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business briefing

Briefing highlights

  • Toronto home prices ‘ridiculous’
  • Governments must act: economists
  • Canada Goose shares surge in debut

Debt and taxes

Douglas Porter wants to stress two points.

Point 1: Toronto house prices are “ridiculous.”

Point 2: Being taxed as though you’re rich, when you can’t afford more than a semi in the burbs, is “ridiculous.”

Mr. Porter, Bank of Montreal’s chief economist, was commenting on both the latest housing market numbers and the upcoming federal and Ontario budgets, and how ridiculous it all is.

Or, in his words, how in Ontario “some folks who are subject to the lofty top personal marginal tax rate of 53.53 per cent (and are thus considered ‘rich’) would be unable to climb aboard the Toronto housing ladder.”

To illustrate, Mr. Porter used a fictitious “highly successful young couple” hunting for a first home in Canada’s biggest city, where benchmark home prices are up 24 per cent from a year ago.

His fictitious couple saved 10 per cent of gross income over several years, assembling a down payment of $100,000. One of them is staying home to care for a new baby while the other, the top earner at $225,000, is still working.

“This still places them on the very cusp of the legendary ‘top 1 per cent’ of all income earners in Canada, but of course also puts them on the cusp of paying the very highest personal tax rate of 53.53 per cent on any additional income,” Mr. Porter noted.

You’d think they could get “a decent place” in Toronto. But think again.

“Immediately they realize that any home above $500,000 will require mortgage insurance, because anything above that means that their down payment would be less than 20 per cent,” Mr. Porter said.

“So, they will need to qualify at the posted five-year rate of 4.84 per cent, a key assumption. They also realize that anything above $1-million is immediately off limits, since it wouldn’t qualify for insurance.”

In fact, the now not-so-happy young couple can qualify for something a bit above $987,000.

Of course, the latest numbers put the average price of a detached house in Toronto’s core 416 area code at almost $1.6-million. And in the 905 areas, it still tops $1.1-million. Even a semi in the core now goes for more than $1-million.

At just over $700,000, they could manage a semi in the burbs, though there aren’t a lot of those.

What you’ve got, then, is a couple considered rich by the federal and Ontario governments who “are at best able to afford a semi-detached home on the fringes of Toronto, or maybe a low-end detached home verging on tear-down status,” Mr. Porter said.

“Now just imagine the predicament a more typical couple of more modest means faces in the current market environment.”

BMO estimates that Toronto home prices have soared almost 40 per cent in the past couple of years on an inflation-adjusted basis.

“While that’s not quite as toppy as the late 1980s (a bubble by any definition), it is the highest in any other period since 1980,” Mr. Porter said.

BMO’s chief economist made headlines earlier this month when he declared the Toronto market a “bubble.”

Not everyone agrees, though that’s probably academic.

Toronto-Dominion Bank economist Diana Petramala said it’s not a bubble yet but “we do think that the market has the potential to increasingly approach one.”

Royal Bank of Canada senior economist Nathan Janzen didn’t put a label on it, but warned that RBC is “becoming increasingly concerned about the dynamics in the Toronto (and surrounding areas) housing market that, in our view, argues that some kind of local policy intervention is necessary (and probably urgently).”

And CIBC World Markets deputy chief economist Benjamin Tal declared that Toronto is “fast approaching a full-blown affordability crisis.”

Regardless of what you call it, many agree something needs to be done quickly because the latest federal tax and mortgage measures, while going some way, haven’t gone far enough on their own.

Mr. Porter suggests a Vancouver-style foreign-buyer tax as a place to start because it certainly worked there.

And CIBC’s Mr. Tal suggests scrapping intensification and density goals as a starting point, and boosting rental housing in the longer term.

Given low mortgage rates and the “negligible impact” of the recent mortgage rule changes, TD’s Ms. Petramala projects home prices in Ontario will surge again this year, by 17 per cent.

“Having said that, the longer this lasts, the more risky the market becomes – something that could potentially lead to a harder landing in the future,” she warned.