In two pre-election announcements late last week, the Ford provincial government introduced several initiatives in the hopes of slowing the rapid rise in unaffordable housing. This comes after their late January announcement to streamline the new home building approval process and inject more supply into communities.
While big city mayors like Jeff Lehman, Mayor of Barrie, acknowledge that, “Municipalities play an important role in increasing housing supply and affordability…[this] can only be successful when there is a collaborative approach with provincial and federal governments”.
Foreign Buyers, Rebates and Interest Rates
The announcements, and proposed legislation are centred around key adjustments to the Non-Resident Speculation Tax by increasing it to 20% and expanding it beyond the Greater Golden Horseshoe area. This is an effort to reduce market speculation and will apply to homes purchased anywhere in Ontario by foreign nationals, foreign corporations or taxable trustees. For those that do buy, the government has also proposed reducing the rebate eligibility to only newcomers who commit to laying down roots in the province long-term.
This is not the first time foreign investors have been facing tough measures with the hopes of reducing house prices. In 2016, the Federal Government cracked d own on foreign investors’ property flipping tax free. In 2017, the previous Liberal Provincial government introduced the Non-Resident Speculation Tax (NRST) as part of the Fair Housing Plan. The original introduction of the NRST did have a cooling effect on home price growth at the time and it seems the Ford government is hoping for more of the same.
Another factor that is actually out of the provinces’ hand and is expected to have a significant impact on the real estate market in the coming months, is projected interest rate hikes. Canadians across the country have enjoyed historically low interest rates as the Bank of Canada reduced rates by 150 basis points during the past two years and has only recently started paving the way for 2022 to be the year that the bank tightens the valve on this pandemic program. The BoC made the first of several planned interest rate hikes in March 2022 by 25 basis points.
So What Does All This Mean for Home Buyers and Sellers?
The reality is that, according to the Organisation for Economic Co-operation and Development (OECD), Canada has the highest price to income ratio of all the G7 countries. According to the OECD, “the price to income ratio is the nominal house price index divided by the nominal disposable income per head and can be considered as a measure of affordability”. Canada is seen as one of the most unaffordable countries to buy a home. However, there is speculation that some of these new measures can make an impact.
- As equity in homes across the province have increased in the past few years, the number of residential property investors has also increased. Back in 2017, the initial introduction of the Fair Housing Plan and the Non-Resident Speculation Tax (NRST) had an immediate effect. The psychological market reaction was swift. Home prices within the Greater Toronto Area plunged 20.3 per cent by May of that year, a decline that remained consistent throughout the subsequent months. A drop in prices and sales activity remained even into the following Spring of 2018. There is hope for buyers that with the planned increase and expansion of the NRST to 20% across the province will bring with it another decline in prices.
- For sellers, a drop in pricing is obviously not a desired outcome. Especially if homeowners have purchased more recently in the past two years. In the GTA, the average price of a home has risen by over $495,000, and now has peaked at over $1,334,568, 59% more than it was in January 2020. Ontario has seen some of the largest price increases in the country over the course of the pandemic. Some current homeowners may choose to ride out the dips and delay putting their property on the market. This will continue to squeeze out available supply which is already at historical lows. Alternatively, they may see this as a great time to sell and finally move up to that next bigger home. Especially if they see less competition in their neighbourhood and can offer up options to buyers who are desperately looking for new listings.
- Interest rate hikes are coming. Some analysts predict that the next increase could be as high as 50 basis points. However, previous tightening cycles reduced market urgency, but not necessarily product price points. Rising interest rates did show a correlation with lower sales volume numbers in previous years. Rising interest rates signal economic change, and this uncertainty can contribute to some prospective buyers and sellers being a little more cautious about getting into the market.
While the timing of these announcements are likely motivated by Ontarians heading to the polls in June 2022, the strong desire for more affordable housing crosses all party lines and levels of government. On April 7th, more housing and cost of living related announcements are expected from Ottawa as the Federal government releases their official budget. Here’s hoping there is more relief for weary home buyers out there.