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If policymakers want to try and contain huge price gains in Toronto’s housing market, they have to address foreign investment, says BMO Chief Economist Douglas Porter.
“I do believe that it is foreign investment that’s really driven [Toronto and Vancouver] into the stratosphere, and I do believe it’s a provincial and municipal matter to basically try to offset some of that strength,” Porter tells BuzzBuzzNews.
“BC attacked it head on,” he adds, referring to a 15-per-cent tax on foreign nationals purchasing residential property anywhere in Metro Vancouver. “We’ll wait to see how successful it is and whether it does what they wanted it to do,” says Porter.
“I think Ontario will one day wish they did it. But at this point, it doesn’t sound like Ontario’s interested in going that route,” he continues.
Surging foreign inflows of capital into Canadian banks suggest foreign investment is indeed contributing to demand and price gains, Porter explains. “We’re seeing billions and billions of dollars coursing through the banking system which we hadn’t seen before.”
This summer, TD Economist Diana Petramala charted foreign-held currency and deposits in Canadian banks alongside total spending on housing in Toronto and Vancouver. Both had roughly doubled since 2013.
Still, Ontario need not copy BC’s approach exactly when attempting to cool the Toronto region, which Porter says includes cities within about 100 kilometres of Toronto proper. The levy doesn’t have to be as high, for instance, nor should it necessarily apply to all residential properties.
“I’m of the opinion that it’s not a bad thing if we get foreign investment in brand new development — that’s another matter — because we’re not fighting over a limited supply there,” he explains.
Allowing foreign investors to buy into new projects can lead to development that may not have otherwise occurred. “Perhaps the tax should only be on existing home sales,” Porter muses.
Porter agrees knowing exactly where to apply the tax is a challenge. After all, foreign investment isn’t a problem everywhere in southern Ontario. “There are some regions you probably don’t want to dissuade foreign investment” in, says Porter.
“But I think it wouldn’t be that difficult to do,” he notes. “They’ve carved out a Greenbelt area. Why not just apply the tax to anything within the Greenbelt?” The Ontario Greenbelt stretches across two million acres of protected land surrounding the Greater Toronto and Hamilton Area.
Builders and at least one noted economist have said a lack of supply due to a shortage of serviced, developable land is to blame for fast-rising home values in the GTA, especially in the low-rise segment. The average price of a resale GTA home, condos included, soared 21.1 per cent year-over-year to $762,975 in October, according to the Toronto Real Estate Board.
To deal with eroding affordability, TREB favours approaches such as re-designating urban land for low-rise housing and reevaluating policies including the Greenbelt over a foreign-buyer tax. But Porter highlights problems with supply-oriented measures. “There’s only so much we can do on the supply side very quickly, and frankly, you don’t want to overbuild, either,” he says.
“You don’t want to make it into a situation where you’re artificially trying to pump up supply and then suddenly the demand disappears and you’re stuck with lots of unwanted units that leads to a lengthy slump in the housing market, which is really what we saw in the US over the last 10 years or so,” he warns.
To date, the policy responses to price gains have been “a tad bewildering, to be frank,” writes Porter in a recent research note.
The recently announced doubling of the maximum tax rebate for first-time buyers to $4,000 has the potential to fuel Toronto’s heated market, he says — and he’s not alone.
“We wouldn’t want to call this type of measure futile, but it seems to be roughly the equivalent of trying to stop a charging elephant with a pop gun,” he quips.