Every night before they go to bed, Mayor John Tory and members of Toronto council should say a little prayer for the municipal land transfer tax.

The tax -- an extra municipal fee charged to the buyer on real estate transactions in Toronto -- deserves an enormous amount of credit for keeping the city financially solvent over the last decade. It’s not a stretch to say it has been city hall’s salvation. 

Even as the mayor and council have struggled to find enough revenue to fund local services like transit and homeless shelters, the LTT has been a straight-up cash bonanza. When the tax was introduced in 2009 by former mayor David Miller, the city estimated it could bring in about $150M a year.

They were way off.

The tax delivered $184M in its first year, in 2009. It crossed the half-billion mark for annual revenue in 2015, and never looked back. In 2021, annual returns topped more than a billion dollars for the first time.

Since Toronto’s land transfer tax was introduced, annual revenues from the tax have grown 540%. That’s not a typo. I didn’t accidentally stick an extra zero in there. It’s really five hundred and forty percent. (Property tax revenues, meanwhile, are up a much more modest 37%.)

Even for those who opposed Miller’s move to implement the tax, it’s impossible to deny it quickly became a critical component of Toronto’s municipal budget. So much so that, despite running on a plan to immediately scrap it, Miller’s successor, the late Mayor Rob Ford, learned to live with it.

But what if the party’s over?

Cracks Start to Show

City hall has reason to worry about the LTT. To keep bringing in revenue, the tax needs two things: a lot of real estate transactions, and high real estate prices.

For this year, there’s no good news on the former. The number of sales per month is looking rough, as the market takes a major hit from rising interest rates. The spike in 2020 and 2021 as people made pandemic-induced real estate moves is over. People aren’t moving like they used to.

Since April, the number of monthly home sales in Toronto has been lagging way behind the previous year, and also behind the monthly average the city has recorded since the LTT was introduced in 2009.

READ: GTA Home Prices Fall Annually in September for First Time Since 2018

After a decent few months to start the year, things have been ugly since June. The 2,422 home sales reported by the Toronto Region Real Estate Board (TRREB) that month were way behind the 3,661 average for the month in the LTT era. July, August and September of this year also represented comparable low points.

The Silver Lining: High Prices?

From a cold hard tax revenue perspective -- but clearly not a housing affordability perspective -- city hall could find a silver lining in the other half of the land transfer tax equation. Overall, average real estate prices in the city have held up pretty well, even as the number of sales has dropped. 

In 2021, the average Toronto real estate transaction price reported by TRREB was $1.05B. In 2022, through the end of September, the average price was $1.12B.

But the optimism here needs to be tempered, too. 

After a hot start, average prices dropped over the summer. They’re now basically equivalent to monthly averages from a year ago. Still high, of course, but the growth seems to have plateaued. 

What does this mean for the budget?

The inherent variability of the real estate market makes it hard to project land transfer tax revenue for this year. The number of sales for October, November and December aren’t available to us, because time travel technology development has been frustratingly slow. But if we project forward a few months using existing trends, data from past years can give us a basis to make a range of projections. 

In all scenarios, I assumed the number of home sales for the remaining three months of the year would be 60% of sales from the same month in 2021. 

The best-case scenario would see the ratio between tax revenue, home sales and average price match 2018. That would see the city generate $956M in revenue, about $8.2M more than budget but a decline of $221M from 2021.

Hitting the budgeted revenue target would be a huge relief, obviously, but there’s no doubt the city was hoping for more. With an $860-M projected operating budget deficit this year, and an even bigger operating budget gap predicted for next year, the extra cash would have come in real handy.

But remember: that’s the best case. The worst case is catastrophic. If the numbers come in at the same ratio they did in 2014, tax revenue would come in nearly half a billion dollars below 2021, blowing a $260M hole in the budget.

The average projection, combining data from the previous eight years, isn’t much better, with a projected loss of $361M from 2021 and a budget miss of $132M.

Replacing LTT revenue is going to represent a massive challenge for the mayor and council in the new term. It’s a budget challenge that will come on top of a series of other budgetary challenges related to COVID and high inflation.

The LTT challenge, at least, would be significantly easier to deal with if the mayor and council hadn’t come to lean so hard on the LTT over the last decade. Many years, Tory and council relied on the LTT as an offset to allow for keeping property tax revenue increases below the rate of inflation. The LTT -- a tax that hits movers and new residents -- has, in effect, subsidized a tax break for long-time homeowners.

In that light, the LTT has always made for some awkwardness, putting elected officials in the weird situation of trying to talk about ways to make housing more affordable while also quietly hoping for high levels of real estate speculation to continue -- to fuel their budget.

Beyond that, though, the real trouble with building a big part of your budget atop a real estate bubble is, well, when the bubble bursts, your budget does too.