CORRECT IT IF YOU DARE
“You gotta live somewhere.” That’s what everyone who just bought a house in Toronto says.
Yeah, $ 1,561,780 — the average sale price of a detached home in the Centre of the Universe — is a lot of money. And yeah, maybe it’s not a great investment, and maybe that million- dollar mortgage will never get paid off. But hey, you gotta live somewhere. That mantra has been carrying Toronto’s housing market to superheated levels, with average sale prices soaring last month by 33 per cent year over year. And there’s no sign that Torontonians’ desire to own the roof over their heads has dimmed a whit.
Our policy- makers, however, seem convinced that Toronto’s housing market is a national crisis. Federal Finance Minister Bill Morneau wants a sit-down with his provincial and municipal partners to figure out solutions.
Nothing is off the table. Ontario Finance Minister Charles Sousa thinks the feds should raise the capital gains tax on non- primary- residence transactions. Toronto Mayor John Tory is taking a look at a special municipal tax on unoccupied homes. Both want to discourage “speculators.” Or maybe foreigners: nobody has ruled out a tax on out-of-country real estate buyers, à la the 15- percent levy the B.C. government introduced in Vancouver last August.
Well, good luck with all that.
THE PATH TO LOWER PRICES IS OVERDETERMINED.
It will be tough. The federal government has repeatedly tried to dampen housing demand with macroprudential policies that make it harder to buy a home. At least by the measure of home prices in Toronto and Vancouver, none of those has work worked, prima facie.
But what, exactly, does “worked” mean anyway? Market interventionists rarely if ever set a clear goal for home prices. Maybe that’s because if they were to set a goal, it would be unreachable, undesirable, or both.
Let’s pull out the old back of the envelope. Median family income in Toronto was $ 75,270 in 2014, the latest year for which statistics are available; if we apply a generous three-per-cent annual increase, our T.O. household gets to $ 86,183 in 2017. What does “affordable” mean to them?
If we use the Canadian Real Estate Board’s affordability calculator, assume property taxes of $ 400 a month, heating costs of $100 a month and an interest rate of 2.76 per cent ( currently the posted rate for a fiveyear fixed mortgage at RBC), our family could afford a mortgage of about $515,000. Let’s further assume they’ve cobbled together a whopping $85,000 for a down payment, and our happy wouldbe homeowners could pay $600,000 for new digs.
That’s a l ot, but not enough. Never mind that $1.5-million detached house in the downtown 416: a semi there goes for almost $1.1 million, a townhouse for $ 760,000, on average. If our family expands their search to the entire Greater Toronto Area, the average price of a home is still $916,567. That’s 53 per cent more they can afford.
So if, in the best of all worlds, Joe Median could afford an average home in Toronto, prices would have to decline by 50 per cent. Would any politician want to take credit for that?
And would it be achievable anyway? It has happened before, in the early 1990s, but not because of policy tinkering: overheated Toronto home prices back then ran face- first into a recession.
Policy just can’t be that effective, or destructive. Some might point to Vancouver and falling prices after B.C. introduced its tax on foreign buyers. But the path to lower prices is over- determined. The cooling could have happened because of China’s new capital controls. Or maybe it’s Vancouver’s crazy winter. ( They got one.)
And does it matter? House prices last month were pretty much where they were a year earlier anyway.
Ever y one agrees t he underlying “problem” is that demand is outstripping supply. True, one way to address that is to try to curb demand. But demand has proven pretty resilient to intervention. And the other side of the equation — supply — is declining, too: active listings in Toronto fell more than 30 per cent last month.
The real, but difficult, answer is that this isn’t a “problem” at all. Eventually, rising demand and falling supply will work themselves out. On the demand side, people who would otherwise move into Toronto or Vancouver will choose not to because prices are too high. On the supply side, sellers will eventually have to lower their prices. Or many of them (the boomers) will die over the next 20 years anyway. Or we’ll have another recession, replacing the “problem” with another, bigger one.
For now, people aren’t selling, whatever the price. And any policy moves designed to curb demand might make the situation worse by curbing supply.
For i nstance, hi ki ng taxes ( as Toronto recently did, when it harmonized its duplicative property transfer tax with the province’s) can encourage homeowners not to sell. Houses aren’t like cigarettes — you can’t “quit” needing a roof over your head. If you sell one home, you usually have to buy another. (Or rent one, which in Toronto is worse — believe me.) What good is selling your house at an inflated price when you’ll just have to buy another at an inflated price, and then pay a threeper-cent-plus transfer tax on top of all that?
In the end, the “problem” for policymakers is that the buyer’s and the seller’s mantra is the same: You gotta live somewhere. Until that changes, don’t expect policymakers’ hand- wringing, however well intentioned, to amount to very much.