Having a hard time finding a house to buy in Toronto? The city's Land Transfer Tax (LTT) is part of the reason. The LTT has made Toronto's tight real estate market tighter, driving a wedge between the price you can afford to pay and the minimum price a seller is willing to accept.
Worse, an LTT may spread to other cities in the province. Mississauga's budget committee recently passed a motion requesting that the province amend the Municipal Act to give municipalities other than Toronto the authority to levy LTTs of their own. Although Mississauga's council decided to defer the motion, the debate on the LTT is very much alive.
Why is the LTT making it harder for you to find the right home? Say that you found the perfect house that you had been looking for. Before the Toronto LTT appeared, if the price you were willing and able to pay – with the existing provincial LTT and other closing costs on top of that – was a price the seller was willing to accept, then the house was probably yours.
But after the introduction of the Toronto LTT, that house is now out of your price range.
The Toronto LTT is a significant portion of homeowners' moving expenses, coming to about $11,400 for the average detached Toronto house, on top of the $12,100 provincial LTT. At first glance, it would seem the LTT has had little effect on Toronto's booming real estate market since its introduction in 2008. However, the rest of the Greater Toronto Area real estate market has been even hotter, especially since the city's introduction of the LTT.
So, how many buyers are shut out of the market because of the Toronto LTT? The key to quantifying the effect of the LTT on the Toronto housing market is to distinguish it from overall market trends and local real estate market effects. To capture the effect of the LTT, I compared the changes in the number of real estate transactions in suburban municipalities that border Toronto with those in otherwise similar areas inside the Toronto border. By comparing the changes in each area before and after the introduction of the LTT, we can tell how the pattern of real estate transactions changed in markets that would otherwise have shown patterns similar to neighbouring markets – but for the introduction of the LTT.
By controlling for these other factors, I find that the LTT drove an average decrease of 16 per cent in sales volume, compared to what would have otherwise occurred. Applied to the overall Toronto market, this results in about 3,500 sales annually foregone because buyers and sellers couldn't make a deal. The effect of the LTT on transactions also varies by house price, with the largest effect on sales in areas with resale prices below the median market sale price.
Because the LTT raises the cost of moving, it has also meant that Toronto residents have more often decided to renovate their current homes, upgrading their living spaces rather than relocating. So higher transaction costs, owing to the LTT, clearly cause some households to tolerate living in ill-suited homes for longer than they would have otherwise desired. Other potential effects of the LTT include government revenue volatility, commercial real estate market distortions, and higher construction costs.
One reason policymakers cite for wanting to introduce an LTT is to curb real estate market speculation, and thus reduce the volatility of house prices. However, if lower volatility is the game, broader policy tools – such as the recent federal changes to the maximum mortgage loan to value ratios – are demonstrably more effective than a transfer tax.
With a provincial and municipal combined top rate of 4 per cent, Toronto's LTT is tied for the highest top statutory transfer tax rate in North America.
It is time for Toronto's city council to abolish its LTT to make it easier for Torontonians to find homes where they want to live and work. And municipalities elsewhere should beware: This is one bad idea that should not spread.
Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute. His study is available atwww.cdhowe.org