The faceless “foreign investor” was painted as the villain of Canadian real estate in 2016, accused of buying up local listings in droves, pushing prices higher and diminishing supply. The perception these buyers allegedly don’t dwell within their properties has contributed to seething frustration from domestic buyers in overheated markets. However, an annual review and forecast released by the Toronto Real Estate Board reveals out-of-country buyers account for far less activity than believed in the Greater Toronto Area, and that taking action against them would be a “misguided” move.
Foreign Buyer Demand Not Impacting Toronto Real Estate Prices
According to TREB’s Market Year in Review and Outlook Report 2017, foreign purchasers represented only 4.9% of transactions in the GTA. Of those, 40% purchased their home to use as a principal residence while 25% intended to rent it out. Perhaps even more telling is that only 2% came to Toronto after being impacted by the 15% foreign investor lax levied last summer in Vancouver, indicating the GTA market has yet to be targeted by displaced west coast investors as initially feared. The findings were gathered by third-party research and survey firm Ipsos Reid, which conducted a survey of homebuyers last November.
Related Read: Is a Toronto Foreign Investment Tax a Possibility?
New Rules to Do More Harm Than Good
That’s hardly cause to introduce measures against foreign buyers argues TREB, adding that doing so would come with additional consequences:
- A foreign buyer tax in the City of Toronto could effectively inflate prices further in surrounding (relatively) affordable markets, as buyers turn to communities without the tax. This could mean hotter overvaluation in suburban areas (for example the already-hot Hamilton real estate and Golden Horseshoe markets). There’s strong evidence of this already in the markets surrounding Vancouver, as buyers flock to Victoria and Kelowna to avoid taxation.
- A tax could put pressure on already extremely tight rental supply, as buyers will be more likely to purchase units to reside in, and will see less value in buying and returning units to rental stock. The vacancy rate in Toronto is estimated to be 1.6%, and the supply of available units has been steadily shrinking – TREB’s Q4 rental report finds listings declined 14% to 9,545 in the last quarter of 2016.
- Taxing newcomers to the area will have a negative effect on immigration, which is a main driver of Toronto’s economy. As an economic and tech centre, attracting foreign specialized talent is of high importance to businesses who are headquartered in the GTA. In fact, it’s this real estate-induced brain drain that has prompted the B.C. government to soften the Metro Vancouver tax requirements, now exempting those with work permits living within the city.
The Real Issue: Too Few Listings
The true culprit behind expensive Toronto real estate, according to the board, is simple lack of supply; there just aren’t enough homes available for sale, which has driven prices out of reach for the average buyer. That’s an issue that can’t be addressed by federal intervention and rule changes, the board argues.
“While changes to federal mortgage lending guidelines and higher borrowing costs may impact some would-be home buyers, the big impediment will be the lack of inventory. Active listings at the end of December were at their lowest point since before the year 2000. It is unlikely that the shortage of listings will improve to any great degree over the course of the next year. This will put a ceiling on sales growth,” stated Jason Mercer, director of market analysis at TREB.
2017 to Be More Expensive Year for All Home Types
The real estate board forecasts double-digit price growth for all home types in the GTA over the coming year, with an average selling point increase between 10 – 16% and price range between $800,000 – $850,000 (up from the current $730,000). Low rise home types (houses, semi-detached and townhouses in Toronto) will see the greatest price growth, but condos will also be in very high demand.
“Gone are the days when we were concerned about a potential glut in inventory in the condominium apartment market. The supply concerns that have been top-of-mind for ground-oriented home types are also now a reality for the condo market segment. Regardless of the price measure considered, heightened competition between condo buyers has resulted in double-digit price inflation,” said TREB President Larry Cerqua in the board’s Q4 condo sales report. Condo sales rose 22.3% year over year to 6,831 units, as new listings declined 13.4% over the same period.
In total, the real estate board calls for between 104,500 – 115,500 units to change hands this year – a decline from 2016 due to lack of supply.
