Yesterday, the Ontario government announced an increase to the Non-Resident Speculation Tax, upping it to 20%, and expanding its reach beyond the Greater Golden Horseshoe to the entirety of the province. Going into effect today, the tax now applies to all binding agreements for purchase and sale made by foreign nationals, corporations, and taxable trustees.
The province says this is just the latest effort to stem speculative activity in the housing market, and by extension, improve affordability for homebuyers.
But is this a measure that will truly move the dial in Ontario’s sizzling market? Or -- with the June provincial election rapidly approaching -- is it just lip service to what has been a red-hot issue with voters?
“I don’t think it will have a huge impact. The toilet is overflowing and we’ve been given two sheets of paper towel,” said Ben Myers, president of Bullpen Research and Consulting. “However, the sooner we try all these demand measures that are constantly thrown about as solutions, the quicker we can get to real zoning reform.”
Foreign Buyers Have Minimal Market Presence
Foreign real estate buyers have long been a target for governments feeling the heat over eroding affordability. Canada’s first foreign buyer’s tax, a 15% surcharge implemented by the BC government in Metro Vancouver in May 2016, initially sent shockwaves through the market, while raising concerns it had xenophobic and racist motivations.
The rub is that the numbers don’t support the notion that non-resident buyers have a profound impact on the market.
In fact, according to several data sets from the Canada Mortgage and Housing Corporation (CMHC) and Statistics Canada, the presence of foreign buyers -- whether end users or investors -- is minimal at best.
The most recent comprehensive data for the province is from StatCan’s 2018 Canadian Housing Statistics Program, which reported non-resident ownership of housing (when more than 50% of owners on a property title reside outside Canada) is just 2.2% in Ontario. That increases slightly to 3.3% when factoring in non-resident participation (when just one of the owners resides outside of the country).
Meanwhile, the CMHC 2020 Condominium Apartment Survey, which tracked non-resident ownership of condo apartments in major urban centres between 2016-2020, found that out of 17 major markets across Canada, the majority had a foreign buyer presence below 1%. Toronto -- which welcomes the highest proportion of newcomers annually -- clocked in at 2.6%, with the highest concentration of 4.4% in Toronto Central.
“I don’t even need a stat to tell me, I know just from our day-to-day, that foreign buyers are so low -- the ones who are actually foreign, who don’t have citizenship, and are ok with paying the 15% -- it’s very low,” says Nasma Ali, broker and founder at One Group Real Estate. “I think in the past year, I’ve had only one person, and that’s out of like 300 clients, that actually bought and sold. It’s easy for a government to use something they know is not going to have a real impact but it’s just pretending that they’re taking action. It’s just for show: ‘Look, I’m taking action, I’m trying to help this market.’
“You know why they target foreign? Because the foreign buyer is not voting! So it’s an easy scapegoat, because they have no voting power. Now this politician, he can't do any wrong. He’s not going to lose any voters, and the election’s around the corner. And people get it, they see what’s happening.”
The Psychological Fallout of Housing Measures
Of course, while the limited hard data suggests the market impact will be minimal based on foreign buyer presence alone, the potential psychological effect can’t be overlooked, based on past implementations of similar measures.
Back in the spring of 2017, the former provincial Liberal government introduced the Fair Housing Plan, a set of measures designed to cool demand following 33% year-over-year price growth that March. The FHP included the province’s first iteration of the NRST, as a 15% surtax for foreign nationals purchasing property within the GGH. The market reaction to the FHP was swift -- sales plunged by nearly 13% between April and May, while new listings rose by nearly half, pushing prices down 6%, according to TRREB data.
However, Ali says this increase won’t have the same fallout, adding that 2017 was “a whole different story.” While there were several similar market factors unwinding at that time, it was the initial introduction of the tax that had stoked so much market uncertainty.
“The difference now is I think a lot of people realize that foreign buyers really aren’t necessarily what’s affecting the market; investors yeah probably, speculators, yeah sure. Foreign investors? That's a very little tiny subset,” she says. “And the second thing is -- it’s 5% extra! It’s not a big thing. If someone is willing to pay 15%, they’re not going to be affected by an extra 5%.”
It’s also important to note that the province’s move has harmonious timing with an already-slowing market; rising inflation, increased inventory, and geopolitical certainties -- combined with overall buyer fatigue -- have taken considerable steam out of the once-scorching sellers’ market.
Rising interest rates will take the biggest bite out of demand says Ali, as the Bank of Canada is poised to hike its trend-setting rate by a full 0.5% next month, and the fixed cost of borrowing sits at a multi-year high of 4%.
“The government doesn’t even need to intercede; everything is happening by itself right now. The fact that the rate hikes are happening; we already had one, and now there’s talk of 50 points -- these are all things that are scaring investors away. And things are happening without you even doing anything at this point, it’s just going to happen.”
The province has indicated that the increase to the NRST is just the first of several tangible housing-related policy changes to come; Ontario is working with municipalities looking to establish a Vacant Home Tax, and is consulting on potential measures to address concerns over land speculation, including factors behind construction slowdowns.
Premier Doug Ford is set to announce new legislation this afternoon.
More to come.