After the Toronto Real Estate Board reported Wednesday that average prices surged 33 percent in March, David Rosenberg, the chief economist at Gluskin Sheff & Associates who forecast the U.S. housing crash, summed it up this way: “This is a bubble of historic proportions.”
The debate among policy makers has now gone public, and the back-and-forth between officials at three levels of government suggests an impasse over the next steps to cool the market.
Canadian Finance Minister Bill Morneau is asking for a meeting with his provincial and local counterparts to take a “closer look” at Toronto’s housing market.
“I know that you share with me growing concerns about access to affordable housing in the Greater Toronto Area,” Morneau wrote in a letter to Ontario Finance Minister Charles Sousa and Toronto Mayor John Tory. The request, a rare public move, comes after a Sousa letter to Morneau last month, and was followed by a Sousa reply Thursday agreeing to a meeting “to help improve housing affordability.”
The path forward is mired in a lack of data, uncertainty on the role of foreign money, low interest rates and a strong Toronto economy. And beyond all that lies another issue: housing is one of the few drivers of Canada’s economy, meaning any policy misstep would have wider implications.
“We need to be careful to manage this in a way that doesn’t create unintended consequences,” Morneau said Friday in London, noting that while prices are climbing in Toronto and Vancouver they are stable — and in some cases declining — in other cities across Canada.
“There’s no easy answer here,” Doug Porter, chief economist at Bank of Montreal in Toronto, said in a phone interview. “Every single measure is going to have some kind of unwelcome side effect. Policy makers just have to accept that ahead of time.”
Here are some of the options on the table.
British Columbia introduced a 15 percent foreign buyers tax last year, triggering a slide in sales though no major price correction in Vancouver. Ontario’s Sousa initially ruled out a foreign buyers tax but is now considering it. Porter agreed that “something like B.C. did is a good starting point.”
It’s probably worth taking a look at something similar to re-balance the Toronto market, Rosenberg said in an interview, adding the British Columbia measure appears to have been effective. “Prices are off the bubble” in Vancouver, he said. While no solid data exists on the number of foreign buyers in the Toronto region, anecdotal evidence shows they are participating in the market “big time.”
The measure has its detractors. Brad Lamb, chief executive officer of Lamb Development Corp., said the notion that foreign buyers or speculators are driving up prices is “bunk.” A foreign buyers tax would “do nothing to help increase the supply of housing,’’ and slow down the creation of new homes, he said in an interview.
To be sure, Rosenberg says Toronto prices — while astronomical in the Canadian context — aren’t out of step with other major financial centers and are “not that out of whack,” based on the incomes of potential foreign buyers wanting to establish a toehold in the city. The average home price surpassed C$900,000 ($670,000) last month.
Maciej Onoszko/Erik Hertzberg/Bloomberg
Supply is regularly cited as a problem, with price increases partly due to strong competition among potential buyers for comparatively scant homes for sale, reflected in unprecedented measures of tightness. Vancouver has more geographic constraints, whereas Toronto’s supply is restricted in part by Ontario’s green belt, a swath of land outside the city where development is barred.
Ontario Premier Kathleen Wynne has resisted changing that, but is instead looking at fast-tracking the development process.
Tax Empty Homes
Sousa last week told reporters that he’s talked to Tory about a possible tax on vacant residential properties, after Vancouver imposed a similar tax in January.
“We certainly don’t want to make decisions that have unintended consequences, but supply is limited and vacant properties hamper that degree of supply,” Sousa said, adding that the goal is to encourage use of empty homes either by selling or renting.
Both Tory and Sousa have said data is needed before proceeding with such a tax.
Dianne Usher, a senior vice president at Johnston & Daniel, a division of Royal LePage, Canada’s biggest provider of real estate services, said she doesn’t think an empty-homes tax would be effective in Toronto. “Unlike Vancouver, we don’t have a lot of vacant properties,” she said.
Governments should consider increasing incentives for more rental developments or boosting investment in affordable housing, according to Benjamin Tal, Toronto-based deputy chief economist at Canadian Imperial Bank of Commerce.
“We have to take a long-term view and this must include a notable increase in rental activity,” Tal said.
Wynne says the argument that imposing rent controls will weaken interest in building new housing “does not hold water” after a decade without significant new rental supply. Apartments built prior to 1991 are already subject to rent controls.
Toronto’s mayor expects some new measures on housing in the upcoming provincial budget, slated for the spring. “I’m assuming they are going to do something because they have kind of said they are,” Tory said in an interview Tuesday at Bloomberg’s Toronto office.
As prices have jumped, it’s become an increasingly political issue. Ahead of a May election, British Columbia has begun to offer loans to first-time buyers to pad their down payments and is subsidizing the property tax bill on homes worth up to C$1.6 million.
Ontario, with an election now expected next year, is considering similar measures. Such steps, however, do nothing to slow price growth in the market — instead, they just add more demand.
The Bank of Canada isn’t expected to raise interest rates this year, though mortgage rates have already begun to inch up in Canada. It may ultimately be up to Governor Stephen Poloz to cool the housing market.
Barring a bold move by governments, “maybe it is time for the Bank of Canada to start playing a role and follow the Fed on a gradual rising interest rate path,” Rosenberg wrote. Home prices in Toronto have moved “so abnormally” compared to the broader economy that it’s almost like the Bank of Canada has already raised rates 200 basis points as far as homeowner affordability, he said.
Canada currently exempts primary residences from any capital gains taxes. Sousa urged Morneau to hike the inclusion rate for capital gains — hike the tax, in effect — for secondary or investment properties. Sousa argued the federal government could “reduce speculative investment” while raising government revenue. Morneau’s budget released March 22 included no capital gains changes.
Bruce Joseph, a broker with Anthem Mortgage Group in Barrie, Ontario, favors some type of “home flipping” tax that would penalize anyone selling a home after just four to six months of purchase. “I think it would be fantastic,” he said in an interview. “It’s not healthy to trade shelter like stocks on the Nasdaq.”
(An earlier version of this story corrected the spelling of Gluskin Sheff in the second paragraph.)