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Some Possible Consequences Of Toronto's Foreign Buyer Tax

It is possible that like Vancouver, foreign buyers' tax may not be able to stem the rising real estate prices in Toronto.

08/02/2017 12:18 EDT | Updated 08/02/2017 12:18 EDT

A 15 per cent tax on foreign buyers of property in the Toronto region has been introduced. This is predicted to have some consequences for the real estate market in Toronto as well as possible effects for the real estate sector in other parts of Canada as well as the wider economy. Along with the tax, the province took additional measures like expanded rent controls and allowing cities, including Toronto, to tax vacant homes.

This has had some immediate effects on the real estate market in Toronto. Sales decreased by 37.3 per cent in June 2017 compared to June 2016. Similar effects were observed in Vancouver when British Columbia introduced a similar tax. Studies have found that the percentage of foreign buyers in the Toronto real estate market may not be that substantial. Analyzing data from April 24 to May 26, the government found that only 4.7 per cent of the properties in the Greater Golden Horseshoe region were purchased by foreigners. A study by the Toronto Real Estate Board revealed that foreign buyers accounted for 4.9 per cent of real estate purchases in the Greater Toronto Area.

Again, data analysis for the same period by the Globe and Mail indicate foreign ownership of residential properties was 9.1 per cent in the York Region while it was 7.2 per cent in the City of Toronto. These analysis portray that foreign buyers, even though present, are not a dominant part of buyers in the Toronto real estate market.

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A study by the Toronto Real Estate Board revealed that foreign buyers accounted for 4.9 per cent of real estate purchases in the Greater Toronto Area.

Last year, British Columbia implemented a 15 per cent foreign buyers' tax for the Metro Vancouver area. Initially, it did have the desired effect and the number of real estate transactions decreased. Also, the price of real estate declined as well. However, both sales and prices have picked up in Vancouver. In March, sales of homes in the Metro Vancouver area increased by almost 50 per cent. This shows that the impact of the foreign buyers' tax is decreasing and may not have been as effective in stemming real estate sales and prices in the Metro Vancouver area.

The imposition of foreign buyers' tax in the two largest cities in Canada has made the relative price of real estate in other parts of Canada cheaper for foreigners. This means that foreign buyers may start purchasing real estate outside of Toronto and the Metro Vancouver area. Even though they are not a significant percentage of real estate buyers in Toronto, it is possible that they might increase the demand for real estate in smaller cities and drive up prices in those cities. Therefore, there is a possible downside of introducing foreign buyers' tax in only the two largest cities. There may be a spillover effect in the real estate sector in other parts of Canada.

It is possible that like Vancouver, foreign buyers' tax may not be able to stem the rising real estate prices in Toronto. Rather than solely focusing on foreign ownership, a more effective policy would be to analyze the impact of foreign earnings and wealth on the real estate sector. When new Canadians move to Canada, they bring wealth earned outside of Canada. A portion of this wealth goes to purchasing real estate in Canada, and contributes to real estate demand and prices. Therefore, any policy to alleviate high demand and prices in the real estate sector has to focus on the influence of foreign-earned money.

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Toronto condo buildings in Canada.

Also, if there is a slowdown in purchase of real estate and a decline in real estate prices in Toronto in the short run due to the imposition of foreign buyers' tax, it may lead to a slowdown in the wider Toronto economy. However, as has been seen in the case of Vancouver, both the sale and price of real estate increased over time after the introduction of the foreign buyers' tax. Therefore, it is expected that the same will happen in Toronto and the effect on the wider economy will be insignificant over time.

The foreign buyers' tax is an important initiative in the correct direction of stemming the price of real estate, especially in large cities, and making housing affordable for the average Canadian. However, it does not seem to have the desired effect in the Metro Vancouver area as both demand and price of real estate are increasing there. A better policy initiative will be to monitor the influence of foreign-earned money on the real estate sector. New Canadians consist a substantial portion of the Canadian population and bring their wealth when they move to Canada, a part of which goes to the purchase of real estate. Appropriate policies that can monitor and control the impact of foreign-earned money on the real estate sector in Canada need to be formulated to make housing affordable for the average Canadian.