Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.
If you’re looking for a rough overview of how US business income taxation works — and who isn’t really — this is an interesting article by Matt Levine. He has a knack for making this stuff a lot more interesting. The real purpose of the article, though, is as a lead up to talking about Biden’s proposed “billionaire minimum tax”. At the highest level, here’s the idea:
His most recent budget would require taxpayers worth more than $100 million to pay a minimum of 25% on their capital gains each year, whether they sold assets for a profit or continue to hold them.
The way things work today is that unrealized capital gains are not taxed. Meaning you can own something like a stock for a really long time and not pay any capital gains on it, until of course you sell or realize the gains. So this is a philosophical kind of change. And in Matt’s words, it is both “jarring” and “possibly unconstitutional”.
But I guess it doesn’t affect that many people. There are, according to CNBC, somewhere around 10,660 centi-millionaires in the US. I wonder why it’s not called a centi-millionaire minimum tax, though. (I know why.)
Last week was “forum week” in Toronto. (That is, it was the Toronto Real Estate Forum.) And as is the case every year, Benjamin Tal, deputy chief economist of CIBC, opened up the event with his usual macro view of the world. For those of you who missed it (as I did), here are some of his key points (via RENX):
The Bank of Canada’s overnight rate will ultimately/likely settle into the 2.75-3% range (currently it sits at 5%). He expects rates to start coming down this summer.
Inflation is down, but we’re not yet at the 2% target. The “last mile” is always the toughest.
But as we know, the BofC will take a recession over high inflation, any day.
The mortgage market has fallen faster than in the early 90s recession. Tal said that the residential real estate market in Canada is right now facing “the biggest test” since then.
Canada is in what he calls a “per capita recession”. But for the million or so immigrants that the country accepted over the last year, we’d be in a full-blown official recession.
Finally, he called this correction in the housing market both “real” and “healthy”; he spoke about normalcy returning in 1-2 years; and he posited that the market will be “crazy” when it does return because of a supply deficit.
This last point is an important one. New housing supply is mostly shut off right now. I say mostly because there are obviously still projects under construction, and there have been and there will continue to be some successful launches. But by and large, most developers are waiting right now, principally because the absorption isn’t there. They have no other choice.
But Canada continues to grow. People from around the world continue to want to move here. And there continues to be a need for a lot more new housing. So when the market does return — and it, of course, will — there is going to be a supply-demand imbalance. And as is always the case in real estate, there will be a lag in responding to this imbalance.
I’m a big fan of Anthony Bourdain and I have seen a lot of his shows. However, up until last night, I was under the impression that he had never done an episode about Toronto. Turns out I was wrong. Yesterday I discovered that, back in 2012, he did one as part of his two-season show, The Layover.
As a born and raised Torontonian and as a fervent supporter of this city, I’m always a combination of excited and nervous before I watch a show like this. I’m excited because I love Toronto and I like seeing it showcased. But I’m nervous because, what if they don’t do a good job showing it off?
Maybe it’s hometown insecurity, or maybe it’s just my inner desire to want to properly sell Toronto to the rest of the world. Either way, my mixed feelings were not unfounded.
The episode opens with Bourdain coming into downtown from the airport and immediately saying, “It’s not a good looking town. They sort of got the worst of the architectural fads of the 20th century. It looks like every public school in America, every third-tier city library, Soviet chic, butt-ugly, glass box.”
Things get generally more positive after this initial impression, and eventually Bourdain does admit that the city has great food, nightlife, diversity, etc. But there is this interesting moment in the middle of the episode where a bunch of Torontonians are asked: What one thing would you say best describes Toronto?
What is our thing? There are, of course, the obvious answers. We are diverse. We have great ethnic foods. We have numerous sports teams. And people are generally nice. But these are a little too generic and boring for me. There are also truly unique features like our ravine network, but I wouldn’t call this our single most notable feature.
The right answer, in my view, is that Toronto is the economic and cultural capital of Canada. It used to be Montréal (which you all know I love deeply), but that’s no longer the case today. Broadly speaking, there’s only one global city in this country and, like it or not, it’s Toronto.
I think it’s important to recognize this ranking because economic opportunity is one of the principal reasons that people live in cities in the first place. And if we are to compete globally, we are going to need to be both confident about our place in the world and insanely ambitious about our goals.
So that’s my answer: Toronto has global city status. But clearly we need to be much better at recognizing and building on it.
By land mass it is the second-largest country in the world, with the longest coastline. Bookended by the vast Pacific and Atlantic oceans it has enormous trading advantages, alongside access to the largely untapped Arctic to its north. It is a net energy exporter; it has the third-largest proven oil reserves and is the fifth-largest producer of natural gas — but it also boasts large deposits of critical minerals vital to the green energy transition. And, of course, it borders the world’s largest economy.
By purchasing power parity, its economy is ranked 15th globally by size, behind the likes of Turkey, Italy and Mexico. The OECD has forecast Canadian per capita gross domestic product growth up to 2060 to be the lowest among advanced nations.
Poor productivity is at the heart of the country’s growth challenges. In an hour a Canadian worker produces just over 70 per cent of what an American can — that’s below the euro area and even the UK based on 2022 data. Many would have expected the resource-rich economy to benefit as globalisation powered forward, but its relative labour productivity has actually slipped since 2000.
The solution is probably a simple one: We need to innovate, invest more in R&D, and create stronger links between research and Canadian businesses. But executing on this has proven difficult:
Enormous efforts have been made to understand why businesses in Canada invest so much less in R&D than their counterparts in the U.S., much of Western Europe, South Korea and Japan. Is it our reliance on the export of natural resources and agricultural products? Is it reduced incentives to innovate for our heavily regulated and profitable oligopolies in sectors such as banking and telecommunications? Is it our decades-old reliance on incentivizing industrial R&D through federal and provincial tax credits?
It’s hard to imagine a more important topic affecting all Canadians. So I would encourage you to read this recent opinion piece by David Naylor (president emeritus of the University of Toronto) and Stephen J. Troops (president of the Canadian Institute for Advanced Research).
It’s a balanced piece. Neither of them are arguing for “empty credentialism” or for research that remains in academia. What matters is what we do with the work that our smartest minds are doing. And the overarching point is that innovative research needs to find demand within Canadian businesses.
Right now, we’re very bad at this. That needs to change.
Back in the spring, I wrote about a study that was done by the University of Toronto and the University of California, Berkeley that measured “downtown recoveries” using mobile phone data.
In other words, it looked at where people’s phones were lingering to try and determine if they were back in the office and doing things downtown.
The headline finding was that San Francisco had the lowest recovery quotient (RT) and that Salt Lake City had the highest, alongside cities like San Diego, Baltimore, and Bakersfield.
But why was there such a spread in recoveries?
One possible explanation was commute times. The cities with the lowest average commute times seemed to generally perform better in this study and have higher recovery quotients. But it’s maybe more nuanced than this.
Here is a recent Brookings article by Tracy Hadden Loh that looks at this same study. And to give just one example, she notes that San Diego’s airport happens to fall within the same zip code as its downtown. Meaning, airport traffic would have been picked up as downtown traffic.
The article also includes the above chart, showing the amount of downtown apartments built since 2019. I don’t think I knew that Chicago was so prolific.
Earlier this month, Resonance Consultancy published its 2024 World’s Best Cities ranking. Or, in their words: its definitive power ranking of the 100 global cities that it believes are shaping tomorrow.
These are always fun to flip through, which is I guess why people do them and why people look at them; but I do think it’s important to look at the underlying methodologies. Otherwise, what does “world’s best” even really mean?
In this case, they’re looking at global cities through the lens of three key categories: livability, lovability, and prosperity. More specifically though, the report looks at factors that are demonstrated to have moderate to strong correlations with attracting talent, visitors, and/or businesses.
This makes it distinct from rankings that are more focused on things like livability. Because according to Resonance, factors such as commute times, crime, and housing affordability don’t tend to correlate strongly (at least in the short-term) with a city’s ability to attract talent, tourism, and investment.
While this may seem a bit counterintuitive, it does also make sense. People don’t move to London because they’re looking for affordable housing and a reasonable commute. They move to London because they want to be in the center of the world.
And yes, London tops their power ranking:
The top of this ranking isn’t all that surprising. It’s the usual suspects. But I continue to be impressed by how quickly Dubai has transformed itself into a top global city. Also impressive is how Dublin punches above its weight of just over 500,000 people.
I am medium surprised to see Hong Kong nowhere on this first page (there are another 65 cities not shown here). It usually features as a top global city. But presumably this is the result of Beijing meddling. People are looking elsewhere — like Singapore.
For the full list of cities and to download a copy of the report, click here.
Big news today in development land. The federal government just announced that it has removed sales tax (GST/HST) from new rental housing effective immediately. This is a significant step in the right direction, and something that we have spoken about many times before on the blog.
In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.
What this is saying is that if you build new rental housing, and even if you plan to continue owning it forever, you need to determine the fair market value of the property and then pay HST on that amount. In Ontario, the HST rate is 13%. However, the effective rate was a bit lower because of new rental rebates. Let’s say it was somewhere around 11%.
Now that this no longer needs to be paid, a lot of rental projects that were flirting at the margin should suddenly make economic sense. Which is why I tweeted earlier today that every housing developer in Canada is right now dusting off their “what if we built rental” development pro forma. It didn’t work yesterday, but maybe it does today!
Today is a good day for new rental housing supply in Canada.
Update: This announcement only relates to the federal portion of the HST. The feds are now calling on provinces to follow suit.
Over the weekend, we spoke about using road pricing as a way to correct supply and demand imbalances on city roads and highways. Because it turns out that when roads, or anything else for that matter, are free, people tend to use them a lot more. It’s why when you suddenly submeter utilities in an apartment building, consumption tends to drop off significantly. Now it’s no longer “free”.
It’s for this exact reason that Venice — a city that has been complaining about too many tourists for many years — has decided to implement a new entrance fee. Starting spring 2024, day trippers will have to pay €5 to enter the “old city” of Venice.
If you own a home there, you’re exempt because presumably you’re already paying property taxes. And if you’re staying overnight, you’re also exempt, because presumably you’re going to be paying whatever hotel taxes the city levies. But if you’re just coming in for the day, you’re going to need to pay.
Now, I don’t know if €5, structured in this way, is going to fully address the city’s overtourism concerns. Maybe it needs to be a lot more. But it is a step in the right direction. If you have too much demand for a certain amount of supply, you can generally lower demand by increasing the price. Perhaps the only exception is a Birkin bag. Apparently you can charge any price for these.
One way you could oversimplify the Canadian economy is to say that it revolves around three things: natural resources, real estate, and high immigration. (You can tell me I’m wrong in the comments below.) More recently, we’ve also been touting the growing number of tech workers in our cities. But in some ways this is a bit of a vanity metric.
I think of it in terms of two different categories of workers. There are tech workers that are the result of foreign companies opening satellite offices to take advantage of the weak Canadian dollar and our more enlightened immigration policies. And there are tech workers that are the result of Canadian-based companies innovating, growing, and needing more talent. Think Shopify.
The former situation is not at all bad, but a lot of the value is going to accrue outside of the country. Whereas in the latter situation, we get to be the principal recipients and we get all of the positive externalities associated with innovation and entrepreneurship. One of these is a powerful compounding effect. Successful startups tend to beget even more new companies.
So even though I work in and benefit from one of the three things that I mentioned at the beginning of this post, I believe that we need to be much better at encouraging a culture of innovation and entrepreneurship in Canada. We’ve become too complacent.
This is a critically important topic that we don’t seem to be talking about nearly enough. So I plan to do more of that here on the blog.
Between 2020 and 2021, so right when the pandemic hit, Manhattan alone lost $16 billion of federally-taxable income, according to this recent study by Economic Innovation Group. And San Francisco saw net migration that reduced its federal income tax base by more than $8 billion. At the time, this represented about a 20% decline.
Now, I don’t know to what extent this maybe changed, slowed, or reversed from 2021 to today, but the IRS tax data is pretty clear: the pandemic accelerated a longstanding trend of Americans moving out of older coastal cities toward newer, sunnier, and more sprawling cities in the sun belt and in the Mountain West region.
Here is a map from EIG showing the difference in incomes between households moving in and moving out of each US county. A dark blue county means that the people who moved in were richer than the people who left. (For an interactive version, click through to their website.)
To give two examples. Here is San Francisco County, which lost nearly 20,000 people with average incomes of around $240,000 per year.
And here is Summit County, Utah (home of Parkview Mountain House in the Mountain West region), which saw 81 new tax returns and an average newcomer income of $395,000 per year.
This is an important reminder that people — especially people of means — vote with their feet. If they stop liking a place, they will leave, along with their incomes, to somewhere else. Indeed, in the case of this IRS data, the income flows to these growth regions seem to have been largely driven by upper-income households.
