RENTT: Looking at the rent numbers This issue brings together the RENTT (Rental Executives National Think Tank) panel to discuss issues related to rent, such as changes in rent control guidelines, increasing rent in provinces where there are no rent controls, property taxes and building assessments. RENTT panelists:
David Hutniak, President and CEO, LandlordBC
Andrew Macallum, President, WRAMA
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Al Kemp, President, Executive Director, Manufactured Home Park Owners Alliance of BC
Arun Pathak, President, Hamilton and District Apartment Association
Chanda Lockhart, Executive Officer, Saskatchewan Landlord Association
Daryl Chong, President & CEO, Greater Toronto Apartment Association
Avrom Charach, Director of External Relations â€“ PPMA
Jeremy Jackson, President, Investment Property Owners Association of Nova Scotia
RHB: Welcome to RHB Magazine’s RENTT panel. We appreciate the time and effort involved in participating in today’s discussion and sharing your experience. Our readers will benefit from your input and experience. Today we’d like to talk about issues that affect rent levels. For those of you who live in a province with a rent control guideline, what is your opinion of the new guideline for 2018? Avrom Charach: The Manitoba guideline does not cover our actual increases effectively. However, the fact that our government tied the guideline to the Consumer Price Index [CPI] for Manitoba a few years ago means that we know what it will be each year. That is a positive as compared to the 30 previous years of uncertain guidelines. Andrew Macallum: The guideline rent increase in Ontario is 1.8 per cent for 2018. It is important to understand that in Ontario, rental increases are not only limited by the provincial government and the Landlord and Tenant Board [LTB] to the guideline, but also capped at 2.5 per cent.
sets the guideline at CPI plus 1 per cent or 2 per cent. David Hutniak: For 2018, the Allowable Maximum Increase in BC is 4 per cent. Al Kemp: The BC guideline formula hasn’t changed. The formula found in the Regulations to the Residential and Manufactured Home Park Tenancy Acts is a maximum annual rent increase of 2 per cent plus the increase in the CPI for the 12 months ending the previous July. For 2018, the rent control limit is 4 per cent, while it was 3.7 per cent in 2017. RHB: What does the new guideline mean for your province this year? Avrom Charach: It means that, for approximately 15 years, the government will see a large number of AFRIs [applications for rent increase above the guideline] filed and I have no doubt that CMHC will, as usual, reflect average rent increases well in excess of the guideline.
Arun Pathak: The guideline is too low due to its being tied to CPI. Many landlords’ costs of operating rental properties go up more than the CPI, such as water and sewage rates, hydro, and property taxes. Over the last few years, many landlords have seen increases in pest control costs as much as 500 per cent. Additionally, due to the aging process, all buildings, including owner-occupied homes, need more expenditure the older they get.
Andrew Macallum: It means that every tenant in the province should expect their rent to increase by 1.8 per cent in 2018. The heavy regulation by the province of the residential rental housing industry has created a culture where landlords are very limited in using their judgment when deciding to increase the rent or not. For example, despite having an excellent relationship with a tenant who makes their rental payments on time and respects their rental home, the landlord must increase rent to the maximum guideline level to ensure they are not left in a precarious position when an emergency repair or upgrade is needed. An above increase application to the LTB would be available; however, becoming involved with the LTB is undesirable – particularly to small landlords – due to the painfully slow and negative experiences had by rental housing providers.
Daryl Chong: The rent increase guideline is too low because it is tied to CPI with no additional factor for major repairs or the cost increases driven by aging buildings and increasing retrofit needs. The solution is for the Ontario government to copy the rule in BC that
Arun Pathak: These guidelines are creating a greater disparity of rents within buildings. The little amount of cash flow from landlords’ long-term tenants is dropping every year and landlords are, instead, losing more money every year on long-term tenants who are locked in at a low rent. These tenants, in some cases,
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get trapped in their unit because they can’t afford to go anywhere else. This limits the income of the landlord, which then forces the landlord to increase the rent of the units that turn over to compensate their income. When instead all rents are allowed to be at a reasonable rate, landlords work hard to reduce turnover and keep tenants in their buildings, because it is better to keep a good tenant than to find a new one. Daryl Chong: Arun is correct to point out the discrepancy between rents within buildings. In addition, the low guideline combines with a high demand for rental units to create a growing disparity between rents in existing buildings and in new buildings. This interferes with tenant mobility as tenants who would normally move to a new building or to home ownership stay put in their existing apartment at an artificially low rent. Low rents for some tenants mean higher rents and less availability for other tenants, including newcomers to Ontario attracted by jobs, especially in major centres. David Hutniak: Costs are continuing to increase in BC for taxes, utilities, insurance, etc. In that context, the allowable increase will be inadequate for many landlords, particularly those whose rent rolls are significantly below market. Al Kemp: Because the BC formula has been in place since 2004, it is accepted. So, lobbying BC’s NDP government to remove rent controls would be a waste of effort. Rent controls only apply during a tenancy, so market rents can be achieved on turnover.
RHB: Overall, how will the new guideline affect rent levels for your members? Avrom Charach: As noted earlier, many of us use Part 9 of our Act to obtain increases which reflect our true increases in operating costs. Those that do so will not see serious deleterious effects, but those that do not take advantage of AFRIs will lose ground to higher operating costs. Andrew Macallum: Landlords have been backed into a corner by regulation from all three levels
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of government. The perception is that the left hand doesn't know what the right hand is doing. In fact, in many cases it seems like the right hand doesn't even know the left hand is there. Rents must be increased to hedge against unpredictable costs, such as unpaid rent, unpaid utility bills, student licensing fees as in Waterloo, to name a few. In a small building, it takes only one tenant to create a domino effect by not paying rent on time, or at all, that can cause great hardship. An example is extreme cold periods that were seen this winter. Higher than normal utility costs to provide heat, met with a tenant who does not pay rent, met with a landlord tenant tribunal process that is long and unpredictable, results in a heavy loss that will have a negative impact on other areas of that particular rental business, such as putting off upgrades, maintenance and/or mortgage payments. Arun Pathak: Rent levels have been increasing when there is turnover, in part due to Hamilton’s recent economic revival. Some new investors, and perhaps some old ones, are applying for above-guideline rent increases to recover the costs of improvements they are making to their newly purchased properties to keep up with revival efforts. Daryl Chong: Long-standing rental owners will see compressed incomes, as the discrepancy between rents in existing building and new building widens. That reduces the turnover rate and raises the risk of creating a vicious circle of reduced revenue leading to reduced upgrades, which lead to reduced revenue, etc. David Hutniak: Overall, the increase will allow our members to deliver quality rental housing to British Columbians. However, we are concerned about the future, as the provincial government moves to increase our tax burden with measures such as the new payroll tax. Al Kemp: Demand in BC’s major centres continues to exceed supply, causing market rents to increase more than inflation. The CPI is irrelevant to costs to operate a rental property or manufactured home community. The annual increases in insurance premiums and property
taxes almost always exceed the increase in the CPI. RHB: If your province does not have a rent control guideline, is there any increase that tenants expect, or that landlords feel comfortable giving? Jeremy Jackson: Generally, in Halifax, rent increases ranging from 1 per cent to 3.5 per cent seem to be acceptable from a tenant’s perspective. Rent increases above 3.5 per cent will, often times, be met with some resistance. Clearly, apartments geared to more fixed income and lower income residents will be more sensitive to rent increases than those targeting the high income, luxury market. Chanda Lockhart: In Saskatchewan, tenants that rent from a member of the Saskatchewan Landlord Association [SLA] would expect to see a six month notice of rent increase. Tenants that are not renting from a member of the SLA would expect to see a 12 month notice of rent increase. The SLA recommends no more than a 10 per cent increase at any given time; however, there is no rent control in place. RHB: Are rent increases keeping up with cost increases? Jeremy Jackson: That depends on market segment. Landlords targeting low-income renters are not achieving adequate rent increases to cover operating cost increases. Rent increases for middle income and higher renters are generally sufficient to cover increased operating costs. This said, Halifax is entering into a highly competitive market period as an influx of highend rentals, currently under construction, are coming to market. As new rentals come to market, we cannot accurately predict whether landlords will be able to continue to obtain sufficient rent increases to cover increased operating costs. Complicating future rental increase is the fact that we are also dealing with rising property
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taxes and high government user fees and utilities, which are adding increased pressure on landlords to raise rents. The big unknown here is, “Will the marketplace allow for higher rents?” Chanda Lockhart: As we do not have a cap on increases, landlords are able to increase rents to keep up with rising costs, should the market allow. RHB: What is your view of the property tax system in your province? David Hutniak: The new NDP government in BC tabled its first budget in February. Where there was initial concern that a new school tax on residential properties, valued at over $3 million, would apply to purpose-built rentals – stand-alone buildings with four or more units– the government subsequently confirmed purpose-built rentals would be exempt, largely due to behind the scenes work by LandlordBC. This was a very significant exemption as the total property tax bill would have effectively doubled for many purpose-built rental buildings. However, owners of rentals with three or fewer units, valued at over $3 million, will be subject to this new school tax, which could be problematic for some, although the universe of such rental housing is not likely to be very large. Al Kemp: Within BC, mill rates differ from city to city; there is no provincial average of which I am aware. There is double taxation in manufactured home communities [MHCs]. BC Assessment assesses the value of individual homes on the site and, in almost cases, vastly exaggerates the actual value of the home. The value of MHCs are assessed based on the homes being on the sites. Further, if a manufactured home owner dies or passes away, any unpaid property taxes on the home must be paid by the MHC owner, even though the community owner does not own or benefit from the home on the rented site! Daryl Chong: In all major centres across Ontario, the municipality charges a higher rate of property tax on rental buildings of seven units or more that it does on single-family homes. In Toronto, the city property tax rate is 2.5 times higher on apartment buildings as it is on a condominium
unit or single-family home. Other major cities charge rates that are twice as high, and that also applies in many smaller cities and towns. The situation has improved since the 1990s. At that time, the Province moved to charge all residential and multi-residential properties the same tax rate. The Province also took steps that have nudged down the municipal tax rates on rental properties, but more action is needed to make property taxes fair for landlords and tenants. Andrew Macallum: The Ontario property tax system gives a benefit to homeowners and taxes everyone else double or more, including apartments. The aim of having apartments taxed at the same rate as homeowners is going too slow. Arun Pathak: The Ontario property tax system is unfair. It penalizes tenants, who typically earn a lower income than most homeowners, as tenants are forced to pay higher tax rates than neighbouring homeowners. Avrom Charach: The majority of Manitoba renters live in the City of Winnipeg, which charges the same mill rate for rental property as homes. While we do not like the tax system, especially given that school taxes form part of it and we firmly believe those should be tied to personal income, at least we do not get penalized as rental properties in other jurisdictions do. Chanda Lockhart: The Saskatchewan property tax system is skewed against landlords that own multi-family properties. When taxes are changed, little to no changes apply to most single-family properties, but multi-family properties are consistently hit the hardest. Jeremy Jackson: The Tax Assessment Cap system in Nova Scotia disadvantages income property owners. Apartments fall outside the Tax Assessment Cap and, therefore, property tax increases are disproportionally higher than single-family homes and condo owners’ property tax rates. RHB: What is new in taxes this year, good or bad? Avrom Charach: School tax rates are just being announced and they are rising significantly. The property tax rates have not yet been announced but should be increasing by less than 3 per cent.
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Arun Pathak: Ontario has changed to using cap rates for building valuation. However, the costs are still estimated, so the new assessments are not necessarily accurate. Andrew Macallum: We are in the middle of the four-year phase-in, so taxes are either going up or down depending on which way a building was assessed last time. That means taxes either go up or down. The bad thing is the municipalities think property owners have bottomless piggy banks because they increase taxes more than inflation each year on top of the reassessment changes. Daryl Chong: New in 2017, the Province has imposed a freeze on municipal taxes on rental property for those municipalities where the tax rate gap is double or higher. The rental industry and tenants would be better off if the Province moved to make the municipalities bring the tax rates into line. With the freeze, the Province also forced municipalities to bring down the tax rate on new rental construction to match the tax rate on single-family homes and condominiums. That is a positive move, but it produces the ironic situation that older buildings with lower rents, and tenants with lower incomes, are charged a property tax rate higher than new buildings with high rent and tenants with higher incomes. That is a regressive tax system. Chanda Lockhart: In Saskatchewan, property taxes almost doubled overnight in July of 2017 and then scaled back slightly in January 2018 for a four-year phase-in. For example, I know of a 12-unit building with no special circumstances for which the property taxes went from $764 in 2016 to $1177 in July 2017, and now down to $939 in January 2018. Saskatoon, Outlook and Biggar had similar increases and decreases. Al Kemp: I don’t think there are any changes in BC at the provincial level. David Hutniak: Not a property tax… but there was bad news in terms of a new payroll tax to cover the cost of the elimination of Medical Services Plan premiums affecting companies with payrolls in excess of $500,000. This will clearly not impact the secondary market landlords, who make up a large share of the
rental industry in BC. However, larger owners and licensed property management firms will see their costs increase. RHB: With building assessments being done en masse instead of individual building appraisals, what effect does this have on local property taxes? Al Kemp: For MHCs, this can lead to a huge increase. In a given area, perhaps an MHC sells once every 10 years, but the tax assessment is based, in part, on recent sales of comparable properties in the area. For single-family dwellings, there are always several sales. Iâ€™ve heard of assessments rising as much as 40 per cent in one year, solely based on the sale price of one other community. Avrom Charach: This is a seriously flawed system and we have told the City of Winnipeg. They compel us to provide individual reporting on each property but, until you spend time and money to appeal the assessment, they do not take that into account. In todayâ€™s
environment of computerized systems, cities should use site-specific information. Andrew Macallum: The en masse assessments tend to even out building values, raising the assessed value of buildings that are worth less and capping buildings that are more valuable. Chanda Lockhart: Doing assessments en masse penalizes the apartment building owners. It is not an equitable way to charge taxes. Jeremy Jackson: With the Nova Scotia government continuing to take a status quo position by not eliminating the Tax Cap system, and showing no willingness to enter into stakeholder discussions, the situation doesnâ€™t bode well for landlords in future years. The numbers clearly demonstrate there is a runaway spread developing between capped properties (single-family homes and condos) compared to the rental apartment sector.
RHB: Thank you for your time and input.
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RHB, RHB Magazine, RENTT, Landlord BC, Manufactured Home Park Park Owners Alliance, Saskatchewan Landlord Association, PPMA, WRAMA, HDAA, GT...
Published on Apr 13, 2018
RHB, RHB Magazine, RENTT, Landlord BC, Manufactured Home Park Park Owners Alliance, Saskatchewan Landlord Association, PPMA, WRAMA, HDAA, GT...