Photo: James Bombales
Or a bad idea, period, depending on who you talk to.
Foreign-buyer tax headlines have dominated Canadian real estate media since the measure was introduced by the BC government last summer to cool the Metro Vancouver housing market, the country’s hottest at the time.
Talk has recently shifted to focus on whether other hot Canadian real estate markets, namely the GTA, should adopt a similar approach as a cooling measure to help dampen foreign-buyer activity. Ontario Finance Minister Charles Sousa, who once opined that interfering with market forces was the wrong call, has since changed his tune and is considering a tax as an option to curb price growth.
While a tax on foreign buyers in the GTA market has its fair share of supporters clamouring for government action to deal with worsening affordability issues, the measure also has a significant number of vocal detractors who have levelled a range of criticisms at the other side.
Below we take a look at some of the key arguments the anti-foreign-buyer tax crowd are favouring:
1. Foreign investors help push the new construction market forward, feeding commercial development in the city. Taxing their homebuying activities would be ruinous for the Ontario economy which could, in turn, tank Canada’s economy.
In a recent email newsletter, Toronto developer Brad J. Lamb calls BC’s foreign-buyer tax “an egregious error in policy.” Lamb argues that the tax will only result in higher prices in Vancouver as it does nothing to address the real issue affecting the market: lack of supply.
The effects of a tax enacted in the GTA could have a similarly deleterious impact on the market and ultimately wreak havoc on the Canadian economy. In an interview with BuzzBuzzNews’ Josh Sherman, Lamb says that pre-construction condos sold to foreign buyers represent as much as 25 per cent of total sales of pre-construction condos in the 416 area, or Toronto proper.
Without foreign buyers, new buildings would not be able to move forward at the rate they have been.
“These buyers are a massive resource that helps ensure the huge number of high-rise projects get financed and built,” he says.
And, without this rate of residential development, much of the commercial, institutional and retail development Toronto has seen during the condo boom would not have taken place.
Lamb puts it bluntly in his newsletter: “The real estate industry represents 14% of the economy for Ontario. Kill the new condo market, kill the Ontario economy. Kill the Ontario economy and Canada falls too. Foreign investors will not buy in Toronto with a 15% tax imposed.”
2. Any measure that makes it more difficult for non-Canadians to invest in the city could harm the broader Toronto economy.
Taking a more measured tone than Lamb on a recent episode of the #urbanizeTHIS podcast, Toronto city councillor Norm Kelly describes this possible unintended consequence of implementing a foreign-buyer tax on Toronto housing.
While he says the tax option is worth looking at, Kelly believes that it would make it harder for non-Canadians to invest in the city which could have far-reaching implications.
“The people that are investing in real estate — especially in residential real estate — are also people that are investing in businesses in your city,” he says.
3. There are more effective ways to address Toronto’s affordability issues, like developing more purpose-built rental.
While CIBC Deputy Chief Economist Benjamin Tal has expressed support for a foreign-buyer tax in Toronto, saying that it “will work to slow activity at the margin,” he believes there are still more effective ways of walking the city’s residential real estate market back from an impending “full-blown affordability crisis.”
Tal’s advice focuses on addressing purpose-built rental supply, or lack thereof. He does not believe that market forces will sufficiently motivate developers to build enough rental housing to meet growing demand. Municipalities must encourage builders to pursue purpose-built rental and Tal suggests a number of helpful measures the city could implement to accomplish this, including working to expedite approvals, allowing for higher densities and cutting HST developers must pay on rental projects.
This, he believes, would have a more pronounced effect on the Toronto market than a tax levied on foreign buyers.
Condo construction in Toronto. Photo: James Bombales
4. Even those who agree speculation is an issue that needs to be addressed in the Toronto housing market believe more targeted measures are required.
Two Scotiabank economists believe cracking down on home sellers attempting to skirt capital gains taxes on non-primary residences could have a positive impact beyond what a broad tax on any transaction involving a foreign-buyer would accomplish.
Economists Jean-Francois Perrault and Adrienne Warren argue further that introducing a tax on transactions in which a home is flipped within a certain timeframe would possibly have an even more powerful effect on reducing speculative activity in the market.
Perrault and Warren also identify supply as a more pressing issue currently affecting the Toronto market than foreign buyers and echo Benjamin Tal’s prescriptions for spurring development in the purpose-built rental segment of the market.
However, the Scotiabank economists say if the government is looking to make an immediate impact, focusing on raising the cost of speculation “without excessively interfering with the market mechanism” is the superior option.
5. The jury is still out on the efficacy of the tax in Vancouver. In fact, the market has shown signs of heating up again after a brief period of declining buyer activity.
There’s little doubt that the Vancouver housing market has cooled since the tax was introduced in August 2016. February data from the Real Estate Board of Greater Vancouver (REBGV) saw home sales fall 7.7 per cent below the 10-year average for the month. While the average price for a detached home in Metro Vancouver increased 1.2 per cent over January 2017, it remained down 6.5 per cent from the average of the past six months.
Not all market-watchers are convinced the foreign-buyer tax has had a major influence on this slowdown.
“It is premature in our view to argue that the foreign buyers tax has led to a sustained cooling of the Vancouver housing market,” say Scotiabank’s Perrault and Warren.
The economists say this should limit the appeal of a similar tax to the Ontario government at this stage.
Foreign-buyer data from the BC government appears to back up their assertion that it’s too early to tell if the tax is having the desired effect. The data, which the government began tracking in June 2016, shows foreign-buyers returning to the Metro Vancouver market after initially dropping following the introduction of the tax.
6. The BC government is already rolling back parts of the tax after only six months.
BC Premier Christy Clark announced in January that the foreign-buyer tax would no longer apply to all non-residents. Those with temporary work permits will be allowed to buy residential property in Metro Vancouver without paying the tax.
Clark says the rollback was a way to encourage more people to come to the province.
“We believe that people, the best and the brightest, should be able to come to British Columbia,” she told reporters when the change was announced.
It’s worth noting that, while she has loosened the rules on who the tax applies to, Clark believes the tax “has done exactly what the government and what citizens hoped it would do” and maintains it’s having a positive effect on affordability in the Lower Mainland.
7. At the end of the day, the extraordinary house price increases Toronto and the surrounding region have seen are being caused by a lack of supply.
The Toronto Real Estate Board (TREB) and Ontario Real Estate Association (OREA) have both been fiery critics of any plan to tax foreign homebuyers.
“Increasing taxes on foreign homebuyers is a knee-jerk reaction to a problem which we do not fully understand, will do little to address the growing affordability challenges facing many Ontarians and may have negative consequences for our broader economy,” read a September 2016 letter addressed to Ontario’s Finance Minister, signed by TREB President Larry Cerqua and then OREA President Ray Ferris.
In the letter, Cerqua and Ferris present a range of alternative policy options to consider, with many geared toward increasing the supply of homes on the market. Re-designating urban land for low-rise housing and relaxing Greenbelt restrictions were among the top supply-side policy options the two suggested.
8. Foreign-buyer tax could make it harder to find a rental home in Toronto — an already almost Herculean task.
Expressing a similar sentiment to Brad J. Lamb on the important role of foreign purchasers in the Toronto market, Urbanation’s Shaun Hildebrand says that an effort to tax foreign buyers will impact confidence and may lead to “condo investors and foreign buyers hold[ing] back on buying new units.”
With so many new condo units making their way into the city’s rental pool this would “restrict the inflow of new rental units into the marketplace.”
Hildebrand, who is the vice president of the Toronto real estate data firm, made the comments on a recent appearance on BuzzBuzzNews’ weekly Facebook Live broadcast.
With Toronto’s low vacancy rate already spurring bidding wars over some of the city’s rental units, constricting the number of condo units being added to the rental pool would invariably make renting in the city more challenging.