Decline in house prices could be bad for Wynne

The Ontario government relies so heavily on Toronto’s roiling housing market for revenue that even a small decline in prices could blow a billiondollar hole in the provincial budget, the legislature’s fiscal watchdog has warned.

It’s a hypothetical scenario from economists at the province’s independent Financial Accountability Office. But it’s not outlandish. Experts everywhere from private-sector banks to Canada Mortgage and Housing Corp. agree Toronto’s bidding wars and condo construction can’t last.

The mad rise in real-estate prices is terrible for young people and locks up a lot of wealth in hard-to-move assets.

But it has created a huge windfall for Premier Kathleen Wynne and Finance Minister Charles Sousa. Pursuing housing affordability is not in their, or any provincial politician’s, immediate political interests.

Home prices in Toronto rose almost 20 per cent in a year, CMHC reported earlier this year, which “outpaced economic and demographic fundamentals. The gap between actual home prices and prices supported by these fundamental drivers has been above its problematic threshold for seven consecutive quarters.”

A long period of overbuilding, especially by condo developers, is easing but, overall, things are worrying.

The provincial government has been creaming money off the Toronto boom by collecting a land-transfer tax on all real-estate sales. In the first decade of the 2000s, that revenue ranged between about $1 billion and $1.5 billion a year; in the last few years, it’s risen to $2.5 billion.

The province also collects sales tax on new homes and on fees attached to buying property such as real-estate agents’ commissions. And it collects taxes on a lot of the things people buy when they move, from new furniture to truck rentals. Plus construction employs people who pay income taxes and supports companies that pay corporate taxes.

If those gushers dry up, that’s bad news.

The FAO’s best forecast is that Toronto’s real estate prices will level off as people come to their senses and eventually the fundamentals will catch up to the nutty prices. Not great for anyone who’s flipping houses for profit or relying on home-equity loans, but not a catastrophe. This is also what the provincial government’s own forecasts expect, too.

But that depends on interest rates staying freakishly low and guesswork about what large numbers of people will do based on incomplete information about what other large numbers of people will do. It’s an expectation, not a certainty.

So the FAO worked up three scenarios. Even in the “low-impact” version, in which real-estate prices fall 10 per cent, the provincial government’s revenues are out by $1.1 billion a year by 2020. In the highimpact version, the gap is $2.2 billion.

“(A) housing market correction could also have an impact on Ontario government spending,” the report says. “For example, a housing market correction which lowers labour income could place increased pressure on social assistance programs. Conversely, the decline in revenues as a result of a housing market correction could force the government to further restrain spending to achieve its fiscal balance targets.”

Then in 2020, real estate gets reassessed for property-tax purposes and the results could affect the portion of property taxes that goes to education. The FAO economists wouldn’t put a number on that.

All of this would be tricky for a government that’s promised a balanced budget, and underlines what a delicate line the government’s walking to get to one.