Taxes could cool the GTA housing market

Canada’s hot housing market, nowhere better exemplified than in the Greater Toronto Area, has caused much hand-wringing.

Read: Toronto homes prove too pricey for top 1%

“There are legitimate worries about how long this can be sustained,” says senior economist at TD Bank James Marple, in an economics report. “The farther prices and sales appear to move away from fundamentals, the more pronounced the risk of a correction. […] The vulnerability to housing correction is the main source of downside risk to the Canadian economy.”

Scotiabank suggests, in a report, that any polices addressing soaring prices must address these underlying issues:

• Supply isn’t keeping up with demand, despite the strength of housing starts in the GTA.
• Listings of existing homes are extremely low, due to factors such as the Toronto land transfer tax, the difficulty of finding another home to move to, and an aging population, which tends to stay put.
• House prices reflect a degree of speculation. That’s because, based on the historical relationship between the sales-to-new listings ratio and price appreciation, current market conditions are more consistent with price appreciation in the 15% year-over-year range, roughly 10 percentage points lower than current readings.

Increasing supply could involve zoning amendments, increased density allowances, a streamlined development approval process and incentives to encourage more rental unit construction. However, these measures would take time.

More timely would be tackling speculation, suggests Scotiabank, including the strict enforcement of a capital gains tax if the home isn’t a principal residence.

The report also suggests introducing a tax on sellers who flip a property within a certain time frame. Revenue from such a tax at the provincial level could be applied to reduce other taxes or be redirected to increase housing stock.

Ontario Finance Minister Charles Sousa also supports more punitive tax measures. He is urging Ottawa to change how capital gains from flipping are taxed.

In a letter to federal Finance Minister Bill Morneau on Friday, Sousa says that boosting the taxable amount above 50% could reduce the incentive for people to purchase homes on speculation. Morneau is set to release his latest budget on Wednesday.

Sousa says curbing speculative real estate purchases could help address dwindling housing affordability. Such a measure could also generate tax revenue to put towards other housing affordability initiatives, he adds.

“My primary focus is to address the concerns of middle class Canadians who are worried about buying their first home,” the letter reads. “Additionally, it is important that the housing market remains stable, meaning that borrowers and lenders are resilient and able to withstand economic shocks.”

Policy results in Vancouver

The Scotiabank report doesn’t recommend a foreign buyer’s tax for Toronto, considering foreign buyers represent fewer buyers in Toronto than in Vancouver (5% versus 10%, anecdotally, says the report). Further, it’s not clear Vancouver’s market will experience sustained cooling from the tax. Though foreign purchases fell sharply following the implementation of the tax, those purchases are now edging back up.

Read: Foreign buyer tax wouldn’t work, says Toronto real estate board

In fact, home prices seem to be picking up steam in Vancouver again, what with gains in the home price index month-over-month in January and February (using Teranet-National Bank HPI data).

Further, demand may be boosted by the B.C. government’s interest-free loan program for first-time homebuyers and the enhancement of the first-time homebuyers’ property transfer tax exemption.

Cooling in Vancouver’s housing market is mostly because of ongoing erosion of affordability and other policy tightening measures, suggests the Scotiabank report.

These include a 3% luxury tax on home sales greater than $2 million, significant new investments in affordable housing, a ban on shadow flipping of properties, cash incentives to municipalities to speed up development approvals and a law allowing municipalities to tax vacant homes.

“It is premature in our view to argue that the foreign buyers’ tax has led to a sustained cooling of the Vancouver housing market,” says the report, compared to measures to more broadly slow speculation among both domestic and foreign buyers.

Read the full report.

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