Despite a slide in residential home prices and sales, Toronto brought in $30-million more than expected from its land-transfer tax in the first three months of the year, thanks to an unexpected boost from the commercial real estate market.
Critics have compared the city’s operating budget to a gamble on the real estate market, as Toronto has relied heavily on ballooning revenues from its land-transfer tax to balance its books every year.
Senior city officials have repeatedly warned that this could backfire in a real estate market crash, forcing the city – which by law cannot borrow to run an operating budget deficit – to slash services or hike property taxes.
But according to a new report from the city’s interim chief financial officer, Joe Farag, Toronto collected $156-million from the tax in the first quarter, $30-million, or 24 per cent, more than the $126-million originally projected.
The report, headed to council’s budget committee on Monday, credits “higher-than-anticipated non-residential market activity” for the boost.
Gary Crawford, the Scarborough councillor who serves as Mayor John Tory’s budget chief, said he also believes the city is still too reliant on the tax – but insists predictions of imminent doom were overstated.
“Everybody said the sky was falling … but we are probably going to be fine,” Mr. Crawford said in an interview.
City officials are still predicting that by year’s end, the tax will bring in the full $817-million they had banked on, the same total it produced last year. As a precautionary measure, the city’s 2018 budget assumed that the land-transfer tax would remain flat, despite the fact it usually brings in tens of millions more than projected each year.
Councillor Gord Perks, a critic of Toronto’s mayor, says the city has for too long used windfall revenue from the real estate market to keep property taxes unrealistically low. He says he is not reassured by the latest numbers, which he suggests may just put off a financial crisis by several months or a year.
“Evidently, we caught a lucky break,” Mr. Perks said in an interview. “But it seems to be a one-time lucky break. The fundamentals are still deeply worrisome.”
The extra tax revenue in the first quarter comes despite headlines about the continuing sag in Toronto’s residential property market. According to the latest numbers from the Canadian Real Estate Association, prices in the Greater Toronto Area were down 5 per cent in April on average compared with the same month last year.
In a report on the city’s long-term financial plans released in March, then-city manager Peter Wallace warned Toronto City Council of the danger of relying on “volatile” land-transfer tax revenue, which he described as a “moderate but growing risk.”
City officials have been watching the tax closely. According to a March 6 e-mail obtained by The Globe and Mail through a freedom-of-information request, Mr. Wallace was told that land-transfer tax revenues were down about 15 per cent in January and February from 2017 numbers. However, city staff said the market typically picks up in May.
In contrast to the city’s cooling residential market, observers say low unemployment and a bustling economy has Toronto’s commercial property market on fire. City officials say the boost to tax revenue came in March from a series of eight non-residential transactions all worth more than $40-million.
Typically, 25 per cent of land-transfer tax revenues come from commercial lands sales, with residential sales making up the rest.
“The industrial markets are just red-hot,” said Stuart Barron, the national director of research for real estate services firm Cushman & Wakefield. “You might say that in the past 35 years, we’ve never seen anything like it.”
The report going to budget committee on Monday also projects the city will see a $10.1-million shortfall over all on its $11-billion operating budget by the end of 2018.
It blames the problem on new spending by the city’s shelter department, which has been dealing with an influx of homeless people and refugee claimants, and added hiring and overtime costs for Toronto police, which has said some of the bills come from recent high-profile investigations.