February 23, 2017

Why High Ontario Home Prices Are Good News for Government

It’s no secret that Land Transfer Tax is among the most reviled of closing costs. Charged to homebuyers upon the transfer of property ownership, it adds thousands of dollars to a home’s price tag. Depending on where you reside (Ontario, British Columbia, Manitoba, Nova Scotia, New Brunswick, Quebec, and PEI all have a version of LTT), you’ll pay a percentage of the home’s total value on a sliding scale.

For example, in Ontario, you’ll pay the following tax rates on your home purchase:

Purchase Price of Home	Marginal Tax Rate
On $55,000 to $250,000	1.0%
On $250,001 to $400,000	1.5%
On $400,001 to $2,000,000	2.0%
Over $2,000,000	2.5%

Double the Tax, Half the Homes

In Ontario – and especially in Toronto, which is the only city in Canada that charges a Municipal Land Transfer Tax in addition to the provincial one – LTT has been a hot issue on the topic of buyer affordability. While traditional detached houses have long been priced above the million-mark in the region, new data from BILD finds unaffordability is trickling down to all new low-rise housing types, including semi-detached and townhouse homes, now an average of $1,028,395.

There have been calls from both the Toronto Real Estate Board and Ontario Real Estate Board to reduce the amount of land transfer tax in the city and in the province as a way to improve buyer affordability. In a joint letter to the Toronto Star titled “Millennials are ‘Generation Screwed’ on Real Estate”, OREA and OHBA CEOs Tim Hudak and Joe Vacceo state LTT is a reason there are so few houses available for first-time buyers, in addition to scant new listings and home supply.

“According to the C.D. Howe Institute, the Toronto land transfer tax negatively affects housing supply because it incents potential home sellers to stay rather than list their property for sale. Instead of paying tens of thousands of dollars to move to a larger home, or downsize as an empty nester, Toronto homeowners are simply choosing to renovate or stay put,” they write. “That means fewer starter homes come onto the market for young couples.”

A Proven Money Maker

While the Ontario government recently gave first timers a modest break, doubling the LTT rebate they can claim to $4,000, neither the provincial Liberals nor Toronto’s city council are in any hurry to retract the tax – it’s simply too much of a cash cow. In fact, a new report finds LTT and MLTT make so much revenue for their respective governments that even a slight market downturn could knock billions out of their budgets.

The study, released by the Financial Accountability Office (FAO), says between 2012 and 2015, Ontario revenue from LTT and other housing related costs (fees, commissions, and taxes paid on relevant services) increased by over 40%, from $0.6 billion to $2.1 billion. Based on their hypothetical scenarios, should the housing market falter by even 10%, that would lead to as much as a $1.2-billion decline in 2017 – 2018.

In fact, LTT just helped reduce the province’s forecasted deficit by nearly half, chopping it to $1.9 billion from an anticipated $4.3 billion. Finance Minister Charles Sousa also stated optimism that they may even balance the province’s budget in the 2017 – 2018 fiscal year, a feat that hasn’t been accomplished since the 2008 financial crisis. While he chalks this up to “businesses succeeding, more people working, consumer confidence improving and exports rising,” it’s clear the more than 20% increase in home prices is helping pad coffers.

Business versus Bubble

In the City of Toronto, where council faces a shortfall of $33 billion for approved pending projects, the MLTT is big business. Implemented in 2008, it has since brought in millions (over $180 million in 2016) to supplement the beleaguered budget, thanks to Toronto real estate prices shooting through the roof.

Critics, such as City Manager Peter Wallace, have complained that depending on home sales to fund services is a “volatile” approach as markets can go either way. However, despite a recent crop of third-party reports raising alarm on housing overvaluation, Mayor John Tory is stalwart in his confidence of Toronto housing. Most recently, he rebuffed comments from BMO Chief Economist Doug Porter, who recently used the dreaded “B-word” to describe the city’s market.

“Prices in Greater Toronto are now up a fiery 22.6% from a year ago, the fastest increase since the late 1980s – a period pretty much everyone can agree was in a bubble,” he stated in a report. Tory dismissed the warnings, saying it’s a “reasonably healthy market”, with demand driven by migrants and immigrants to the region.

“I think the Toronto housing market is not such that we need to push any panic buttons, we just need to keep an eye on it and be responsible in how we run the government and most of all work on increasing the supply of housing,” he stated.

It’s no wonder the mayor has been publicly resistant to the idea of implementing measures to cool homebuyer demand, such as the foreign buyer tax rolled out in Metro Vancouver – a stance also shared by Premier Kathleen Wynne, who stated she would not introduce a tactic designed for a “completely different” market without understanding its consequences.

Do you think LTT should be reduced in Toronto and Ontario? Share your thoughts in a comment!