Canada's Condominium Magazine

Supply or demand problem? Foreign buyers tax or not? No unanimity in Toronto's housing price debate

After years of rapidly rising Toronto home prices and endless debates among real estate and building industry stakeholders about the causes thereof, the mayor has asked for a report on the subject and plans to call together a panel of experts for advice about what to do. One possible action could be to impose a foreign buyers tax in Toronto, as was done in Vancouver last summer. The purpose of such a tax would be to dampen demand for housing, and thus ease upward pressure on prices. To impose such a tax, he would need the approval of the province. The mayor’s comment that there has not been “any kind of unanimity” on what the city might do is, perhaps, evidence of the mayor’s droll sense of humour.

The provincial minister of finance, for his part, raised the possibility of the tax just days ago. However, since no data have been collected to quantify how many foreign buyers are active in the Toronto market, the use of such a tax at this point seems unlikely. In Vancouver, on the other hand, since the tax was imposed there are reports that sales of detached houses dropped by 54 per cent from a year earlier, suggesting a high level of foreign activity in that market.

Foreign buyer activity in Vancouver, June–November 2016. Source: In High Demand

That excessive demand is in fact the cause of the rapid price growth in Toronto is by no means a unanimous opinion either. Many, especially those on the supply side, the builders, lay the blame for Toronto’s shortage of housing at the feet of government policy that, they say, restricts the use of land for low-density housing. The homebuilders have frequently called for higher-level policy changes to make it easier for them to build what they say many people still want: single detached homes on large lots. They argue that red tape and outdated zoning, along with restrictive land-use regulations, stifle their ability to provide this type of housing.

Now there’s a new report from Ryerson University’s School of Public Policy that argues for a foreign buyers tax in Toronto, on the ground that the high cost of housing is not a problem of supply but of demand. Its author, Josh Gordon, argues that low interest rates, leniently enforced mortgage regulations, demographic shifts, and foreign investment, including multiple property ownership by both domestic and foreign investors, are the main factors behind the rising prices.

Gordon dismisses the notion that shortfalls in supply are responsible for rising prices. “There is no compelling evidence that insufficient housing is being built relative to demographic needs,” he writes. A slowdown in low-rise home construction has been more than compensated for by higher construction of condominiums or apartments. As cities grow, it is common for residential construction to shift from low to high density, as people become more willing to live downtown and avoid long commutes from the suburbs, Gordon says. Claims that we are “bumping up against the Greenbelt”  have been shown to be false. Provincial policy influences where and how the region grows, but it does not stop the growth.

In fact, according to Gordon, growth has slowed “dramatically” in Toronto, dropping from an expansion rate of 26 per cent in the 1990s to just 4 per cent between 2011 and 2016. Yet construction of new housing has kept pace with demographic demand and there is little evidence that construction is not keeping up with demand. There remain 45,000 hectares of land to be developed in the area covered by the Greenbelt plan, he says.

This paper shows that the primary determinants of Toronto’s high housing prices are on the demand side, and that the element of foreign investment has been under-appreciated by various public authorities to this point. The case for supply-side reform is overstated and would not address the immediate challenges facing the city.

But why argue for a foreign buyers’ tax in Toronto when we don’t know how many foreign buyers there are? What has happened, he says, is that “powerful expectational dynamics” have been set in motion, the notion that prices will continue to rise and that foreign capital will continue to arrive. In short, there is a speculative mindset at play which encourages domestic buyers to jump into the market even at very high prices. Foreign demand, however much of it there is, has thus “fostered” domestic speculative demand, which has created “scorching” demand conditions.

Gordon says that there has been a “large and continuous flow” of foreign capital into Toronto’s housing market, based on wealth-based migration. Admitting that the data are not there, he relies instead on general information and Vancouver’s experience—$1 trillion left China in 2016 and “flooded” into property markets, including Toronto. About $10 billion of that went to Vancouver, but he has no firm number for Toronto.

Still, based on what happened in Vancouver after the tax took effect—the market “has gone cold” in the detached segment, especially in areas where foreign buyers were most active and prices have started to fall—Toronto should follow suit. Not only did the tax deter foreign buyers, it also calmed demand among local buyers who were afraid of missing out and “scared off” speculative demand. The evidence, he says, could not be clearer, that such a cooling would be helpful in Toronto as well.

Source: Teranet National Bank

The need for cooling can be seen in the latest Teranet–National Bank House Price Index, which rose 1 per cent in February compared to January, the largest February increase in eighteen years. For the year, the index is up 13.4 per cent, led by Toronto, where prices rose 23 per cent year over year.

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