Photo: James Bombales
Last week we presented eight arguments against introducing a foreign-buyer tax in the Greater Toronto Area. This week, we’re looking at the alternative view, one that has plenty of proponents, from economists at some of Canada’s biggest banks to brokers working on the ground in the country’s hottest real estate market.
And even if you’re an ardent supporter of a hands-off approach to the market, it’s still worth reading what the other side has to say, right?
Below we take a look at some of the major arguments that the pro-foreign-buyer-tax crowd are using to justify government intervention in Toronto's real estate market:
1. BC’s tax is clearly having a positive impact on Vancouver affordability, as evidenced by comparing recent price behaviour in Vancouver (tax) and Toronto (no tax) and Victoria (no tax).
A major argument against introducing a foreign buyer tax focuses on the supposed lack of evidence that such a measure will actually have the desired impact on deteriorating affordability across the GTA. Without accurate data on foreign buyer activity in the market, we don’t really know what kind of force it is exerting on the market. There are also those who claim that the jury is still out on whether the tax is offering anything more than temporary relief from rapid home price growth in Greater Vancouver.
But anyone who argues that foreign buyers are likely too marginal a force to actually have an impact on prices should have a look at this graph comparing Toronto, Greater Vancouver and Victoria home prices published in January by BMO Economics. The vertical black line indicates the time when the foreign-buyer tax was introduced and the price divergence between Vancouver, post-tax, and Toronto and Victoria is clear.
Chart: BMO Economics
“[I]n case there was any doubt what force is at play, note that Victoria has tracked closer to Toronto’s behaviour than Vancouver’s,” says BMO Chief Economist Douglas Porter.
2. It’s not just about calming foreign buyer demand. While the BC tax has already led to a drop in transactions involving foreign buyers in Greater Vancouver, it’s also reducing demand beyond the non-resident segment which has a desirable cooling effect. The same is possible for Toronto.
A policy paper from the Ryerson City Building Institute published in March argued in favour of a BC-style foreign-buyer tax for the GTA market, noting that since it came into effect “prices have started to fall sharply at the high end, and price growth has stalled in the attached and condo market” in Greater Vancouver. Sales volume has also dropped sharply.
The paper’s authors say that this indicates foreign buyers were having “powerful knock-on effects” on the market.
“What has happened is that their desertion calmed FOMO demand and scared off speculative demand,” they say. “The evidence could not be much clearer, and for a market as hot as Toronto’s, such a cooling would be helpful.”
3. While addressing the issue of supply is essential, supply-focused initiatives won’t have a strong enough immediate impact on affordability.
“In the long run, supply has to be part of the solution,” says National Bank’s Managing Director of Public Sector Research Warren Lovely.
“But,” he continues, “it appears more could be done to tame demand, and dulling the foreign bid for Toronto and environs could be part of a multi-pronged housing affordability strategy for Canada’s largest province.”
Canada’s sixth-largest bank had previously argued against implementing a foreign-buyer tax in Toronto but changed its tune in March after observing high home price growth that was once thought to be contained in Toronto and some of the more active GTA markets moving farther afield to areas like St. Catharines-Niagara.
4. Even those who once were skeptical of any government intervention have reconsidered their stance in the face of continued home price increases.
It’s not just National Bank’s Warren Lovely who has shifted his stance on a foreign-buyer tax in the GTA. In March, the Globe reported that Ontario Finance Minister Charles Sousa is considering the tax as an option to curb price growth. Sousa had previously come out against a tax similar to BC’s in 2016.
“A year ago I was thinking, ‘Let market forces prevail,’” says Sousa, as quoted by the Globe. “But now I’m concerned about… the ability of people to enter the marketplace. [There are] bidding wars everywhere you go, it appears, and I’m sensitive to that.”
5. The Ontario government’s tax doesn’t need to be identical to BC’s. It can be tailored to the specific issues that Ontario needs to address.
BMO’s Porter suggests a more nuanced approach could be entertained. Echoing developer Brad J. Lamb, who believes foreign-buyer participation is essential to the new residential market’s health, Porter says foreign investment in new development isn’t a bad thing (it's worth noting, though, that Lamb is vehemently against any kind of foreign buyer tax).
“[W]e’re not fighting over a limited supply there,” Porter notes. Instead, he suggests introducing the tax only on existing homes so as not to dissuade foreign-buyers from purchasing in new developments, which he says can spur construction that may not have moved forward otherwise.
Porter also points out that the levy doesn’t need to be as high as BC’s, and the government could apply the tax to only certain areas in southern Ontario.
6. In the long term, the province may regret not taking more forceful action sooner.
In a November 2016 interview with BuzzBuzzNews, BMO’s Porter characterized the BC government’s move as attacking foreign investment in the housing market head on.
“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,” says Porter.
It’s worth noting that the economist made these comments before the Ontario government signalled it was open to considering a foreign buyer tax this March.
7. Some real estate brokers believe action curtailing foreign-buyer activity in the resale market is a good idea too.
“Ontario should introduce a tax on foreign buyers similar to the one implemented in Vancouver by the British Columbia (BC) government, but with improvements,” states a report titled “How Investor Demand for Houses is Driving Up Prices in the Greater Toronto Area” from Toronto brokerage Realosophy.
Instead of implementing the tax across all homes bought in the region, Realosophy recommends prohibiting foreign buyers from purchasing resale homes while maintaining their access to the new construction market.
“Such a policy prevents domestic buyers from being priced out of homes today while leveraging foreign capital to build the homes that will be needed tomorrow,” says the brokerage.
The report also notes that a similar measure was introduced to curtail foreign buyer activity in Australia.