Greater Toronto Residential Real Estate Market and the 2017 Ontario Budget

On April 20, 2017, Premier Kathleen Wynne announced measures under the Ontario Fair Housing Plan (see detailed plan) affecting the Greater Toronto residential real estate market ahead of the Ontario Liberal government’s 2017 budget scheduled to be tabled on April 27.  The multi-faceted plan is meant to help moderate demand, address supply, protect buyers and renters, and promote affordability in the provincial housing market – all of which is intended to increase market stability.

Political pressure has been mounting on the Liberals to intervene in the Greater Toronto residential real estate market given the very strong demand and continued double digit increases in price. In response, the provincial government announced the following policy measures:

Demand Cooling

• A 15% non-resident speculation tax (NRST) on the price of homes in the Greater Golden Horseshoe that applies to transfers of land that contain between one and six units.
• Prevention of reselling properties pre-construction.

Supply Boosting

• Allow municipalities to levy a property tax on vacant homes.
• Provide flexibility for municipalities to impose higher taxes on vacant land.
• Lower property taxes for new, purpose-built apartment buildings.
• Leverage provincial assets to help build a mix of housing stock.
• Introduce a $125 million program over five years to encourage purpose-built apartments.

Expanding Rent Control and Enhancing Standards

• Expand rent control to all renters and including purpose-built properties built after 1991.
• Strengthen the Residential Tenancy Act by developing standard leases, increasing rental standards and rules that govern the sales of properties, as well as several other measures designed to enhance efficiency and clarity in the housing market.

Commentary

We are awaiting further details regarding the above announced initiatives and more analysis will be required.  The following is some early commentary on what we know so far. 

Tax on Foreign Speculative Activity

The new tax will levy a 15% Non-Resident Speculation Tax (NRST) on residential real estate transactions where a foreign buyer purchases a property and is deemed to be engaged in speculative activity.

Fortunately, foreign buyers who have work visas and students studying in Canada will be exempt from the tax.  There were unintended consequences from the foreign buyer tax introduced in Greater Vancouver that came into effect on August 2, 2016, which the BC provincial government subsequently reversed.    

In addition, the new tax will apply to transactions initiated after April 20, 2017. This is unlike the Vancouver tax, which applied to closings after August 2, and unfairly impacted buyers who had entered into contracts before the tax was introduced, but where the completion of the contract fell after the tax’s effective date.

While statistics are lacking, most experts agree that foreign buyers represent a small component of the market at somewhere between 5-10% of the market.  We estimate that foreign buyers engage in speculative activity are +/- 1-3% of the total market. We expect there may be a slowdown in activity as all buyer digest the change and determine its effect.  No doubt it will curb some pure speculative activity but in the longer run, the strong domestic demand twined with continued limited supply will keep upward pressure on prices.

While many point at the introduction of the foreign buyer tax in Vancouver as a policy success, it is too soon to gauge its ultimate effect.  So far, the policy has attracted a class action lawsuit– there is a fear that it will be challenged from a constitutional basis and that it may contravene one or more trade agreements.

Unlike the Vancouver foreign buyer tax, the introduction of a similar tax in the Greater Toronto Area will not be as shocking.  There has been considerable speculation in the press for some time. 

Market observers have noticed that, while activity declined following the introduction of the Vancouver tax, most of that was due to market participants withdrawing and sitting on the sidelines.  This constrained supply particularly at higher price points.  This changed the mix of home sold to the lower end of the price scale giving the illusion that market prices were moderating or decreasing when in fact it was simply the average price of homes sold (rather than the average price of a home). 

The Vancouver tax has done nothing to contribute to affordability and there is mounting evidence that pricing pressure is returning to the Vancouver market as buyers are coming to the belief that the market will continue to grow and supply constraints are still present. 

Ban on Selling Pre-construction Units by Speculators

Most developers prohibit or dramatically restrict this practice.  We do not expect that this policy initiative will have a significant effect on moderating the demand for housing or prices. 

Initiatives Relative to the Rental Market Control

The government announced a series of initiatives designed to restrict increases in rents paid by tenants, while at the same time increasing the stock of rental units. 

While rent controls are a popular solution in the short term, most industry participants and economists agree that rent control will no doubt stifle new rental construction, encourage conversion of existing residential multi-unit stock to condominiums, and add to the demand for new condominium construction.  All of which will have the effect of reducing the stock of available rental properties in the longer run and not really contributing to affordable housing options.

On the other hand, initiatives designed to encourage continued and additional construction of rental units will provide relief to the tight vacancy condition and some relief on rental rates.

Conclusion

We will be watching the market carefully over the coming months and reporting on our observations.  We expect a period of adjustment where we might see activity subside somewhat.  We expect the effect to be much less significant that what we observed in Vancouver.  Ultimately, the fundamentals of demand remain strong so until supply side measures take effect, we believe that there will continue to be more buyers than sellers, that many properties will continue to see multiple offers and that there will continue to be upward pressure on home prices.