Foreign-buyers tax not seen as panacea for Toronto’s hot housing market

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A tax on foreign property buyers in Toronto would likely cool the rampant price growth that has hit the market in recent months, but would not be enough to affect longer-term affordability in the city, experts predict.

Economists and real estate experts are divided in their support for a foreign-buyers tax, but many agree it would almost certainly have a short-term impact on prices, even if it turns out that foreign buyers account for a small minority of sales in the Greater Toronto Area. A tax could at least temporarily curb speculation, including among domestic investors, if they foresee slower buyer demand going forward, economists believe.

"I think the idea of those proposing this tax is almost to send a clear signal," said Royal Bank of Canada senior economist Robert Hogue. "It's more about the signalling than the actual tax. In effect it would signal that the government intends to cool the market down."

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Ontario Finance Minister Charles Sousa said Thursday he is looking at a foreign-buyers tax as one of a number of options to control aggressive price growth in the Toronto region, saying he is concerned about the ability of people to enter the market. While he was non-committal, Mr. Sousa's comments have sparked new debate about the possible price impact of a tax.

Bank of Montreal senior economist Robert Kavcic said it is difficult to build a model to predict the impact of a new tax with so little available data about foreign buyers. But he said Vancouver's experience after imposing a 15-per-cent foreign-buyers tax last August, and seeing a resulting drop in home prices since then, provides "a very good case study."

Mr. Kavcic believes market fundamentals in Toronto – including population growth and a low supply of available housing – mean price growth cannot be halted. But he said a foreign buyers' tax would bring growth back to the 8-per-cent to 9-per-cent annual range it was in during the five years before Vancouver's tax took effect in August. Since then, sale prices in Toronto have soared, with detached homes in the Greater Toronto Area up 32 per cent in February over the same month last year.

"If [a tax] works to take out some of the foreign demand and reduce speculation, just through the messaging that price growth is going to be softer, then ideally the price growth curve goes back down to what we were seeing over the last five or six years," Mr. Kavcic said. "You're not going to get a big 10- or 20-per-cent correction and detached homes are suddenly going to be affordable for everybody."

But Royal LePage president Phil Soper warns a foreign-buyers tax, which he opposes, could lead to a far bigger correction and declining values.

Mr. Soper said market forces will eventually lead to a cooling in Toronto, which was already happening in Vancouver before the tax was imposed there. But instead of letting market forces engineer a "soft landing" in Toronto with demand naturally falling as prices move too high, a tax could lead to a "hard landing" and a sharp price correction, he said.

"What I'm concerned about is government intervention trying to manipulate asset values causing a more abrupt change in the value of peoples' homes than would occur normally," he said. "You will not have 20 to 30 per cent price increases continue indefinitely. Probably in 2018, left to its own devices, the market would start to grind to a halt."

Stuart Levings, chief executive officer of mortgage insurer Genworth MI Canada Inc., believes the solution may lie in imposing a foreign-buyers tax that targets higher-end properties – such as those selling for over $1-million – to slow the currently unsustainable pace of price growth.

"We don't believe it would lead to an abrupt correction in property values," Mr. Levings said.

Toronto Mayor John Tory, who reached out to aides of Mr. Sousa on Friday, says he doesn't believe Queen's Park is planning to impose a foreign-buyers tax any time soon. The mayor said all three governments – Mr. Tory also spoke with federal Finance Minister Bill Morneau this week – continue to monitor the housing market and no decisions have been made.

"I think people often think when you are watching something carefully it means you are doing nothing," Mr. Tory told reporters. "What we're trying to do I think is to be sensible, be responsible about this."

Mr. Sousa's remarks Thursday appeared at odds with comments last fall from Premier Kathleen Wynne, who rejected the idea. "We're not going to go down the road that British Columbia has gone down," she said in October.

However, sources say Mr. Sousa was not signalling any new policy direction with his new comments.

His spokeswoman, Jessica Martin, said on Friday that the Finance Minister had only "reiterated what he has said many times – that we are monitoring the housing market closely and are interested in examining the market forces that are affecting home prices."

Both supporters and opponents of a new tax are united in agreement that a tax would not address longer-term concerns about an inadequate supply of available housing in Toronto, which they say requires policy makers to address other factors influencing the market. The Ontario Real Estate Association, for example, wants more "greenbelt" land surrounding Toronto to be zoned for development.

Bank of Montreal chief economist Doug Porter says no one believes a foreign-buyers tax would "cure all ills," but it has the advantage of being able to cool prices quickly and let more first-time buyers "climb on the property ladder."

"As things stand now, even the one-per-centers would struggle to afford a detached home in Toronto at current prices, if they didn't own already," he said.

With a report from Adrian Morrow