Would a tax on house-flippers cool off the GTA housing market?

The definition of “affordable” is expanding as Toronto’s housing market shows no signs of slowing down.

Last month, GTA house prices soared to a new monthly record – a 27 per cent increase over February 2016, with an average selling price of $876,000. If you’re looking for a detached home, you’re definitely in millionaire territory. The average home crossed the $1.5-million mark, a 35 per cent increase over the same month last year.

Finance Minister Charles Sousa says he is looking at all options to cool down the hot Toronto market in his upcoming budget.

“We’re giving considerations to what [we] may do,” said Sousa. “We know for certain that this is a result of increased demand in the province. That demand is being increased by a number of factors.”

He’s written a letter to federal finance minister Bill Morneau, asking him to increase the capital gains inclusion rate of 50 per cent on the sale of non-principal residences as a way to “reduce the incentive for people to make speculative purchases.”

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A spokesperson for Morneau wouldn’t commit to adopting Sousa’s request but said other measures were being taken to keep the market from spiraling out of control.

“Since increasing down payment requirements in December of 2015 to address pockets of risk in Toronto and Vancouver, we have studied the state of the housing market, alongside provincial and municipal partners. Our Government is bringing consistency to mortgage rules by standardizing stress tests for both low and high ratio mortgages.”

“Additionally, we’re improving tax fairness by ensuring that the principal residence exemption is available only in appropriate cases. Finally, we are also looking at whether the distribution of risk in Canada’s system is balanced to protect Canadians. These actions will protect middle class Canadians’ financial security and help ensure financial and economic stability.”

Scotia Bank Chief economist Jean Francois Perrault says the government should consider cracking down on speculators and house-flippers, and says Sousa’s suggestion is just one of many tools available to governments.

“There are a range of things one can do to reduce speculation. Minister Sousa’s idea is one approach.”

Perrault however, is recommending a graduated tax system, in which owners who buy and sell a house within six months pay a higher tax than those who hold onto the property for a year, 18 months or two years.

“Our perspective is that flippers represent a much larger part of the market than foreign buyers,” said Perrault. “About 10 per cent of the 24 per cent or so increase in prices year-over-year in Toronto is related to speculation. So it is, in our opinion, a sizeable market dimension.”

Real estate broker Frank Leo says speculators and “domestic investors” are a major contributor to the market — but says adding new taxes or increasing taxes may not deliver the results the government is looking for.

“The government always does things that end up being a long-term negative as opposed to a positive,” said Leo. “When you start taxing and controlling the market… it’s taking money out of the market. And real estate right now is fueling the economic engine. Do you really want to stop the engine?”

Leo, like many other real estate brokers and agents we’ve spoken to over the past few months, doesn’t believe that a foreign investors tax is the appropriate route to take either. He says they make up “a very small percent, maybe 4 per cent” of sales in the GTA.

Although the Ontario government is planning on tracking citizenship information on home purchases, there is currently no hard-and fast data on the number of foreign buyers in the Toronto market. Anecdotal evidence from the Toronto Real Estate Board suggests that foreign buyers make up only five per cent of the market, as opposed to 10 per cent in Vancouver before a foreign buyers’ tax was introduced there.

Although Vancouver did experience a decline in house prices following the introduction of the tax, Perrault argues that other factors would have influenced the drop as well, including new federal rules for down payments and mortgage qualifications, and a law allowing municipalities to tax vacant homes.

“Our assessment of what we’re seeing in the Toronto market is supply issues are much more important than demand issues. So demand is strong, but supply hasn’t kept up with that. So to truly affect prices over a long period of time, you really need to play the supply. A foreign buyers’ tax, or any other tax for that matter, can influence demand over the short run, but it’s not likely to have sustained impact on prices.”

He notes that housing prices have started to creep back up in Vancouver, with foreign investors making up an estimated 4 per cent of the buyers’ market over the last few months of 2016.