Megan J. Lem is a corporate lawyer in the Toronto Office of Oslers LLP. This article reflects the personal views of the authors alone.
Ontario’s recent experiment with a foreign real estate ownership tax has finally produced some hard data, and none of it has come as any surprise to industry pundits. Effective April 21, 2017, with almost no prior warning, a 15 per cent surtax (in addition to the regular land transfer tax) was imposed on all foreign buyers acquiring residential property in the Greater Golden Horseshoe Region, stretching roughly from Peterborough in the east to Midland in the north, Waterloo in the west and around the horn to Niagara Falls in the south.
This 15 per cent surtax, called the “Non-Resident Speculation Tax,” was intended to curb perceived foreign speculation in Southern Ontario, which the government had estimated was as high as eight per cent of all sales in the Greater Golden Horseshoe Region, and was modelled almost entirely after the same sort of tax on foreign buyers in the Greater Vancouver Region implemented by the British Columbia government last year.
Data released by the Ministry of Finance for the month ending May 26, 2017 (being the first full month period following the introduction of the tax) shows relatively modest foreign buyer activity. Far from being the huge market driver that the government had predicted (the government itself anticipated that foreign ownership could be as high as eight per cent of all purchases in the Greater Golden Horseshoe Region), the data revealed that only 4.7 per cent of the residential purchases made in that month in the Greater Golden Horseshoe Region was made by foreigners.
Garth Turner, a former federal cabinet minister and economist, summarized the general industry reaction to the news in an interview for CBC News. “The bottom line here is that if we want to blame someone for ridiculous house prices you’re going to have to look at yourself or look at your neighbour,” he said, “because it’s not guys coming over by the planeload from mainland China.”
In defence of the original government predictions, however, one has to remember that the 4.7 per cent number reflects only post-tax transactions. That is, 4.7 per cent of purchases in the month were made by foreigners after the tax was already in effect. Unlike the B.C. Foreigner Tax, Ontario’s version of the tax “grandfathered” all pending transactions that were already under contract before the announcement of the tax. While this had the laudable effect of not causing a “rush to close” that caused a literal stampede to the Registry Office in Vancouver in the days before the tax came into effect, it also meant that any data that the Ministry of Finance has can only reflect the post-tax paradigm. The Ministry of Finance has no hard data on the level of foreign investment in the province before the tax.
In a further irony known mostly to real estate lawyers and very few others, the Ontario government actually implemented a mandatory plan to gather comprehensive property ownership data in the province, but then decided to launch the tax before gathering any data under that plan! As it stands now, we will never know for sure what the pre-tax level of foreign ownership in the province actually was before the introduction of the tax, and, hence, we will never know how effective or ineffective the tax was in curbing foreign speculation (but, depending on how much of a conspiracy theorist you really are, maybe that was the point all along of rushing the tax in before the government had the data).
Preliminary indicators of market activity in Ontario suggest that the tax is working. The Toronto Real Estate Board reported the number of homes sold in the Greater Toronto Area (the epicentre of the Greater Golden Horseshoe Region) fell 20 per cent in May compared to May last year. More recent numbers suggest that there is almost a 50 per cent reduction in the number of homes sold in the first two weeks of June compared to the same period last year. The same report also shows that the average price has fallen 12.2 per cent from the all-time, pre-tax high (although it is important to note that average home prices are still up 6.7 per cent on a year-over-year basis). Anecdotal evidence from real estate lawyers also suggest that the sheer volume of house deals has fallen this spring/summer, in some cases as a welcome respite to the blistering pace of the previous couple of years.
Some analysts have suggested that the decline is actually part of an organic correction that was due in any event, and that the tax merely triggered, exacerbated and concentrated the otherwise inevitable market correction. We will not really know for sure, nor is it particularly relevant, whether the market has been permanently affected by the tax.
Industry pundits are almost universal in suggesting that the effect of the tax is fleeting, and point to the Vancouver experience as a harbinger of things to come in the Greater Golden Horseshoe Region. In a report by on the impact of the B.C. Foreigner Tax, now a year old, the CBC summed-up the efficacy of the west coast version of the tax: “The foreign buyers’ tax, introduced by the previous Liberal government, has done little to improve affordability a year after it was introduced, say observers of Metro Vancouver’s real estate market. Analysts say home prices have continued to escalate, sales are on pace with pre-tax expectations and houses are largely still out of reach for most residents.”
This brings us full-circle back to the original proposition held by many in the industry that housing affordability is a policy question involving long-term supply, and that policies aimed at artificially suppressing price (like the Non-Resident Speculation Tax) are simply doomed to failure.
Megan J. Lem is a corporate lawyer in the Toronto office of Osler, Hoskin & Harcourt LLP. This article reflects the opinions of the author alone.