The municipal government’s governing the Greater Toronto Area may be forced to implement a 15% foreign buyer’s sales tax, explains CIBC Deputy Chief Economist Benjamin Tal, but it won’t solve the main barrier to the city’s affordable housing problem.
“I’m not predicting there will be a tax, nor am I suggesting there should be,” said Tal during a recent interview. Yet, the impact of the recent Vancouver foreign buyer’s tax has been dramatic enough to prompt a few outspoken politicians and policymakers to suggest that a Toronto foreign buyer’s tax may be an obvious step to cooling Ontario’s hottest market.
Tal’s comments come after a busy week where media stories were dominated with further problems in the way foreign buyers are able to obtain Canadian mortgage and shortly after data was released regarding the impact of Vancouver’s foreign buyer tax.
According to a report released by the B.C. Ministry of Finance, there was both a big rush to close deals before the new foreign buyers’ tax took effect on Aug. 2, 2016 and a dramatic drop in sales after the introduction of this tax. The data shows that real estate purchases involving foreign money in Metro Vancouver fell to just 60 sales between August 2 and August 31, down 97% from the 1,974 sales involving foreign investment between June 10 to August 1.
Adding to the din was former Finance Minister Joe Oliver, who penned a column for the Financial Post yesterday imploring policymakers to implement a similar foreign buyers’ tax in the GTA that was recently passed in Vancouver.
Foreign buyers aren’t the only problem
But Tal is a bit worried. “Clearly foreign investment is influencing our real estate markets and housing prices,” he says. “At the same time it’s not the number one issue.”
According to Tal, a lack of land supply is the biggest problem facing Toronto and Vancouver. “The price of land is rising and this is particularly impacting the low-rise, or single residential market.”
Since Vancouver is essentially an island, there is no clear solution as to how to address the lack of land supply, other than to increase density. This limits the number of single-family homes, which creates an increased demand for buyers to get into this type of housing, before interest rates go up.
In Toronto, planning initiatives from decades ago—created to protect the area’s green-belt—are now restricting where housing can be built. “This is the main reason for increased housing prices,” says Tal. And this, combined with low interest rates, prompts more buyers to overcome this lack of supply by bidding up current single-family dwellings. “People are basically blinded by low interest rates and taking on extra large mortgages and this could have long-lasting implications.”
Can’t solve a supply problem with a demand solution
Tal’s concern is that the supply problem isn’t being addressed. “We’re in a situation where the main issue—lack of land—is a supply problem and yet we’re trying to tackle that problem with a demand tool,” including taxes and regulations. As a result, there has been little change in the two hottest markets in Canada. Tal explains that if supply weren’t an issue than prices for condos and other strata or shared dwellings would’ve kept pace with single family dwellings. This hasn’t been the case. According to a January 26, 2016 Globe and Mail article, the price gap between condos and houses soared past the 50% mark in 2015 in the Greater Toronto Area. “Value of single-family homes skyrocketed, while the condo market flatlined.” According to sales figures from commercial real estate firm, Altus Group, the sales of single-family homes jumped 8% in 2015, while sales of condos fell 2%.
That’s not to say Tal is against a foreign buyers’ tax being introduced in Toronto or other cities that may be impacted by foreign buyer money. “The impact is absolutely happening,” says Tal, “but how big that influence remains to be seen.”