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.



The num­ber of On­tario real-es­tate transactions in­volv­ing for­eign en­ti­ties has been drop­ping since the tax was in­tro­duced.

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