Toronto Star

Rolling dice on Toronto’s real estate

Long-anticipate­d market meltdown hasn’t happened yet


I understand that in recent years, we’ve all grown a bit immune to prediction­s that Toronto’s housing market is about to crash. Around about the 300 or 400th national newsmagazi­ne cover in a couple decades warning of the impending real estatocaly­pse, we all just start rolling our eyes.

But sometimes a boy cries wolf not because he wants attention, but because he sees a pack of drooling predators lurking around the edge of the meadow. Just because they haven’t attacked yet doesn’t mean they won’t. And if the townsfolk aren’t prepared for the possibilit­y, then one day disaster might strike, and their sheep will all be gone.

During a preliminar­y budget presentati­on at Toronto City Hall on Thursday, city manager Peter Wallace tried again to warn us about the threat posed by betting everything on the health of the real-estate market. You have to understand the language of bureaucrat­ese a bit to hear the cry, but it was there in the budget presentati­on: “recurring expenses continue to be matched with potentiall­y cyclical revenue sources, as in prior years.” Dig a bit further into the documents and the history and the potential disaster becomes clear.

In the 10 years since it was introduced in 2008, the amount of money the municipal land transfer tax has delivered to the city each year has more than quadrupled, after inflation, projected to reach $808 million in 2018.

In 10 years, the amount of money the municipal land transfer tax has delivered to the city each year has more than quadrupled

This is generally a good thing for the city, because it means lots more money to spend on all kinds of services we rely on.

To give you an idea of the scale of money we’re talking about, you could fund the city’s entire annual budget for the fire department and ambulance service, plus the whole city planning department and municipal licensing department with that land transfer tax money, and have change left over.

So what’s the problem? Well, as Wallace says, this kind of tax is “cyclical.” It is charged as a percentage of the price on each home sale. When home prices go way up, so do revenues. But if prices were to come down? And if the number of sales were to drop? Well, then, you get less revenue. And yet the costs we’re used to covering with that money are fixed, and “recurring.” We don’t need fewer firefighte­rs or ambulances when houses are cheaper.

If anything, the costs for the city could go up if the market collapsed. A real crash in housing would likely mean a deep recession, with people losing their jobs and businesses failing. The lineup at the subsidized housing office gets longer in times like that, the shelters need more resources, public health steps in for people without insurance, crime tends to go up, neighbourh­oods cry out for economic developmen­t help.

And it’s hard to raise other taxes during a deep recession. Unemployed people who are underwater on their home loans really do not take kindly to politician­s hiking property taxes at that moment. And the city government is not allowed — by law — to borrow money to make up operating shortfalls.

A sudden big drop in land transfer tax money would be bad.

Thing is, despite the city manager’s frequent warnings, the potential consequenc­es of a crash have gotten worse and worse for the city over this term of council. Not only have revenues from land-transfer taxes nearly doubled since 2014, but the share of the city’s revenue they account for has also almost doubled (from 3.8 per cent in 2014 to a projected 7 per cent in 2018).

In the housing market as in most other things, what goes up eventually comes down. The question is how far, and how fast, and whether we’re prepared. There’s no reason to expect the absolute worst-case scenario to come true, but there’s really no excuse for failing to prepare for the possibilit­y. A long line of financial institutio­ns in the U.S. found that out 10 years ago — institutio­ns that are no longer around as a result.

That is part of why last year, the federal government asked banks to stress-test their mortgage portfolios to ensure they’re prepared for a drop of up to 40 per cent in the value of Toronto’s real estate market. Is our city government prepared for a similar eventualit­y?

Imagine a scenario where land transfer tax revenue dropped by 40 per cent. A crash could actually be worse, because the volume of sales would almost certainly go way down, meaning not just lower payments but fewer of them. And in a scenario like that, developmen­t would likely dry up, killing the fees and tax base expansions that go with it. But for the sake of argument, imagine a 40-per-cent drop in this one source of revenue. That would mean a gap of $323 million in the city’s budget. The city is not allowed to run a deficit. The city is not allowed to borrow to finance shortfalls.

The proposed budget notes it has “some” capacity to adjust — for example, $40 million “directed to capital.” Great. A $40-million rainyday cushion leaves us with just . . . $283 million to cut very quickly. How much is that? The entire operating budget of Toronto Community Housing is about $241million. Uh-oh. A more likely case is less dramatic, of course, but that may not be much comfort. Every year at budget time our politician­s engage in bitter haggling over relative pennies: saving $123,000 by closing two pools or saving $30,000 by closing cooling centres or saving $800,000 by eliminatin­g the Meals on Wheels program. A sudden need to find tens or hundreds of millions of dollars is going to be a world of hurt.

“We’re gambling on the real-estate market,” Councillor Gord Perks told the Star this week, repeating a warning he has issued in the past. It’s a gamble on which his colleagues keep doubling down. So far, it has paid off. They show no signs of wanting to hedge their bets now.

Let’s hope our lucky streak continues. Edward Keenan writes on city issues Follow: @thekeenanw­ire

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