Want to cool the housing market? Raise property taxes

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Two of the biggest economic problems caused by the pandemic could be addressed by increasing property taxes on your home.

Higher property taxes would help settle a housing market that has been torqued beyond all common sense through a combination of low interest rates and demand for better living spaces while isolating from COVID-19.

“If people are paying higher property taxes, they can’t afford to pay as much for mortgages and they won’t buy as big a house,” said Frank Clayton, co-founder and senior research fellow at Ryerson University’s Centre for Urban Research and Land Development. “Some won’t buy a house, but they may buy a condo.”

Higher property taxes would also help the finances of municipal governments, which have faced rising costs in the pandemic and falling revenues from sources such as transit and parking.

The rise of home prices has been a wealth eruption for property owners at a time when governments are struggling financially and facing growing anger about a housing market that is pricing out young families. Now there’s a new element of risk in owning a home – not just higher interest rates and a pullback in real estate prices, but higher taxes of some sort.

The most recent federal budget left the capital-gains tax exemption on principal residences untouched, which is a relief if you own a home that has gone up a lot in price. The big concern now is property taxes, which are based on the assessed value of a property.

Some provinces adjust assessed values annually, others every few years. In Ontario, where home prices have soared in many cities, 2016 values are still being used because an update has been postponed by the pandemic. No matter when the next assessment happens, homeowners should understand that their municipality will sooner or later reflect recent pricing trends in property-tax calculations. Nationally, the average resale price was up almost 42 per cent in April on a year-over-year basis.

For now, relax. Municipalities cannot immediately apply their usual tax rates against newly inflated home values to generate more revenue. “Even if we had a reassessment, the answer for most properties would be that nothing changes. No tax increases,” Mr. Clayton said.

What happens instead is that the municipality will adjust its tax rate lower so that, when applied to higher home values, it produces the same amount of revenue as before. But that’s not the end of the story. When municipal governments set their annual budgets, they can increase the tax rate to provide more money.

There’s nothing new about property taxes rising year to year. Vancouver City Council has approved a 5-per-cent increase for 2021. Sudbury has set the increase at 4 per cent, Ottawa is going for 3 per cent and Saskatoon has gone with 2.8 per cent.

Beyond 2021, there’s potential for still higher increases on a percentage basis. The pandemic has left revenue gaps for cities and financial supports from higher levels of government have limits. Mr. Clayton said municipalities are also taking on new responsibilities for promoting green and social-justice agendas, which could increase their need for tax revenue. He added that some cities are shifting a bit of the tax burden away from businesses to residential property owners.

Actual property tax rates differ a lot from city to city, a point that’s important to bear in mind if you’re moving from a big city like Toronto to a smaller community. The real estate website Zoocasa surveyed 35 Ontario communities and found Toronto had the lowest 2020 rate at 0.6 per cent, compared with rates ranging from 1.3 per cent to 1.8 per cent in Kingston, London, Peterborough and Windsor. Each of these cities has a booming real estate market right now.

Mr. Clayton’s own prescription for property taxes: Keep a level tax rate and apply it against assessed values as they rise over time – or, fall. “I’ve been arguing for years that the effective tax rate should stay the same, just like income taxes and sales taxes,” Mr. Clayton said.

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