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A home for sale in Toronto, May 11 2017.Fred Lum/The Globe and Mail

The Ontario government moved ahead with a foreign-buyers tax after earning the approval of Canada's top bank economists in private meetings that officials say were critical to shaping a new housing policy.

The advice received at the closed-door meetings between Ontario Finance Minister Charles Sousa and economists representing Canada's major banks and other industry stakeholders shifted in the six months before the April announcement, according to government and industry insiders who spoke with The Globe and Mail. The gathered panel moved from near unanimous opposition to a tax on foreign buyers in the Greater Toronto Area to virtually universal support.

Premier Kathleen Wynne and Mr. Sousa told government officials that they needed the approval of the major banks to pursue the tax, according to senior officials, who asked not to be identified because they are not cleared to speak with reporters.

Read more: Realtors see buyers pull back in Toronto market

Mr. Sousa sat down with the economists in confidential conferences in early October, 2016, and late March, 2017. Along with the banks were economists representing private think tanks such as the Conference Board. He also held a number of meetings with developers and members of the real estate industry during the six-month span. The get-togethers coincided with a near-record increase in real estate prices and a heated public debate on housing affordability.

Between October and the following spring, real estate sprang to the top of the political agenda in Ontario. As officials debated what to do, prices in Toronto's housing market continued a rapid upsurge that started in March, 2016, and showed no signs of abating. In neighbourhoods throughout the city, prospective homeowners were getting into bidding wars that sent prices ever higher and tenants were reporting unusually harsh rent increases.

In early October, Mr. Sousa assembled private-sector economists to discuss a budget update he would deliver during the third week of November. At the top of his mind was the near-record prices of homes from Niagara to Peterborough, a region centred on Toronto and known as the Greater Golden Horseshoe. Only three months earlier, British Columbia had levied a tax on foreign buyers in Vancouver and Mr. Sousa was weighing whether to follow B.C.'s lead.

The advice that day was muddled when it came to why prices were so high, but it was nearly unanimous when it came to a foreign-buyers tax: Don't do it.

"None of them, not a one, said we should follow suit. They were all concerned about the consequences and noted that the Vancouver market was tapering down as the tax came in," Mr. Sousa told the Globe and Mail. "Then those economists who said, 'Don't do this, don't do this,' all of a sudden they were telling us to do it. They suddenly changed their tune."

Within six months, a nearly identical group of private-sector economists reversed itself and supported a tax. That change of opinion was considered essential by Ms. Wynne to go ahead with the foreign-buyers tax, dubbed the Non-Resident Speculation Tax.

The tax became the centrepiece of a plan in response to the province's red-hot housing market that was released on April 20. Along with the tax, the government's strategy included 16 measures meant to increase the supply of homes, reduce demand and strengthen ethics in a real estate industry struggling with questionable sales practices.

The last measure added to the 16-point plan before its release was the foreign-buyers tax, several officials confirmed.

"We were going to have a plan, but there was just a question of whether the tax was going to be part of it. For months we had this space left empty at the top of the plan that said either 'Yes or no' to a tax," said a senior government official.

While the foreign-buyers tax came last, one of the most controversial planks of the government's strategy came first: re-establishing full rent control.

Ending a rule that allowed rentals built after 1991 to be exempt from rent control first came up among senior officials in the summer of 2016 and worked its way through the province's finance and housing ministries by the end of that year. The measure was adopted by cabinet in February.

Beyond rent control, the Finance Minister's biggest concern in late 2016 was whether speculation was tipping the market into the red-hot growth it was experiencing. He was concerned that speculators were crowding out families.

While economists, both in the private sector and government, were split on their verdict about speculation, views started to change in March when the Toronto Real Estate Board reported that prices had soared by 27.7 per cent the previous month compared with the last year. The increase was even higher the following month. The data, showing skyrocketing prices, marked "a turning point" for the government another senior official said.

In early April, Bank of Canada Governor Stephen Poloz said the increases were being driven by something more than typical home buyers, suggesting that speculators were at play in the market. Mr. Sousa's public statements about speculators grew louder and he soon began calling them property scalpers.

Only three weeks before the government's housing plan was unveiled in April, Mr. Sousa got the endorsement from a room of bank economists to go forward with a tax on foreign buyers. TD Bank chief economist Beata Caranci wrote a report on March 20 that several officials said was effective at swaying opinions around that table. Ms. Caranci was not at the subsequent meeting.

"We were getting the data and it was like a Rubik's Cube, all the sides were lining up. That's when we realized that we had something more material at hand," she told The Globe of the price increase in Toronto. "There was exuberance building that was divorced from fundamentals. I don't know who on the street would forecast 30-per-cent growth."

The position adopted in support of a foreign-buyers tax echoed one long maintained by Bank of Montreal chief economist Douglas Porter who had called on the government to slow the market and not slam on the brakes.

"The wait was a little long, but better late than never," he told The Globe. Mr. Porter was at the October meeting, but he sent a lieutenant to the March gathering. "I suspect many economists realized that something needed to be done."

With foreign buyers making up a small part of the Toronto market, estimated at between 3 per cent and 8 per cent of sales, the tax's impact is expected to be more psychological than direct, he added. The tax is expected to communicate that the government is concerned enough about the market to take action when needed.

The tax lined up with Ms. Wynne and Mr. Sousa's thinking on the housing market and worry that more drastic action could cause house values to plummet. "We knew that if we pulled on one thread it would pull something else. The Premier was adamant, she didn't want us to burst a bubble, only to bend the curve on prices," another senior official told The Globe.

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