Capital gains tax hike or foreign buyer tax?

What device would be better for cooling the hot housing market? A capital gains tax hike or a foreign buyer tax? One thing that’s not up for debate is that buying a home in the GTA and in surrounding areas has become difficult for many home hunters.

According to a report by Ipsos in the Toronto Real Estate Board’s (TREB) 2016 Market Year in Review, 40% of non-recent home buyers plan to spend $50,000 on renovations, up from 23% a year ago, further evidence that a “starter” home may be a “forever” home for those lucky, smart or connected enough to already be in the market.

In an anecdotal story on CBC.ca, it’s suggested that first-time buyers whose lifestyles change — adding, say, a kid or three over the last few years — can’t afford to move up to get more space and will be spending what they can afford on home renos instead.

The trend means that homes that otherwise would have been listed are staying off the market, which TREB describes as a “vicious circle.” While overall home sales were up last month in the GTA compared to the same period last year, sales of detached and semi-detached homes dropped by 6.8% and 16% respectively. This puts further upward pressure on prices, which means fewer people can afford to move. Which means … well, there’s the circle.

The story also cites data collected in the 2011 census that shows that fewer Boomers are downsizing, as they need the space to house their adult children; according to the data, more than 40% of Canadians aged 20 to 29 either still live at “home” or never left. In Toronto, it’s even more pronounced, at more than 56%.  

BMO chief economist Douglas Porter says even someone earning $225,000 a year - which just nudges them into the “one-percenter” category - would struggle to afford an average-priced single-family home in Toronto these days.

With new mortgage stress test requirements in place, such an earner even with $100,000 for a down payment could carry a mortgage of $987,289, well below the average single-family home price in February of $1.57 million.

Driving such high-income potential buyers out of the market could prove problematic to the city’s economy, as it makes it difficult to attract talent; prices in the 905 average over a million now, too, so even commuting is becoming a less viable option.

Would Toronto benefit from a capital gains tax hike?

So who is buying those $1.57 million homes? In spite of the vicious circle described above, Capital Economics senior Canada economist David Madani wrote last month that the Toronto market is driven mainly by move-up buyers who saw prices soar in their existing homes and leveraged their equity to keep their mortgages down on a new home. Investors, he says, are another significant contributor to soaring prices.

To cool it all down, Finance Minister Charles Sousa says he’s written a letter to federal Finance Minister Bill Morneau requesting an increase in the capital gains inclusion rate of 50% on the sale of non-principal residences, according to City News.

To address the same problem, ScotiaBank chief economist Jean Francois Perrault recommends a graduated tax system in which owners who buy and sell within six months pay a higher rate than those who hold a property for a year, 18 months or two years. He says flippers represent a greater percentage of the market than foreign buyers. Naturally, real estate brokers and agents disagree.

I don’t know where it’s all going, but one thing is for sure. “Going home” has become one very fraught phrase.