Air B N Be Careful

As we await Tuesday Economic Update form the Finance Minister, rumours are swirling, and a lot have been confirmed ” off the record “. Keeping a secret in our current government is like trying to catch water through a cheese grater.

No matter, Tuesday’s Economic Update will contain something on housing that everyone in our industry should pay attention to, and it is likely to lay another blow to an already battered housing market. Nothing in life is more sure than a government coming out with a policy change AFTER it was needed. Let’s look at probably the largest announcement that will com e out : Short Term Rentals.

The current government has laid most of their economic failures on housing squarely at the feet of short term rentals and operators like Airbnb. After all, it is hard to take accountability for ones own actions, but it is really really easy to point a target on something, and convince everyone that the object is to blame. The Liberal government screwed up housing policy at every turn, and everything they have tried to do has failed. With Canadians becoming more and more angry at the current state of housing, and a potential election on the horizon, they need a solution – and I can assure you it won’t be deep soul searching and admitting their failures. No, no, that wouldn’t be the political way. So, they will try to lay the blame for all that ails housing in Airbnb. Airbnb, much like many things has become a name for sector. We have seen in before with the likes of Kleenex used for facial tissues, Zerox for photocopying, and Jacuzzi for hot tub ( not all hot tubs are Jaccuzi’s, but all Jaccuzi’s are hot tubs ).

Airbnb will bore the brunt of a government gasping at its last political breathe. So let’s look at what will likely come to pass, and how it will basically kill the entire short term rental market.

The government, or so goes the rumours will basically disallow any deduction for short term rental properties. So, let look at what it means.

Let say you have a portfolio of short term rentals – STR for short that generate $50,000.00 a month in income. However, to generate $50,000.00 in income, you have mortgage payments, taxes, maintenance, insurance, repairs, etc. etc. that probably total around $40,000.00 a month. So, you net out $10,000.00, which you would pay roughly 35% tax on, so net net net, you take in around $6,500.00 a month. Seems like a lot, however, on the risk you are taking I would argue it is still a very poor return.

If the Liberal bill comes in disallowing the deductions, you would now be claiming around $600,000.00 a year, or $50,000.00 a month in income. Lucky you. That puts you in the top bracket of 53.53% on everything over $210,000.00. Your tax bill is roughly an annual amount of $293,000.00 ( since income tax is progressive, you would not pay 53.53% on all the income, just the amount after $210,000.00 ) . $293,000.00 a year is about $24,416.00 a month in income tax. So, add your expenses to your taxes, and you have a monthly obligation of $ 64,416.00 on income from STR’s of $50,000.00. It won’t take long to be bankrupt in the short term rental game.

The government will argue that this will magically solve the countries housing problem over night, and everything will be fine. They will say they are not ‘ banning’ STR’s – which is true, but the effect is still the same.

Are STR’s like Airbnb a contributing factor to the housing problem? Yes. So did Liberal spending during the pandemic – but of course they won’t cut that, or say that had any part to play. So what is the real reason?

Basically the government hates STR’s because they cannot track them and tax them properly. That is it. STR’s are too difficult to track, very few people report them on their taxes, and everytime an STR is rented, it means a hotel ( which pays taxes, collects GST and HST, etc ) doesn’t get the night.

While effectively shutting down the STR market overnight may seem like a great thing for the housing market, I truly don’t think it will help. All this will do is cause a flood of properties onto a market that already has plenty of supply. The time to make this move was 2 and 3 years ago, but expecting quick action from any government is akin to a fantasy.

However, but making this move, the government will accomplish 3 things:

1. It gives the illusion that they actually care.
2. It shuts down people from earning untaxed income off the books
3. It creates a windfall for the government. Let me explain.

A lot of STR’s were purchased prior to the massive runup in prices of the late 2020 and 2021 frenzy. Some of these places have massive equity – even after a price correction. Should an STR operator get discouraged by the announcement on Tuesday and dump their property, it is likely that the sale of said property would still create a capital gain. Of course, taxes are due on capital gains in Canada. Capital gains also raise your income for the year, reducing transfers payments, Child Tax Credit, HST payment, working tax benefit, the list goes on and on. We all know the current government has a fiscal hole the size of the grand canyon, so anything that increases revenue while reducing payment out is a welcome move in the right direction.

And finally – something to think on. Anyone that took out a mortgage during 2020, and 2021 also has a locked in low interest rate. When they sell, the mortgage gets paid out. That will help Canada’s big 5 banks close out mortgages on the books that could potentially be fixed around 1.60% for another 2 or 3 years – generating BILLIONS of net interest margin gains for the financial sector. Like I always say, banks in Canada will never go under, because the government will ensure they always survive.

But I am certain the announcement on Tuesday will be hailed as a great thing for the average Canadian, when in fact it couldn’t be further from the truth.