Toronto’s Housing Market Can Learn From Vancouver’s Experience

Additional taxes can defer, not necessarily solve the problem
March 8, 2017 Updated: March 8, 2017

Recent data show Toronto’s housing market is heading down the same dangerous road Vancouver’s was on. While analysts agree the situation is improving in Vancouver, Toronto faces rapidly worsening affordability.

Increasing the housing supply is the panacea, but it is a longer-term solution. Additional taxation, however unpopular it may be, can constrain a skyrocketing market relatively quickly, as Vancouver’s experience shows.

The latest figures from the Toronto Real Estate Board (TREB) show that the average home selling price is up 27.7 percent since February 2016, while new listings have shrunk 12.5 percent.

The foreign buyer tax is an approximation of the right thing to do.
— Thomas Davidoff, Sauder School of Business, University of British Columbia

Based on historical data from the Teranet-National Bank House Price Index, Vancouver’s market started heating up in mid-2015 with double-digit price growth. It reached 20 percent annual growth, until the 15 percent foreign buyer tax hit in last August.

Like a lagged version of Vancouver, Toronto’s housing market hit double-digit price growth in early 2016 and climbed rapidly to reach 20 percent annual growth in earlier this year.

By the sales metric, Vancouver’s housing market showed consistent strength in early 2015 and heated up further in early 2016. Home sales started to fall a few months before the introduction of the foreign buyer tax. Toronto home sales, which grew robustly in early 2016 and gathered steam in late 2016, now seems to be stalling as Vancouver’s did around March last year.

The latest figures from the Real Estate Board of Greater Vancouver show a 6.5 percent drop over the last six months for the benchmark home price. And home sales are nosediving—down 41.9 percent year over year. New listings are down 36.9 percent to the lowest level since February 2003.

Vancouver’s foreign buyer tax did impact sales and prices, but how much is open to debate. Vancouver’s once-scorching real estate market currently seems to be on a safer track and prices are coming down.

“I do think it [foreign buyer tax] slowed down the market last summer and gave people some breathing room, which was appropriate,” said Thomas Davidoff, a professor at the Sauder School of Business of the University of British Columbia, in a phone interview.

Benjamin Tal, deputy chief economist at CIBC, thinks the foreign buyer tax shouldn’t take all the credit.

“What we have seen in Vancouver is a relatively positive development, although I think that the decline in sales and even prices exaggerate the real impact of the tax,” Tal said in a phone interview.

Vancouver Treatment for Toronto?

“If you’re bringing in a big bag of cash and don’t do anything else, you should probably pay more tax than if you’re living and working someplace—at least on the property,” Davidoff said.

For Davidoff, it’s not about the nationality of who pays the tax, but rather what is being taxed.

For example, he likes Vancouver’s Empty Homes Tax (EHT), which came into effect Jan. 1. It and the foreign buyer tax are consistent with his preference to tax property, not incomes, and with his view that the primary residence shouldn’t attract the additional tax.

The EHT targets vacant homes, which could be a result of foreign money being parked there.

We need to work very hard to encourage the supply of rental properties.
— Benjamin Tal, Deputy Chief Economist, CIBC

It’s hard to say what impact the EHT will have, but Davidoff thinks it could be material, since it is potentially paid every year for a given property, unlike the one-time foreign buyer tax.

“When you have a high tax rate on income and sales and a low tax rate on property, you’re inviting people to come and bring money from outside to buy a property locally. So the foreign buyer tax is an approximation of the right thing to do.

“I think it’s better than nothing, but I don’t think it’s the best,” Davidoff said.

Davidoff cites the U.S. example of mortgage interest and property tax deductibility as giving a preference to those who pay U.S. taxes. Similarly, Vancouver’s foreign buyer tax and EHT essentially give preference to people who live and work in the city.

In a research note last August, Tal called for Toronto to enact an empty homes tax and a “flipping” tax. However, he said he would stop short at calling for a foreign buyer tax in Toronto because of the implications it would have for business and development in the city.

The lack of data on foreign buyers and foreign money is an ongoing issue, but Tal says various estimates put the impact at around 5 percent of the market, which would represent a narrow definition of foreign money.

Tal suggests focusing on where the money is coming from, not necessarily whom it belongs to. Foreign money can come from new immigrants. It can also come from “satellite” situations where part of the family lives in Canada with the breadwinner living abroad.

“If you measure it by these metrics, it makes the number much higher. I would not be surprised if it’s 15 to 20 percent,” Tal said.

Supply Problem

“The solution to strong rates of price growth and related affordability concerns lies not with taxing foreign buyers more, but rather with addressing the supply of homes available for sale, or lack thereof,” said TREB president Larry Cerqua in a March 3 press release.

Even if the additional taxes have some merit, they are only addressing the demand aspect of the problem, which is largely supply-side driven.

“We need to work very hard to encourage the supply of rental properties,” Tal said. “That is part of the solution that is not discussed enough.”

But it will take time for more supply to come on the market and in the interim, Tal expects Toronto’s housing market to move higher.

Capital is expected to keep flowing into “gateway cities” like Toronto and Vancouver. For example, Canada attracted 8,000 of the 82,000 millionaires who relocated in 2016, according to a report by New World Wealth. The 82,000 figure is up from 64,000 in 2015.

“In the near term I just don’t see what is to stop it,” Tal said.

Follow Rahul on Twitter @RV_ETBiz

Follow Rahul on Twitter: @RV_ETBiz