Torontos proposed land transfer tax, far from being a massive tax grab since it targets people who can least afford it (according to the Toronto Real Estate Board), in fact targets high-end properties, such as the typical Rosedale mansion that sells for $1.5 million, for the biggest bite.
Torontos property market is becoming increasingly expensive, but it is market-fuelled increases in house prices, along with general economic trends, that are pushing the cost of ownership beyond the reach of many Torontonians.
Toronto real estate agents are mounting a last-ditch effort to block the citys proposed land transfer tax, claiming it will have a chilling and negative impact on property sales in TO and slamming city politicians as arrogant and oblivious to the fragile nature of the high-rise market.
Strong words indeed for a modest new tax that will have a slight bite: Ranging from just half of one percent for lowest-priced properties to a maximum of 2% for multi-million dollar Rosedale mansions.
The proposed land transfer tax goes before Toronto City Council for consideration at its meeting this week. It represents a mere fraction of the typical 5% fee charged by real estate agents. Real estate agents have not been heard to complain that their fees are killing the home-buying market in Toronto, especially for first-time buyers. Some realtors do cut their fees, but others engage in the practice of representing both the buyer and the seller at double the commission.
Realtors have a big stake in Torontos property market. In April of 2007, the Toronto Real Estate Board (TREB) reported an average price of $379,025 on sales of 9,452 homes in the Greater Toronto Area (which includes the City of Toronto, plus surrounding municipalities). That adds up to at least $3.6 billion in sales and realtors fees of $179 million. No wonder realtors are anxious to see Torontos housing market continue to spin upwards. The higher it goes, the bigger the fees that they charge.
April 2007 brought a 3% increase in the average house price over April 2006. Overall price increases are holding at marginally above the inflation rate, which means that potential first-time buyers are not being pushed out of the market, said the TREB. So, a 3% increase in house prices in 2007 will have no impact on first-time home-buyers, according to realtors. Yet the citys proposed land transfer tax, which is exactly half that amount for an average home, will be a market killer, say those same realtors.
A few thousand dollars is a lot of money to a first-time buyer, according to realtor Brad Lamb, quoted in the June 30th Toronto Star. Lamb, who reportedly sells a large number of condominiums in Toronto, has been silent in the last couple of years as the average selling price has jumped higher and higher. For instance, in the east end of downtown Toronto (an active area for new condo sales, many of them to first-time buyers), the TREB reports that in the two years from April 2005 to April 2006 the average price of a condo unit jumped from $241,388 to $295,483 thats 22% or a total of $54,000!
RBC Economics tracks housing affordability in the ownership markets across Canada, including Toronto. Recent releases have confirmed that there is a slight dip in the ownership markets (though Canadas housing market is no where near the belly flop that is being experienced in the United States). RBC reports that a new buyer needed a qualifying income of $63,051 to purchase a standard condo in Toronto in the first quarter of 2007 thats up from the $60,688 required in the last quarter of last year. Overall, RBC in June of 2007 reported that there was a modest deterioration in housing affordability, mainly due (in the case of Toronto) to rapid price growth and that rising mortgage rates are likely to drive up affordability problems.
RBC Economics confirms what other experts say: Key economic factors (such as overall market prices, mortgage rates and employment trends) have the biggest impact on housing affordability.
The bottom line: The relentless market pressure to drive prices up which realtors seem to happily support is a bigger factor in killing affordability than a small land transfer tax. So, why is a tiny little tax labeled a market-killer when great big increases year-over-year pass without comment?
Torontos proposed land transfer tax passes the basic test of tax fairness: Its fair, efficient and simple.
FAIRNESS means that a tax is based on an ability to pay (ie wealthier people pay more, and poorer people pay less). The proposed land transfer tax uses an increasing scale based on the value of the property: Half of one percent for modest properties of less than $55,000 and up to 2% for properties with a value over $400,000.
EFFICIENCY means that a tax actually raises revenue. City officials predict that the proposed land transfer tax would raise $300 million annually. That money represents a huge increase over the current municipal spending on housing.
SIMPLICITY means that a tax doesnt have huge costs (either to the taxpayer or to the tax collector) to administer. A municipal land transfer tax would be simple to administer and tied to the existing legal process for the sale and transfer of real property.
One key challenge will be to ensure that a Toronto land transfer tax is devoted to affordable housing. The land transfer tax proposal going to executive committee doesnt mention a dedicated housing fund. The danger is that the revenue raised by the housing tax will be spread over the broad range of municipal concerns, without being targeted to affordable housing.
An annual, $300 million housing fund created by the City of Toronto using land transfer tax revenues would have a powerful impact if it was dedicated to affordable housing. For instance, it could, on an annual basis, fund:
1,000 new affordable homes at a capital subsidy of $100,000 each
3,000 rent supplements for very-low income households at $700 each
6,000 rent supplements for low-income households at $350 each
Renovations for 3,300 homes at $15,000 each
5,000 units of supportive / special needs housing services at $3,000 each
Plus still have $85 annually million to improve Torontos emergency shelters and services for the homeless, implement a comprehensive extreme heat / smog strategy for homeless people and low-income tenants and homeless people, plus other housing-related measures.