Ontario will have little choice but to follow B.C.’s lead when it comes to taxing foreign homebuyers, according to one economist.
CIBC economist Benjamin Tal said policymakers in Ontario will be forced to consider taxing foreign investment similar to the 15 per cent charge recently smacked on home purchases by foreigners in Vancouver.
He believes the red-hot real estate market in Toronto is being driven by a lack of “land supply” to build new real estate in the downtown area.
“Vancouver has been slowing for a few months now, and the new tax on foreign investors provided an extra push,” Tal said in a recent note to clients. “The main reason behind higher prices in the GTA is a policy-driven lack of land supply. And with no change on that front policymakers have to use demand tools to deal with what is essentially a supply problem.”
Since B.C. announced the tax in July, early numbers have indicated that Vancouver’s housing market is showing signs of a slowdown. In August, the Real Estate Board of Greater Vancouver reported that home purchases dropped by 26 per cent in August compared with the same month a year earlier.
Global News also reported last week that foreign homebuyers are pulling out of Vancouver and heading to cities like Seattle and Toronto to invest in real estate.
Some experts have said it’s too early to say for sure if the tax is having the desired effect to cool the housing market. And while Toronto Mayor John Tory may agree, he recently said he is working with provincial and federal levels of government to address housing supply in the GTA.
WATCH: Toronto Mayor John Tory addresses the latest home sales numbers
Earlier in July, Ontario Finance Minister Charles Sousa said he is “looking very closely” at B.C.’s new tax.
The average price for a home in the GTA grew from $603,534 to $710,410 year-over-year last month, according to the latest numbers from the Toronto Real Estate Board.
While Tal doesn’t offer any specifics on how much of a tax or when it should be implemented to help cool the Toronto market, he offers other solutions to deal with sky-high home prices:
- Banks should pay for their own mortgage insurance which would compel lenders to start pricing for risk and limit liquidity in the market.
- Raise the minimum down payment on homes valued between $500,000 and $1 million to more than 10 per cent.
- Closer monitoring of subprime and alternative lenders.
- Provide tax incentives to developers to build more large rental buildings, including more flexible rent control rules, for seniors and young families who have been priced out of single-family homes.
“The key risk facing the market is not a wave of defaults but rather a situation in which higher mortgage rates down the road will elevate debt financing costs at the expense of other spending — a trajectory that is potentially recessionary,” Tal said. “Any upcoming changes to regulations should make it a bit more difficult to borrow — simply to save Canadians, blinded by the current affordability mirage, from themselves.”