Fall Market Assessment - Where we are 6 Months after the Fair Housing Plan (Part One)

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This post is part one of a three part series to evaluate the state of the Toronto Real Estate market 6 months after the implementation of the Ontario Fair Housing Plan. This post is based on Fortress Real Development’s own, 70 page “Market Manuscript” that was released this fall.

In Q1 2017, Canada had the fastest growing house prices in the world. That same quarter, Toronto experienced the 4th highest annual residential price growth among top global cities in with 25% growth.

In response to the rapid growth, in April 2017 the Ontario government implemented 16 new measures to cool the market. The mandate for the new legislation was to “help more people find affordable homes, increase supply, protect buyers and renters and bring stability to the real estate market”

To gain a better understanding of the forces behind our market and the impact of the 16 new rules, Fortress performed primary and secondary research to uncover the real data behind the market. Taking a look at existing data and reports, as well as performing their own research with urban planners, Fortress revealed some compelling information on the background of our fast-growing market.

The purpose of this article series is to explore the key points Fortress uncovered, and to share my thoughts on what they mean for Toronto Real Estate moving forward.

The focus of this post is:

The Non-Resident Speculation Tax - Did it Work to Cool the Market?

In both Toronto and Vancouver, rapid price growth, and an increasingly less affordable housing market, has stimulated anger in local communities. While there are a multitude of factors impacting prices in both cities, people tend to look for a scapegoat, and in early 2017 it was foreign buyers.

There is an argument that demand from foreign investors can transform housing into a tradable good. This can in turn distort prices, as well as influence the types of properties built. The manuscript evaluates this argument by assessing the real impact of foreign buyers, and where the market stands since the taxes have been implemented.

So let’s take a look:

Before the foreign buyer tax was implemented in Vancouver, foreign buyers represented 9.9% of purchases in June 2016 and 15.1% in July 2016 (BC Government). Once the tax was implemented in August, the percentage fell to 0.9% that month, 2.7% in September, and 3.0% in October.

Alongside these changes, home prices adjusted. For five months following the tax implementation, housing prices fell from the average of $933,000 to $896,000. However by early 2017, general sentiment toward the market shifted; prospective buyers and sellers were no longer worried about a large scale pull-back in the market, despite the mini price correction of 4%, and they confidently re-entered the market. By April 2017, the average house price topped the pre-tax peak of $941,000.

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TD Economics writes “ As time goes by, international experience shows that the foreign buyer’s tax, in the form of a land transfer tax, does not choke demand. Purchasers tend to bounce back within a year or two of implementation.”

Speculative buyers/investors jump into a market that is already rising; they are not the root cause of a rising market but a symptom of a much larger problem. The majority of demand in major cities such as Vancouver and Toronto is organic demand. Fortress revealed that 50% of foreign buyers are buying for their primary residence.

The manuscript does a good job to summarize:

“There is a general misconception that all foreign buyers are investors, that they use their property as a vacation home and otherwise keep it vacant. Half of the buyers are using the property to live in, or at least for one of their relatives to live in.

Keep in mind, if all non-Canadian citizens were banned from purchasing real estate, the demand for new immigrants and temporary residents would flow into the rental market, driving up rents, when rents go up, it results in more renters looking to buy, and more domestic investors buying up property to lease out (because of rising rents).

Either way, as long as the population is increasing and supply is not increasing enough to accommodate that growth, we’re simply shuffling the deck chairs on the Titanic. If we really wanted to prevent foreign buyers from affecting our housing market we would ban immigration, and clearly no one is advocating for that.”

Four months after the tax was implemented, foreign buyers accounted for 4.2% of transactions in Vancouver. While the tax did reduce the share of foreign purchases, Vancouver prices continued to rise, and were $60,000 over pre-implementation prices this fall. It is evident that foreign buyers are not the only reason, or even the greatest reason that housing prices are rising.

The reality is that the real estate market is driven by a multitude of forces, only one of which is demand. It’s easy to get caught up in the demand side of the equation because it’s highly visible and the media loves to drive attention toward it. However, what the market manuscript begins to demonstrate, is that targeting demand side solutions for our increasing housing market, is a short time fix. Speculation and foreign investment can have impacts in the short term, however it’s the physical and man-made restrictions on supply that have the largest impact on long-term housing prices.

The focus should shift away from who is buying real estate, to what types of real estate is being developed and built. In my opinion, the bigger impact that foreign investors have had on the market is a growth of “investor units” in large developments. The majority of units built today are small one bedroom units designed to be rental properties. And while, I am all for real estate investment, the long term effects of an over supply of one bedroom apartments versus 2-3 bedroom apartments, could have a huge effect on prices. As millennials start to expand their family, and the boomer generation continues to downsize, the demand for larger condo units will rise.

Now that a foreign tax has been implemented in both Vancouver and Toronto, the conversation should refocus to what projects are being developed and what the tax dollars can do for our communities. With the additional income, the government should focus on affordable housing, building better, more diverse and more sustainable communities. A greater supply of low to mid-rise buildings that focus on quality of life versus land density should be the topic of discussion.

So Since the Tax, How Much Money has the Government Made and What are they Planning to do with it?

Since the implementation of the Non-Resident Speculation Tax, there have been roughly 36,500 property sales with a total volume of nearly $29 Billion Dollars (Toronto Real Estate board). If non-residents represent 4.7% of property purchases, who are now subject to the 15% tax, the government has made over $100 million dollars in tax revenue (assuming 50% are exempt for buying for their primary residence), in only 5 months and from the GTA alone.

Over the past year there have also been some significant real estate planning announcements that at least help to explain what the tax revenue could be used for.

In May 2017 the ministry of housing announced that the Ontario government will be investing $600 Million in affordable and sustainable housing in Toronto. The investment will include repairs and retrofits to social housing. The funding comes from the $2 billion dollars allocated by the Ontario government to expand social and sustainable housing across the province.

In more recent news, Google’s Sidewalk Labs and Waterfront Toronto announced a new tech focused neighbourhood planned for our eastern waterfront. All three levels of Government will together provided 1.185 billion for the development of the site into a more sustainable community!

These endeavours are exciting and are a few steps in the right direction, however they still just skim the surface of our urban planning shortfalls. I look forward to more exciting developments.