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Policymakers should focus on supply and speculation more so than foreign buyers if they actually want to effectively cool Toronto’s feverish housing market, says Scotiabank’s economics team.
“Action is required to cool Toronto’s housing market, which continues to reach new dizzying heights,” begins a report from Jean-Francois Perrault, Scotiabank’s chief economist, and Adrienne Warren, an economist with the bank.
In February, the Greater Toronto Area’s average selling price for a home, including condo units, was $875,983, up a barrelling 27.7 per cent from 12 months prior.
Recent price growth like that led BMO Chief Economist Douglas Porter to say Toronto was in a housing bubble and Scotiabank CEO Brian Porter to say a correction was in the cards for the market.
On the supply front, the Scotiabank economists prescribe specific moves they suggest would lead to a greater supply of housing in the GTA and in turn reduce volatility.
“This could include, for example, zoning amendments, increased density allowances in established neighbourhoods, a streamlined approval process and incentives to encourage more rental unit construction,” write Perrault and Warren.
CIBC Deputy Chief Economist Benjamin Tal recently outlined how municipalities could spur more rental construction.
Cutting the HST developers must pay on developments and reducing or getting rid of development charges applied to rental buildings were among his suggestions.
However, Scotiabank argues tamping down speculation would have a more immediate effect than any supply-related scheme.
“The idea, simply, would be to raise the cost of speculation, without excessively interfering with the market mechanism,” they state.
There is more than one way to go about this, according to Scotiabank, including getting tax officials to take a closer look at residential real estate transactions.
When a property owner in Canada sells a home they don’t live in primarily, the seller must pay a tax on their financial gains.
A crackdown on home sellers trying to avoid paying the capital gains tax will discourage speculative activity. “But more specifically targeted measures are needed,” the report reads.
“A number of possibilities exist to do this, such as introducing a tax on sellers who flip a property within a certain period of time,” it continues.
Scotiabank prefers this to the controversial foreign-buyer tax some economists have recommended for Toronto, much to the building and real estate industries disapproval.
“There is no solid data on the number of foreign buyers in the GTA,” the bank says.
Since Greater Vancouver home prices have recently shown signs of heating up again following the BC government’s implementation this summer of a foreign-buyer tax for the area, Warren and Perrault aren’t sold on a similar levy for the GTA.
“It is premature in our view to argue that the foreign buyers’ tax has led to a sustained cooling of the Vancouver housing market. This should limit its appeal to the Ontario government.”