As rents and property prices go up the government is going to act in favor of renters. Expect foreign buyers' tax, rent control, and property tax surcharges for investors.
It's no secret that real estate prices are going up. I'm no economist, but it's probably because:
- Consumers stayed home and saved money in 2020 to splurge on real estate in 2021
- Cheap credit is plentiful
- There are more foreign investors parking money (i.e. not looking for returns but just safety) in western housing markets like Canada, Australia, and the UK
Governments - national, regional and local - find themselves in a pickle. Renters make up about a third of households. Owners are the other two-thirds. Renters want reasonable rents with the hope of one day being able to buy their own place. Owners never want to see the value of their property drop.
But as prices charge ahead, the down payment renters needed to buy goes up. Once you can get that down payment together, the monthly payments are stable (especially in the US where over 90% of mortgages are fixed for 30 years). That's very different to a few years ago when interest rates were higher and house prices were lower. As a renter you needed less down payment and you were earning interest as you saved for it. But today that initial deposit is getting bigger and bigger.
Now rents are charging up too. Yes, there was brief relief in the middle of the pandemic. (You could get three months' free rent in New York for a while!). Renters are being hit with a double-whammy: rising rents and bigger deposits to buy. I suspect politicians of all types know which way the wind is blowing. Landlords have never been a group politicians defend. I expect politicians to more vocally side with renters.
Here's a brief rant: governments have failed to allow innovation in home building design/technology or land use. If you think I'm exaggerating I recommend reading your local building code cover-to-cover. I guarantee you it is archaic. But rather than solve the complex supply side problem, I think governments at all levels will opt for the easy way out. Here are three things I expect to see more of in the coming months and years:
Foreign buyers' tax
Rent control comes in many flavors, usually limiting the amount, the frequency or the notice period a landlord can raise rents. Berlin recently introduced a rent cap (later defeated). Boston is toying with the idea. Most provinces across Canada have some form of rent control. New York introduced fairly draconian rent control laws in 2019.
It's rare for rental property taxes to be different than a primary residence. Kaua'i in Hawaii is one example where property tax is 1.5X higher for rental properties. But even in Florida rentals under six months are subject to a 6% sales tax, which is effectively a property tax.
I haven't covered what changes in 1031 exchanges or capital gains tax could mean. It's beyond my grasp.
My point remains: governments are going to become more sympathetic to renters as house prices and rents accelerate. Real estate investors of all stripes should prepare for unfavorable taxes.
If you like this post, you'll love getting my email every other week right to your inbox. Subscribe here:
For random takes on real estate investing you can follow me on Twitter @laziestlandlord.