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The Wynne government flies blindly into the housing bubble

Ontario sat idle while foreign buyers flocked to Toronto. With no reliable data, who knows what the province’s new tax will do?


 
Real estate for sale signs in Oakville, Ont., Friday, Oct.14, 2016. (Richard Buchan/CP)

The real estate frenzy has struck across southern Ontario, including this street in Oakville (Richard Buchan/CP)

The Ontario government introduced a package of 16 measures Thursday designed to tame runaway home prices in Toronto and surrounding cities, and improve affordability for those hoping to own or rent property. Premier Kathleen Wynne confidently declared the plan would bring stability to the market. “It’s about helping people buy a home, afford to rent a home or to stay in the rental home they’re in,” she said. “My objective is to make sure that what we do helps people.” As for the underlying data guiding these policy decisions? About that, the government is less confident.

The Ontario Fair Housing Plan includes options to boost housing supply, prevent egregious rent increases and rein in excessive speculation. But it’s hard to shake the feeling the government is, in several important ways, flying blind. The lack of data surrounding Canada’s housing market has been a problem for years, and it’s only grown more pressing as real estate markets in B.C. and Ontario have turned red hot. In the federal Liberal’s first budget in 2016, the government allotted a measly $500,000 to Statistics Canada to monitor foreign investment in real estate. This year, the government announced a much bigger investment geared toward collecting housing data—$300 million over the next decade, including $39.9 million to study foreign ownership. Though welcome, such investment should have come long before prices in Vancouver and Toronto flew into the stratosphere. Without reliable numbers, policymakers are left making decisions in the dark—and far too late.

Take the 15 per cent “non-resident speculation tax” the Ontario government announced on Thursday. The levy, effective immediately, targets foreign buyers who are flipping properties or using real estate to park cash. But the government doesn’t know how big a factor offshore buyers are. At a news conference, a reporter pressed Sousa to account for the number of foreign and domestic speculators in the market, compared to families who are simply trying to find a place to live. “The data is very clear,” Sousa said before sidestepping the question. “Prices are going too high, and demand is extremely high.” Eventually, he conceded: “We have to get greater clarity.”

RELATED: How Canada completely lost its mind over real estate

When Vancouver implemented a foreign buyer tax last summer, many observers and economists predicted investment would flow to Toronto. Rather than try to get a handle on the issue, Ontario policymakers sat idly by. Wynne maintained a similar tax wasn’t the right fit for the province. “I’m not interested in doing something that would have an unintended consequence in Ontario,” she said in October.

The government is only now pledging to collect more data on homebuyers. Effective April 24, purchasers will have to declare residency, citizenship and permanent resident status, and whether the home will be occupied by the purchaser or family members as a primary residence. One of the outcomes of the much ballyhooed housing summit earlier this week between Sousa, his federal counterpart Bill Morneau and Toronto mayor John Tory was a commitment to “sharing relevant data more regularly between governments to enhance understanding,” a move that seems comically late after prices in the region have surged double-digits over the past few months.

Sousa’s targeting of “property scalpers” is equally devoid of hard facts. The finance minister has asserted that speculators are flipping contracts to purchase pre-construction housing units before closing, a practice he argues is contributing to price increases and crowding out families. Assignment sales, the more benign name for the transaction Sousa is talking about, have occurred in the condo market for years. But the government did not provide any information on the prevalence or frequency of the practice. Instead, the province pledged to “work to understand” the issue. The move to preemptively brand “property scalpers” a problem, however, smacks of an effort to create a villain that the government can then vanquish—a useful tactic for a government headed by a leader with a record-low approval rating facing an election next year.

RELATED: Chinese real estate investors are reshaping the market

None of this is to say that the package announced today is not needed. It would simply be reassuring for the public to know that policymakers are guided by research and firm data, instead of reacting to frothiness in a real estate market that’s been foaming for years. The housing market is far too important to the economy for that.

“The household sector has been pretty much the only game in town when it comes to driving broad Canadian GDP growth,” wrote Scotiabank economist Derek Holt in an unsettling note this week. The real estate market heavily influences consumer spending—when markets boom, homeowners feel wealthier, and spend more money. Holt calculates that housing and consumption amounted to 84 per cent of annual growth in real GDP from 2010 to 2016. Governments, he says, need to be “very careful in not removing what has essentially been the only source of growth in the economy for years now and doing so a) potentially at the peak of the cycle, and b) with cavalier attitudes to the importance of facts and figures.”

The good news is that the measures announced today are unlikely to send the market into a tailspin. If anything, the package might be too tepid. “The bark is bigger than the bite,” wrote Bank of Montreal senior economist Robert Kavcic this morning. Benjamin Tal, an economist at CIBC, wrote most of the policies are “reasonable and potentially helpful.” The foreign buyer tax and a crackdown on assignment sales would both have only a marginal impact on the market. “But margins do add up,” Tal wrote.

No one can say for certain how effective the new policies will be, of course. When it comes to the housing market, the future is just as cloudy as the past.


 

The Wynne government flies blindly into the housing bubble

  1. Amazing how the media always knows better than our elected govt.

    • We are talking the Ontario liberal government here. Let me remind you.
      Health tax after promising no new taxes, some couples pay over $1500, eliminating eye examinations, HST tax on gasoline, home heating and other new items. Numerous wage hikes to unions of all stripes, as well as cabinet members and assistants, health scandal, OLG scandal, Caledonia police manipulation, ornge scandal, ridiculous weed spraying law, ridiculous .05 drinking law, green energy fiasco, high hydro rates, hydro delivery charge doubling, gas plant fiasco, UPX white elephant, Pan AM games overrun, G20 secret law, beer tax, ORRP waste of money, election fraud charges. Deficit after deficit, and now a tax on heating our homes and getting to work disguised as saving the planet.

      • Whatmeworry A good post, unfortunately too many people just comment without bothering to find out what the issue is and what could be done with existing legislation. This is one time I am happy that the CRA has many experts who do nothing else that trying to get money. The easiest means are federal since provincial tax is not quite the same although they know how to make thing taxable.

    • Kindergarten kids know more than your elected government.

      • Mmmmm You guys elect people, pay them well, and then spend all your time mocking them.

        If you could do the job better then I invite you to run for election.

  2. At least the CRA is working on it. Number one if the profits are taxable there are other issues to hurt the foreign investor.Secondly the profit will become taxable in those senarios. All our dumb liberals need to do is ask the CRA how to word the law.

  3. Targeting straw men!?. I know several people who recently went through multiple bidding wars for existing real estate and they were only ever bidding against people just like them chasing after the limited supply of family homes. The article plays on the not too improbable thought that politicians don’t know what their doing. The basic data is clear: the GTA is a center of population growth with higher than average growth due to being a a a focus for immigration as well as inter-provincial and intra-provincial migration. This merely emphasizes the fact that Canadian housing additions (new housing minus housing removed) have for nearly a decade been insufficient to accommodate population growth: for several years prior to 2008 housing stocks grew faster than population but since then have grown at a lower rate; that’s coupled with a declining occupancy level per unit and a shift to smaller units in urban centers. It’s simple math that if housing additions times occupancy level is less than population growth (as it has continually since 2008), there is a lack of supply which is continually increasing. Only politicians would propose to reverse the law of supply and demand.

  4. There are at least two issues with the property bubble
    – is foreign ownership good or bad?
    – is it appropriate for residential property to be a speculative investment?
    The problem with resolving either of these is the cumulative bias of the decision makers, whether they have ties to foreign nationalists or are themselves speculating on property. A recent study in Australia found federal politicians on average held 33 properties. It is not likely to be that different in Canada.

    The foreign owner issue might only be bad when it links to the speculation issue which results in empty properties, money laundering and all sorts of fringe problems. The resolution may be in whether a property is tied to accommodation or speculation. If the address is tied to a voter (either by the owner or a renter) then maybe it is residential and taxed at a residential rate (for municipal taxes) and not a capital investment (for CRA). If it isn’t tied to a voter then it is a pure investment and is taxed as a business (municipally) and is a capital investment (CRA). To discourage speculation then adjust the capital depreciation deduction (or eliminate it) and the related income deductions).

    There is a role for banks /money lenders and property registration agencies in tracking the shadow flipping to make sure income from speculation is tracked and reported.

    Rent controls and affordable housing programs only help when value is increased by population growth.

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