Ontario Foreign Home Buyers Tax – Controversy or Reality?
Foreign Home Buyers Tax in Ontario – Top Real Estate Debate
**Please note this is a blog post from 2016. The Non Resident Speculation Tax (NRST) across Ontario has been increased to 25% as of October 25, 2022.**
The average price for a home in the GTA grew from $603,534 to $710,410 same time last year, according to latest numbers from TREB. If we look at home prices individually in Toronto, Markham or Mississauga, the average prices would be much higher.
To date in 2016, home buyers are finding themselves pitted against a very bullish real estate market. Home buyers have been doing some frenzied buying by paying anything like $50,000 to $150,000+ over asking price for a home. This has been superficially inflating real estate growth, one that cannot be sustained over the long term.
This has led to a lot of speculation about an impending real estate market crash. Well, all the pointers are strongly suggesting a bubble burst. Government finds itself hard-pressed to find solutions fast to keep this from happening.
There are many factors that have contributed to the uncontrolled home price increase: lack of resale home supply, lack of new land for constructing new homes and untamed foreign investment in real estate. It appears that the latter two are the only actionable items.
And of the two, taming of foreign investment seems to be an easier cookie to bite in the short-term. Hence many discussions and debates have hit the fore around foreign home buyers tax in Ontario.
It appears that a few economists and political figures are touting for Foreign Home Buyers Tax in Ontario. Former finance minister Joe Oliver wants Ontario to impose a tax on foreign homebuyers. He has expressed his opinion that a 15% levy should be imposed on foreign buyers to stop international money from helping inflate real estate prices in the GTA. Recent interview comments by Benjamin Tal, Deputy Chief Economist at CIBC Capital Markets just added more fuel to the fire.
Foreign Home Buyers Tax in Ontario – Will Ontario follow B.C.’s lead in this matter?
Implementing a tax on foreign home buyers is a controversial issue. It hasn’t met with unanimous consensus. Provincial leaders claim they are watching Vancouver housing market after the recent imposition of a 15% tax on foreign home buyers. It appears that the premier and minister of finance in Ontario are not convinced that a similar move would be good or work for Ontario. However, Ontario’s Finance Minister is keeping the door as per a BNN report.
However some economists beg to differ. According to Benjamin Tal, with Australia, New Zealand and B.C. introducing measures for foreign investors, Ontario will be forced to do the same. He feels that shortage of land supply is the main issue and recently commented: “Vancouver has been slowing for a few months now, and the new tax on foreign investors provided an extra push. 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.”
B.C. announced the tax in July and the Real Estate Board of Greater Vancouver reported that home purchases dropped by 26 per cent in August compared with the same month last year.
It has also been reported that foreign homebuyers are pulling out of Vancouver and heading to cities like Seattle (US) and Toronto to invest in real estate.
According to Toronto Mayor John Tory – “We are working away quickly at identifying what is the most effective way to maintain housing supply and make sure that we build in a degree of affordability in this market. The subject of whether we should be imposing a tax, or whether [B.C.’s tax] is adversely affecting our market, I think it’s far too early to tell. We are watching it very closely.”
While Benjamin Tal doesn’t offer any specifics on the how the tax would or should work, he has also offered other solutions to combat sky-rocketing 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 and large rental buildings, including more flexible rent control rules, for seniors and young families who have been priced out of single-family homes.
“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”, says Tal.
Foreign Home Buyers Tax in Ontario – Controversial Position
It is definitely a tough decision to make, and one that needs to be clearly evaluated for all its merits and demerits. Some economists suggest imposing a tax for a shorter period of time, to calm the current over inflated real estate markets in Ontario. Some fear that the imposition of the tax may be seen as targeting a particular ethnic group who invest hugely in the Canadian real estate. Others worry it will effect business and economic growth in Ontario. Yet others argue that foreign buyers invest in condos which make up for the rental supply for Ontario residents looking to rent.
The Real Question is whether foreign buyer tax will help Ontario residents afford homes?
Read BNN article on what everyone who matters is saying on this issue.
Class-action lawsuit filed files against B.C.’s foreign buyer tax
In another news a class-action against the foreign buyer property tax questions the Provincial government’s authority in implementing this tax.
As per, Luciana Brasil, a partner with Branch MacMaster Barristers and Solicitors, the law firm that has filed the class-action suit on behalf of Jing, “The problem here is that the province has intruded into an area of federal jurisdiction”. Luciana claims that the province chose to use nationality as the basis for the tax and by doing this they are intruding into an area of federal jurisdiction. She claims that province is violating over 30 international treaties that guarantee equal treatment to these citizens and residents of other countries.”
It will be interesting to see the outcome of this lawsuit and it might stop other provinces from implementing a foreign buyers tax.
Foreign Home Buyers Tax in Ontario – My Two Cents
While policy making is a whole different ball game and part of the bigger macro economic picture, first I’d like to comment on what is happening at the micro level of home buying and selling in Mississauga and other parts of the GTA.
The current real estate situation is no short of a crisis for home buyers who find themselves priced out of the market. The most hard hit are home buyers looking to upsize, newcomers, first time home buyers and millennial home buyers. Many millennial home buyers have almost given up on the notion of ever being able to afford a home. This is where I strongly feel the parents need to step in, if they can by contributing towards buying a home for their adult children.
Joint ownership or joint home buying is another trend that will become popular in the coming years. This is when siblings or friends decide to split the expense of buying at least a two bedroom or a two-bedroom plus den. I have personally helped a couple of young buyers buy a condo jointly at Square One, Mississauga.
People who are looking to both sell their home and buy another one to upsize are skeptical about what should be done first, or whether they should bother selling their current home at all. After all, if they sell high, they will have to buy high as well. However, at least this issue can be strategically handled by an experienced Realtor.
Some type of measure is definitely necessary to stabilize and ground the housing market. Is foreign home buyers tax the only answer, I am not so convinced about it. At some point, government needs to address the elephant in the room as well – policy driven lack of land supply. The imposition of foreign home buyers tax in Ontario will only impact the “demand” side of the equation, not the “supply” angle of the whole problem. And the impacts on demand will be both positive and negative.