The Conference Board of Canada’s Chief Economist Craig Alexander offers the following perspectives/insights:
“Given the frothy real estate price growth across the Greater Golden Horseshoe, policy action was needed to reduce the growing risks to the Ontario and National economy. More sustainable and moderate price growth is in the interests of buyers, sellers, the financial system and the economy. In recent years, the federal government has delivered several rounds of housing policy tightening that impacted real estate markets from coast-to-coast. The next logical step was regional policy actions where the imbalances are greatest. It was time for Ontario to act,”
—Craig Alexander, Senior Vice-President and Chief Economist, The Conference Board of Canada.
- The Government of Ontario announced measures today aimed at cooling real estate price growth in the Greater Golden Horseshoe and addressing deteriorating housing affordability. Broadly speaking, the measures are a prudent response to growing real estate imbalances in the region that pose material economic risks to the Ontario economy, as well as potential ramifications for the national economy.
- Over the past year and half, resale home price growth in the Greater Toronto Area accelerated in a dramatic way that far exceeds the pace supported by economic fundamentals, including household income growth and population gains. Moreover, the booming price growth widened from single detached homes, for which there was a scarcity of supply, to all segments of housing – including singles, multi-unit (condos) and townhouses. The price boom also increasingly widened to surrounding regions across the Greater Golden Horseshoe, from Niagara Falls to Oshawa around Lake Ontario, and then north of this region including Kitchener-Waterloo. For many real estate markets in the region, the year-over-year price growth is in excess of 20 percent and accelerating.
- A boom-bust cycle in home prices would carry significant economic costs to the region and more broadly to the national economy. The Greater Golden Horseshoe accounted for 60 per cent of Ontario’s population and 23 per cent of Canada’s population in 2016. It was 65 per cent of Ontario’s economy and 23 per cent of the national economy, as measured by GDP.
- Given the possible economic fallout from a major housing price correction, and considering the continuing low interest rate environment, the appropriate policy response is to take measured action to temper activity, but not in such a dramatic way as to cause a price collapse. The Ontario government announced several measures aimed at achieving this goal.
- A non-resident speculation tax of 15 percent will be implemented in the Greater Golden Horseshoe. This is in-line with the foreign buying tax implemented in British Columbia. There are exemptions to protect foreign nationals that are contributing to the Ontario economy and society. The exemption is implemented as a refund, so the tax gets paid and then refunded when eligible. Foreign nationals working in Ontario will be exempt after one year of employment. Foreign students who bought real estate, are enrolled in an Ontario education program and were resident in that property will be exempt after two years. Immigrants on track to permanent residency will also have to pay but be refunded once permanent residency eligibility is established. Immigrants through the Ontario Immigrant Nominee Program and refugees are exempt and will not have to pay up front.
- Good data on the impact of foreign buying in the market is not available, but the experience of Vancouver is illustrative. The non-resident speculative tax should shift some foreign buyers out of the market and temper price growth, particularly of high-priced homes.
- Ontario will grant the City of Toronto the ability to put a tax on vacant homes. It will be up to the municipality to determine the size of tax and how to implement it. The goal is to dampen speculation and encourage land development sooner rather than later. Other cities have the option of implementing such levies upon request to the Ontario government. The impact will depend on the size of tax applied. Municipalities will also be able to request for the ability to tax vacant lands. A key question will be how the vacant home tax is operationalized, since vacant properties will need to be identified in order to collect the tax.
- The Ontario government is expanding rent controls on units built after 1991, which is when prior rent controls ended, with an annual increase capped at 2.5 per cent. Economists generally do not applaud such measures. While it will be favourable for renters that get rent controlled properties, such action incents builders to shift away from constructing new rental projects, which creates scarcity of supply for future renters. Acknowledging the disincentive that rent controls can cause, Ontario is providing a carrot with a commitment that builders can rebate a portion of development charges associated with new rental projects. The province is also looking at a few other incentives to stimulate rental and affordable housing development. The rent controls will stem the rapid rise in rental prices occurring in the market. Only time will tell whether it hampers future rental supply.
- The new regional policy actions are a first step to cooling real estate activity in Southern Ontario. They are unlikely to lead to a sustained price correction, but it is hard to assess market reaction in the short term. If the measures are effective, they should help temper the economic risks. If the measures fail to cool the market, then follow-up action may be required.