estate industry. They can be contacted on the Haider-Moranis Bulletin website, www.hmbulletin.com.