Late last month, the Ontario government announced a 16-point plan for tackling exploding housing prices in Toronto and other parts of the province. Of those 16 points, there’s one that has been grabbing the majority of the headlines: the Non-Resident Speculation Tax, which, if enacted as currently envisioned, would slap foreign nationals who buy property in the Greater Golden Horseshoe with a 15 per cent surcharge on the purchase price of most types of residential property. The theory is that, by driving foreign speculators out of the market—but only foreign speculators, and nobody else—Ontario can bring about a gentle slowdown in home price appreciation, without catalyzing a sudden price crash.
But the tax, in its current form, wouldn’t be as punitive as it sounds. Permanent residents and students would be exempt, and there would be rebates for foreigners who could later prove that they actually worked full-time in Ontario for at least a year after their purchase. Some believe the tax would be too weak to have any meaningful effect on housing affordability in Toronto; others believe a more assertive tax would spell disaster for Toronto’s housing market.
To get a sense of how the debate over the province’s plan is shaping up, we brought together two people who have very different views on the health of Toronto’s real estate market.
Josh Gordon is an assistant professor of public policy at Simon Fraser University, whose recent research has focused on the Canadian housing market. In a policy paper for Ryerson’s City Building Institute, he argued that housing price increases in Toronto are being driven not by a shortage of housing supply, but rather by scorching-hot demand from buyers who believe prices will continue rising indefinitely.
Mark McLean is a 25-year veteran of the Toronto real estate industry. He’s currently the president of Property.ca, a Toronto real estate brokerage. He was president of the Toronto Real Estate Board until 2016.
Mark, can you describe what went through your mind the day you found out about the non-resident sales tax?
I think it was ill-conceived. It’s really just a policy to quiet down the public’s concern. I’ve talked to developers who said foreign buyers account for less than five per cent of sales, or maybe 10 per cent at the most. The Toronto Real Estate Board did a big survey and said it was five per cent. I was grateful to hear that the tax was designed to stop only investors—people who never intended to put roots in the ground in the city.
Josh, what was your reaction when you saw what the province was proposing?
I was initially pleased, but then I read the fine print and all the exemptions that they had introduced, and I realized that it was a toothless tiger. It will only affect a small fraction of foreign money arriving into the Toronto real estate market. Most money that arrives from overseas does not arrive through non-citizens. It comes through people who have access to money from overseas, but who reside in Canada or have permanent resident status here. If the province had done a 15 per cent tax with no exemptions, then that would have quite an impact. But they chose to riddle it with loopholes. Like, they exempted foreign students, which makes zero sense. There’s no reason to exempt foreign students. They’re simply being used as conduits to get money out of various dodgy situations overseas. I kind of agree with Mark that this tax was politically motivated. They could have had an impact on the market, but they chose to riddle it with so many loopholes.
I agree with that.
Is a powerful market effect really what we want out of this? What if we accidentally screw something up?
If you’re slowing down the number of transactions that happen in Toronto, you’re also making the city’s income from the Municipal Land Transfer Tax that much smaller. If you cut that tax revenue down by five to 10 per cent, that’s a significant impact to the city’s bottom line. Plus, this is a city that’s built on 140 different neighbourhoods, with people from all over the world. Now you’re going out and saying to people, “We don’t want people from your country anymore.” I think that’s a dangerous path to go down.
It’s as if the U.S. housing bubble and crash didn’t happen. We can’t be looking at this situation and just salivating over the revenues that will be earned from land transfer taxes. When you get people who are in a frenzy, who are bidding up prices to insane levels, you are getting a lot of people who are leveraging themselves very highly, and who are very precariously placed should interest rates rise even a fraction. That’s a very dangerous place to put an economy, and that is effectively what we have done.
Second of all, the idea that this has something to do with people arriving into Canada is misleading. What is going on is the following: in Canada, we have low property taxes. We do not enforce money laundering rules; we do not enforce capital gains taxes very well. What that means is that if you want to have a safe investment to plunk your money in, this is a wonderful place to do it. You get all the value lift that taxpayer-funded public investment delivers, and you get that for free. Essentially our system has local taxpayers subsidizing wealthy individuals from abroad. Some people are benefitting from this, with their equity rising. But all other taxpayers are effectively subsidizing that scheme.
The only thing I would disagree with is the idea that people are getting perilously in debt. The federal government’s new guidelines with regards to mortgage qualification really put people through a stress test. If they can’t afford a house at a higher interest rate, they can’t get a mortgage. I just built a house, and I went to refinance it for 30 or 40 per cent of the value. I’ve never gone through more hoops in my entire life to get a mortgage. I think that the banks are wary of over-lending or giving money to people who may not be able to afford it.
A lot of that is premised on house prices rising. There are a lot of people who are alright at the moment. People feel wealthy and they go out and spend, and there are a lot of jobs. But when that reverses and equity goes down, then you have this complicated drawdown, and that’s when you get these de-leveraging situations which are disastrous for economies.
It seems like you two disagree on the extent to which foreign buyers are having an impact on the Toronto property market. We have information from the Toronto Real Estate Board that indicates that foreign buyer activity isn’t that pervasive, but Queen’s Park has just started collecting residency information through the provincial land registry, so we’ll have more accurate numbers soon. Are you expecting any surprises from that data?
It doesn’t matter what the data says. Politicians have made up their minds that the foreign buyer is the enemy here.
The problem is that they’re starting to collect data after they’ve already introduced the tax. The idea that you would collect data on foreign buyers after you’ve started taxing them is pretty ridiculous. You’re not going to get an accurate estimate of what role they’re playing. The real irony here is that they don’t need to collect data. They have all the information they need to figure out what share is foreign money. All they need to do is study income taxes paid—or income reported—in the lead-up to a purchase. The CRA and the Ontario government have that information already. All they need to do is communicate.
I think that they were trying to act very quickly, as sort of a Band-Aid solution to escalating prices, without really digging into the actual facts.
So that’s something we can all agree on.
What I will say is that there is no downside to taxing foreign buyers, because even if it doesn’t cool the market, you get tax revenues. In that sense, you don’t necessarily need rigorous data.
In my mind it’s not really about collecting tax dollars. It’s just about creating a perception that we’re doing something about the market.
I think to the extent that the tax is a substitute for real action, that’s problematic. But at the same time, the psychology of the market is very important right now. In the lead-up to the introduction of the tax, new listings started to jump, because people started to think, “Wait a second, maybe there are going to be some policies that are going to reduce the price of housing, so maybe I should cash out now.” The psychology matters here, and to the extent that they’re sending some kind of a message that they’re not going to allow this to continue, I think that’s a good thing.
Mark, are Queen’s Park’s cooling measures making buyers nervous, at all?
There have been a lot more listings out there, so people are tending to take a little bit more time. If they see something they like, they might think, “There are a lot of listings out there, I think I’ll just wait.” I think there are a lot of great opportunities for people who want to buy now.
I would encourage anyone who reads this not to buy in the present market. I don’t think this is a sustainable market, when you have condo prices rising 30 per cent year over year. Condo supply is elastic. I think that’s a sign that this is a market that is disconnected from fundamentals and is in a bubble trajectory. I would steer clear.
You have a city that’s growing. You’ve got to house new arrivals somewhere. I think all these measures, if they slow the market down, are going to create a lot of strife. And I think that, ultimately, is going to really take a bite out of how people live and breathe in this city.
The Ontario government has said that it will act to increase housing supply, in part by carving out some provincially owned land for development and offering financial breaks to developers of rental housing. Is that going to be enough to counterbalance the cooling effect of the non-resident sales tax?
I think that some of the policies that they’ve introduced in relation to supply work at cross purposes. It’s not clear what the net effect will be. Fundamentally, though, price increases in the Toronto market are primarily a demand-driven phenomenon. In a context where people think that prices can only go up, you will never be able to sufficiently supply demand, because everybody wants to get on board. The idea that you can tackle this on the basis of supply alone is fundamentally mistaken.
Will Ontario’s new, expanded rent controls have a negative effect on the rental market?
The rent controls are hurting. The province has relied on individual investors buying units in condos and renting them out to people. Now, with rent control, investors might say, “You know what? I’m now worried that if my maintenance fees go up, or if I get a special assessment, I’m not going to be able to be able to increase rent to cover my costs.” That in itself is going to, I think, fundamentally hurt the rental market in Toronto.
There are varieties of rent controls. There are different ways of doing it, and some are less damaging than others. I think the way the Ontario government did it is not of the least damaging sort, so that is a problem.
The province is planning to review the rules that govern real estate transactions, to ensure that buyers and sellers are “fairly represented.” Mark, do you think the practices of realtors have had any hand in bringing the market to this point?
I think it’s pretty easy to pin the blame on us, but I don’t see it. Certainly, there are a few people who maybe don’t know the rules, but the reality is that the legislation that governs us is 15 years old. Fifteen years ago, the internet was in its infancy. I hear about agents getting their wrists slapped for bad advertising on the internet. But are realtors actually going out there and making the market higher? I find that hard to believe. At the end of the day, it’s the buyer who’s responsible for choosing a price. I don’t think there’s anyone forcing somebody to sign on the dotted line.
Problematic realtor behaviour, which certainly exists, is a symptom rather than a cause. When you have a market that starts appreciating at the rate that it is in Toronto, there’s a lot of incentive to do questionable things. As Mark was saying, the sanctioning mechanisms at the real estate boards have not kept up, and are not sufficient. There does need to be greater regulation and stricter punishment for various misdeeds, but to pin this on realtors is incorrect. They are simply reacting to an out-of-control market.
I think with so many people still trying to get into the housing market, what I’ve seen is buyers who say, “I’m not going to hire the agent who has my best interests in mind. I’m going to hire the agent who has the house listed, because he’ll make a deal with me, and he can get it for me at a lower price.” Let’s get the data first before we start pointing fingers.
As you know, we’ve been waiting for the data for five years. Ultimately, that’s the responsibility of government, and the blame lies with governments for not having gathered data for years and years when it was quite obvious that this was playing a big role in the market.
Is there anything else you want to add before we finish?
I’m tempted to end on a point of agreement. I think the fundamental framework around real estate in Toronto and Vancouver needs to be rethought. We have made these cities extremely attractive as global assets, especially in an uncertain world. That has its benefits for certain people, but it means that housing becomes extremely unaffordable, and that debt levels rise dramatically as people try to get their own share of it, and you have local taxpayers who are subsidizing windfall profits for people who aren’t paying their fair share of taxes. That fundamental framework needs to be changed, otherwise you will have unaffordable markets in cities like Vancouver and Toronto for a long time.
I see Toronto and the whole Greater Golden Horseshoe as a melting pot of people from all across the globe, who come here for the safety and security that we offer. We need to build more houses to house them, and we need to encourage people to invest in residential rental housing. A detached house five years ago was $700,000, and is now close to $1.5 million. I don’t think that people are overly leveraged in their home purchases, and I would encourage people to get out there and buy more houses while they can.