Canada’s most crowded province, Ontario -- home to Toronto and its hot real-estate market -- has followed Vancouver and the federal government in trying to tame booming house prices in hopes of preventing a crash. The template is the one used elsewhere across the country: Tax foreign buyers, expand rent control and put levies on vacant properties.
1. What’s Ontario’s game plan?
On April 20, provincial Finance Minister Charles Sousa unveiled a 16-point plan that called for a 15 percent tax on foreign "speculators" in the Toronto region and expanded rent control for buildings constructed after 1991. He also proposed a five-year, C$125-million ($93 million) program to encourage the construction of new rental units by refunding a portion of the fees collected from builders. This followed moves by the province of British Columbia, which enacted a 15 percent tax on foreign home buyers in Vancouver in 2016.
2. Did it work in Vancouver?
The tax did push down home sales to the lowest in almost two years. But the market’s showing signs of heating up again.
3. What are federal officials doing?
In October 2016, Finance Minister Bill Morneau closed a tax loophole used by overseas purchasers: They’re no longer be able to claim a capital gains tax exemption on the sale of their principal home. There are also limits on capital gains tax breaks for resident home buyers and tightened requirements on mortgage insurance. In December 2015, the government raised down payment requirements on homes over C$500,000. The government may ask banks to hold more money backing property loans in case of default.
4. Why is Canada’s housing market so hot?
Rich foreigners -- particularly from China -- have been blamed by government and locals for soaking up the limited supply of houses and condos. House prices in Toronto shot up more than 30 percent in March 2017, surpassing gains in Vancouver, and have outpaced San Francisco and New York in recent years. Priced-out residents are driving up sales and prices in sleepy nearby towns.
5. How did we get here?
Blame a perfect storm of depressed interest rates, limited housing supply and city planning policies. Armed with cheap debt, buyers are overextending themselves: An overnight lending rate near a record low means some mortgage rates are as low as 2.28 percent. Vancouver’s sprawl is hemmed in by the Pacific Ocean on one side and mountains on the other, Toronto is limited by an ecological reserved territory, the Green Belt. And since the 1980s, the Canadian government has been encouraging offshore investment, at one point even establishing a national investor program to fast-track citizenship applications.
6. Where else have steps like this been tried?
In Australia, foreigners generally now need to seek approval before buying residential real estate and are required to pay extra fees. Switzerland doesn’t allow any purchase of residential real estate by non-residents, though investors can get around the rule by applying for a Swiss residence permit. Hong Kong taxes non-resident home buyers an additional 15 percent. On Canada’s east coast, Prince Edward Island limits purchases by non-residents -- even Canadians from other provinces -- to five acres.
7. So will this work?
Probably not. While economists at Toronto-Dominion Bank say the non-resident tax and rent control expansion combined will “take some steam” out of Toronto sales and prices in the near term, several others say the measures may deter investment and curb future supply of homes. Expectations that real estate prices will continue rising are the highest since at least 2008, according to the weekly Bloomberg Nanos Canadian Confidence Index released on April 24.
8. What’s proving so difficult?
The tricky part is that rich investors from abroad find ways around crackdowns. To skirt tighter bank rules, buyers can go to non-bank lenders, a k a the shadow market. In Australia, even as the nation implemented offshore buyer rules, home prices continued rising and investment increased.
The Reference Shelf
- A Noah Smith column on China sending real-estate bubbles to North America.
- Scenes from Vancouver, playground of the rich.
- A University of Alberta China Institute research paper on foreign investment in Canadian real estate.
- A story, based on a C.D. Howe report, about the risk of a mortgage meltdown.