Removal of so-called ‘Double Tax’ will worsen rental market: Report

Government’s focus should be on tackling financialization and strengthening tenants’ rights, the New Brunswick Coalition for Tenants Rights says

An explosive new report by the New Brunswick Coalition for Tenants Rights shows that landlords stand to make enormous sums of money if the Government of New Brunswick follows through on promises to cut the so-called “double tax.” Rather than solving the affordable housing crisis, this property tax cut for landlords will likely make the crisis worse.

The report – the first of its kind focused on New Brunswick’s market – describes how financial investors have developed a technique to cause “forced appreciation” of rental properties. This is a process whereby landlords increase rents to increase the net operating income of a property, which results in a higher property valuation, in turn permitting owners to source more capital by refinancing the property that has now been forced to appreciate in value.

Forced appreciation is a result of increased financialization of housing, where profit is the primary motive rather than affordability, the report notes. New Brunswickers facing astronomical rent increases are seeing the direct result of financialized housing markets.

The report’s author, Dr. Matthew Hayes, is a Canada Research Chair in Global and Transnational Studies at St. Thomas University in Fredericton. According to Hayes, cutting taxes on landlords during a real estate boom will make real estate more desirable for financial investors, who are increasingly seeking out rental incomes for their portfolios, which will worsen rental inflation. 

This is something that should worry New Brunswick homeowners too, Hayes notes.

“New Brunswick homeowners who are complaining about high property tax bills throughout the province should know that these bills are in part the result of a red hot real estate market for rental housing inflating property values that the province intends to make worse with a handout to corporate real estate investors in the form of a tax cut for landlords,” Hayes said.

A key reason why a property tax cut is likely to lead to more rental inflation is the national and international trend towards something called “cap rate compressions” in the real estate industry. As Dr. Hayes points out in the report, “cap rates” or capitalization rates, are a measure of risk (lower rates indicate less risk), and they have been falling across Canada as institutional investors pour more capital into the housing sector.

“Simply put, financial investors consider New Brunswick landlords to be undervaluing their properties,” Hayes said. “They have demonstrated their willingness to buy properties far above their assessed values. The national rental property boom reflects the growth of financialized landlords in regional Canadian markets like New Brunswick, where there are still significant profits to be extracted from forced appreciation.”

The report notes that the largest landlords capitalizing on New Brunswick rental properties are not necessarily reinvesting that money in New Brunswick. Killam REIT, New Brunswick’s largest landlord, owns 1 in 7 rental units in the province. Revenue generated through refinancing and tax cuts will likely be used for its ambitions to expand its portfolio of properties outside of Atlantic Canada, and to pass profits on to investors.

“The Coalition for Tenants Rights is sounding the alarm on this proposed tax cut not just for tenants, but also for small landlords,” Hayes said. “While some landlords—especially the largest—will win big returns as a result of a tax cut, smaller landlords without access to credit will simply see their costs continue to rise, as the industries that service rental firms continue to consolidate. Beyond tax bills, insurance and building costs are increasing faster on a per unit basis for smaller landlords than they are for larger ones, who can leverage their economies of scale.”

According to the Coalition, the report shows that it is unsound public policy to expect tax cuts for landlords to trickle down to benefit tenants. There are proven solutions to the affordable housing crisis that the Government of New Brunswick should focus on instead of debating a tax cut guaranteed to enrich wealthy landlords, the Coalition argues. 

“It is not a coincidence that tenants in New Brunswick are bearing the brunt of these out-of-control rent increases. Previous research shows that financial investors are attracted to jurisdictions with weak tenant protections,” said Jael Duarte, a lawyer and the Tenants Advocate for the New Brunswick Coalition for Tenants Rights.

“Instead of diverting $70 million or more of public funds as a result of the tax cut to New Brunswick landlords – the largest of which will take home the largest shares of the cut – the province must focus on proven solutions: rent control, investing in non-market housing, such as non-profit and cooperative housing, and strengthening tenants’ rights,” Duarte said.

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