Toronto Star

Did tax close the deal?

Industry takes stock of foreign-buyer regulation­s’ effect


Government numbers earlier this week showed that the province’s foreign-buyer’s tax on real estate has curbed offshore investment and hosed down a feverish Toronto-region housing market.

But a year after its launch last April, industry observers remain unconvince­d that Ontario’s 15-per-cent non-resident speculatio­n tax had the right target in its crosshairs, and homebuyers and sellers — caught mid-transactio­n by the ensuing plunge in home values — say the government hasn’t even acknowledg­ed the casualties caused by its manipulati­on of the market.

If anything, the data attached to the tax collection has reinforced research that showed the typical Toronto condo investor isn’t a high roller from overseas. They are more likely middle-aged immigrants buying a second property as a retirement investment or home for their children. Many of them lose money on renting out their units. A study released earlier this month by consulting group Urbanation and CIBC found that only 10 per cent of Toronto condobuyer­s were from overseas.

Toronto broker John Pasalis, who was among the first to identify speculatio­n and investment as a key driver in the soaring 2016 and early-2017 market, approves of the ensuing cool-down. He even thinks the real-estate industry has downplayed the impact of foreign investment.

Seven-per-cent foreign buyer participat­ion — the level in York Region last year, according to the province — is “quite big enough to tip a housing market out of balance,” Pasalis said. But it was domestic investment that played a significan­t role in driving up prices to a peak in March with a more-than-30per-cent year-over-year increase.

In the year since the tax was introduced as the centrepiec­e of Ontario’s Fair Housing Policy, it has raised $40 million and reduced the number of offshore property transactio­ns in the Greater Golden Horseshoe to 1.6 per cent in February, down from 4.7 per cent last May, according to the Liberal gov- ernment’s release Wednesday.

It showed nearly half of the nonresiden­t speculatio­n tax collected in Ontario — $18.9 million — between Nov. 18 and Feb. 16 was in the city of Toronto. York Region accounted for another $13.1 million. Less than 1 per cent was collected outside the Toronto area.

The foreign buyers’ tax was one of 16 measures by the Liberal government aimed at slowing increasing­ly unaffordab­le housing in the region.

“Our data continues to indicate that our measures have helped to calm the housing market,” said Ontario Finance Minister Charles Sousa in a statement Wednesday.

“People are finding more affordable alternativ­es as housing supply has increased, and rent control measures are helping to ensure rental prices remain predictabl­e for tenants.”

But even the expansion of rent controls to newer buildings, which has been welcomed by tenant groups, hasn’t made finding an affordable rental easier, said Mary Todorow, research/policy analyst with the Advocacy Centre for Tenants Ontario.

“It’s great that exemption is gone so people don’t have to worry, shake in their boots when the annual rent increase is taken,” she said.

But it doesn’t solve the affordabil­ity crisis, particular­ly in Toronto where half the renters in Ontario live, Todorow said. Tenants make less than half the median income of homeowners in the province and the dearth of vacanciesm­eans rents continue to climb.

Until the government expanded restrictio­ns on landlord increases last April to include rentals built after 1991, 240,000 households weren’t covered by rent controls and the number was increasing all the time, she said. That’s because condos have picked up where purposebui­lt rental developmen­t has left off, and if you look at all the condos built since 1991 that’s a significan­t number.

The foreign buyers’ tax has an indirect effect on a relatively small group of buyers, but the psychologi­cal impacts of its introducti­on have been profound and have lingered.

Toronto area home sales were down 40 per cent year over year compared with an extraordin­ary March 2017. The average price was 14 per cent or about $130,000 lower compared to last year, according to the Toronto Real Estate Board. There have been some month-overmonth improvemen­ts this year, however, suggesting to some analysts that the region has experience­d a correction rather than a trough. Homebuyer Shahina Khan says the tax was ill-considered and implemente­d without sufficient research. If the government knew how many people would be trapped in midtransac­tion by falling home values, those buyers and sellers were written off as collateral damage, she said.

The downturn in the market has been compounded by new mortgage stress tests for buyers like Khan and her husband, who bought a pre-constructi­on home in February 2017, just before the market dropped.

They got less than they were expecting from the sale of their previous house and are now living in a basement apartment struggling to finance the closing of their new house, delayed six weeks to September. The Khans are among a group of more than 100 desperate buyers featured in the Toronto Star earlier this month, that call themselves Community for Fairness. If they don’t find the money to close on their new houses, the buyers say they will have to forfeit hundreds of thousands of dollars in deposits and face a potential legal suit from their builder, Mattamy Homes, which is refusing to extend closing dates or reduce prices.

Khan says they have emailed a spectrum of politician­s and met with some opposition MPs but have received no response from the Liberal government.

The problem isn’t confined to new-constructi­on homebuyers, she added.

A study by Pasalis shows at least 1,000 Ontario re-sale home transactio­ns failed to close in the aftermath of the policy, costing those sellers a collective $136 million in losses in about five months when they had to put their homes back on the market and settle for a lower price.

Pasalis believes the losses were probably much greater, including sellers who agreed to a lower price to close their initial sale and move on to their next home.

Pasalis says there’s a generation of homebuyer s who haven’t experience­d a sustained market downturn. While he’s somewhat sympatheti­c to those caught in the recently fallen housing market, older home buyers would probably never have considered buying a new home before selling their old one.

And, he says, “had (the government) not done anything, it probably would have been way worse if prices kept going up another six months.”

Shaun Hildebrand, senior vice-president of Urbanation, said the foreign buyers’ tax has had little to no impact on demand in the Toronto condo market. “It’s viewed as a minor cost to most overseas purchasers,” he said.

“In most cases, they’re coming from much more expensive markets, and in some cases are just trying to get money out of the country to a safe haven,” he said, adding that China’s stepped-up restrictio­ns on the outflow of capital has probably had a bigger impact. Pre-constructi­on buyers aren’t captured in the government statistics until their unit’s constructi­on is complete.

“Ultimately, 15 per cent is viewed as insignific­ant to a foreign buyer motivated to move their money here.” SHAUN HILDEBRAND

“Five years is a good hedge for a foreign buyer to see the unit appreciate in value to offset the tax and also provides time to figure out a way to avoid paying the tax,” Hildebrand said. There are also rebates for foreign buyers who have children attending school here, as well as those who will become citizens.

“Ultimately, 15 per cent is viewed as insignific­ant to a foreign buyer motivated to move their money here,” he said. “Many pay all cash.”

Government data suggests that it’s foreign re-sale homebuyers who have stepped away from the Toronto-area market, Hildebrand said.

Any new tax or policy is going to cause uncertaint­y in the market, he said. The Ontario non-resident speculatio­n tax is no different.

That explains the slowdown in high-end property sales: Discretion­ary buyers can often afford to wait for the market to stabilize.

“It reflects a change in buyer psychology and lender risk appetite for large loans rather than underlying demand,” he said. “The core of the market — homes priced at or below the market average, has remained pretty steady. Which is one of the key reasons why the condo market has outperform­ed.”

Real estate professor James McKellar of the Schulich School of Business at York University, says there’s an element of coincidenc­e in the tax’s launch and the softening of the real estate market.

“The market was waiting for someone to step in and do something,” he said.

But make no mistake, the Toronto area’s housing affordabil­ity challenges are here to stay based on land values alone, he said.


 ?? SEAN KILPATRICK/THE CANADIAN PRESS FILE PHOTO ?? The number of Ontario real-estate transactio­ns involving foreign entities has been dropping since the tax was introduced.
SEAN KILPATRICK/THE CANADIAN PRESS FILE PHOTO The number of Ontario real-estate transactio­ns involving foreign entities has been dropping since the tax was introduced.

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