A Trojan House of tax policies

Looks like the Ryerson City Building Institute in Toronto ran out of local leftist economic talent when it was looking for someone to write a research paper to endorse dubious policies to curb the big increases in the city’s housing prices. So it brought in a veteran of the ideological housing wars in Vancouver to deliver the hard policy recommendation: What Toronto needs is a tax on foreign buyers.

The veteran is Josh Gordon, assistant professor at Simon Fraser University. With a claque of fellow travellers from Vancouver, Gordon championed the 15-per-cent foreign buyers tax brought in last year by the B.C. government. The proximate result has been a slowdown in Vancouver house sales and a slight downtick in prices. Vancouver’s average sale price for detached homes is down seven per cent since last July, while prices for townhomes and condos remain flat.

So what would a similar tax on foreign buyers do to make Toronto house prices more affordable? Nothing, judging by the Vancouver experience. Vancouver sales are down, scared off by all the politics, but prices aren’t even down where they were this time last year. The benchmark prices for all forms of housing are still 15- to 20-per-cent higher than 12 months ago. The $1.5-million detached home purchased a year ago is still worth $1.5-million today, and a $350,000 condo in New Westminster is still up 20 per cent from a year ago.

Gordon’s Ryerson paper, as with his work on Vancouver’s housing market, claims that the cause of Toronto’s housing-price balloon is rich foreign buyers. No evidence is presented to support this idea, mainly because there is no evidence — no data, no study, no facts beyond some news stories and references to surveys. Instead, the paper is devoted to disproving the argument put forward by some Toronto housing experts that one of the main reasons housing prices are soaring is a lack of supply to meet demand.

The lack of supply argument doesn’t stand up, says Gordon. “Supply-related dynamics simply cannot come close to generating the kinds of prices Toronto is currently experiencing.” Toronto’s Greenbelt ring, zoning laws and reluctant sellers are not behind the price surge, Gordon says. To prove that point, he produced some graphs and charts derived from complicated economic modelling and regressions that look like interesting economic noodling but are far from convincing.

Gordon may well be right about supply. Not that it matters, because the objective appears to be less about understanding the housing market and more about triggering a rash of government interventions to control demand. The tax on foreign buyers is just one idea packed into a Trojan House of tax policies. Even Gordon concedes that, in view of the failure of the foreign tax to trigger real price change in Vancouver, “there is a good chance that affordability cannot be achieved based on a foreign buyer tax alone.

Now we get down to the real objective, which is to impose controls, taxes and other policies on the Toronto and Vancouver housing markets. Gordon and his academic confederates in Vancouver — business professor Thomas Davidoff at UBC, economist J. Rhys Kesselman at SFU, geographer David Ley at UBC — have jointly and severally been promoting various interventions.

As Gordon says, the 15-per-cent foreign buyers tax won’t have much impact, so “a second policy option might be considered.” Designed by Kesselman, the second idea is to impose a retroactive annual progressive property surtax on all existing foreign owners who do not have Canadian income.

The tax would start at one per cent and rise to two or three per cent on the value of houses worth more than a couple million dollars.

On a $2-million property, the annual tax would be $14,000. Davidoff’s proposal is for a 1.5-per-cent tax on “owners with limited economic and social ties to Canada.” The money collected would go into a housing-affordability fund and be distributed to local homebuyers.

If that plan doesn’t appeal, how about Ley’s proposal for a Canadian version of a stamp tax? That’s a property-transfer tax that would apply to the entire market, with the tax imposed on an escalating scale up to maybe 15 per cent for the most expensive properties. The beauty of this plan, says Ley, is that it “taxes by class of buyer rather than by national origin.” That’s an improvement?

In his Toronto paper, Gordon hauls out an Angus Reid poll that he says shows that “a foreign-buyer tax is also supported by around 77 per cent of Torontonians.”

As my colleague Andrew Coyne wrote the other day, people who use polls to support a policy are promoting the low art of “perception-based decision-making” rather than solid analysis.

In this case, the poll is a bit tricky. The results show only 34 per cent of Torontonians believe foreign buyers are the cause of rising house prices, while 56 per cent say prices are rising because people want to live there, and 44 per cent blame low interest rates. As an aside, the poll found that 42 per cent of residents felt a foreign-buyer tax would be “really excellent news for me” or “good news for me,” while another 46 per cent said it would be neither good nor bad. What a surprise that a majority of people are willing to support a tax that they either think will personally benefit them or won’t hurt them.

Missing in action here are the Bank of Canada and the chartered banks. Bank mortgage lending hit $1.4 trillion in 2016. Current five-year mortgages, variable and fixed, can be had for less than three per cent. The banks, abdicating responsibility, support a foreign-buyer tax. The Bank of Canada, the origin of dirt-cheap mortgage rates, has washed its hands of the housing-price boom. “Other policies are needed,” the bank has said. When the boom goes bust, they will deny all responsibility.