Toronto may be next on the list of global cities with a tax on home purchases by foreigners as government officials search for ways to cool scorching price gains.
Ontario Finance Minister Charles Sousa surprised many on Thursday, saying he was reconsidering imposing a tax to curb price increases that have accelerated in Canada’s biggest city, reversing a stance last year to leave the market to its own devices.
“A year ago I was saying, ‘Let market forces prevail,’” Sousa told reporters in Toronto. Now he’s concerned about people facing “bidding wars everywhere you go.” Sousa said he is considering a number of options for next steps, and a foreign tax is just one.
Governments from the U.K. to Australia and Hong Kong have imposed levies and restrictions on foreign buyers in recent years in an effort to tamp down home values that are shooting beyond the reach of many local residents. The Canadian province of British Columbia added a 15 percent levy to home purchases by foreign nationals in Vancouver, and the city in January began taxing empty homes.
Sales in Vancouver have since plummeted, with some of the foreign buyers probably shifting east to Toronto. The average cost of a home in Toronto and its suburbs jumped 28 percent in February from a year earlier to C$875,983 ($648,588), the sixth straight month of above-20 percent growth. That’s more than the 18 percent gain in Manhattan, which pushed the median price to $1.25 million in the 12 months through January.
Sousa’s comments are likely to set off fierce debate in Toronto, with the real estate industry arguing Friday that a tax would do nothing to improve the underlying problem in the market -- the lowest supply of homes in the city in more than 15 years, according to the Toronto Real Estate Board.
“Imposing a tax on foreign buyers will not have the desired effect of cooling the housing market and could create adverse effects,” Larry Cerqua, president of TREB, said in a statement. “It will do little to correct the real issue impacting housing affordability, which is the lack of available housing supply.”
The real estate board said a survey it conducted last year showed only about 5 percent of purchases brokered by its members were on behalf of a foreign buyer and 80 percent of buyers purchased a home as a residence, a place for another family member to live in, or as an investment to rent out, which helps increase rental supply.
Shaun Hildebrand, senior vice president at Toronto-based real estate research firm Urbanation, said research shows foreign buyers represent only about 5 percent of new condo sales as well. Wealthy immigrants represent a “much more substantial component of the market,” and many rent out their purchases.
While a tax on foreign buyers might pinch rental supply, a levy on resale homes could be effective in “slowing price growth,” Hildebrand said. Non-Canadian purchasers are concentrated in the high end of the market, making a 5 percent share “quite significant” as only 6 percent of homes sold last year cost more than C$1.5 million, he said.
Foreign buyers are probably driving up high-end purchases and triggering a “cascading effect on price growth for the entire market,” Hildebrand said. “Reducing that top-end pressure could really help slow overall price appreciation.”
The provincial government should work with municipalities and the industry to boost availability, according to TREB’s Cerqua. Options could include revisiting land-use designations in built-up areas to allow for a broader array of home types to be built, streamlining the development approvals process, facilitating the permit process and examining ways to give land owners incentives to develop, he said.
Others said measures are required now to reign in the market.
“In the long run, supply has to be part of the solution, but it appears that more could be done to tame demand, and dulling the foreign bid for Toronto and environs could be part of a multi-pronged housing-affordability strategy for Canada’s largest province,” Warren Lovely, an economist at National Bank Financial, said in a note. He now supports a foreign tax after being opposed to it just six months ago.
Royal Bank of Canada Chief Executive Officer David McKay has said Toronto may require Vancouver-style measures to take the heat out of the market. Such calls for possible action come as an increasing number of observers refer to a housing “bubble.”
A tax on foreign purchases “is one of the few policy tools that can slow the Toronto market down right now,” Josh Gordon, a public policy professor at Simon Fraser University, said in an interview. “Not only would a stiff tax curtail an important source of demand pressure, from foreign buying, but it would also have an effect on the expectations and buying behavior of local buyers, including speculators.”