Toronto drop in home prices? Not this year

Toronto’s housing market is likely to stay strong for the rest of the year, with home prices jumping as much as 25 per cent, amid hints that speculators are fueling demand and posing a potential risk to the economy, TD Economics Chief Economist Beata Caranci said.

A “strong Toronto home-price forecast is not a vote of confidence in market fundamentals,” Caranci wrote in a note to clients. “It’s getting harder to ignore warning signs that market demand pressures are increasingly reflecting speculative forces.”

Residential prices in Canada’s largest metropolitan region are forecast to grow 20 to 25 per cent this year, up from a previous estimate of 10 to 15 percent, according to the report by TD Economics, part of Toronto-Dominion Bank. Toronto-area prices have climbed 19 per cent in the past 12 months, the fastest clip since the 1980s, when a frenzied housing market resulted in year-over-year increases of 55 per cent, Caranci said.

“Evidence is building that speculative forces are growing deeper roots, which raises the risk that prices will move closer to the top end of that forecast in the absence of policy measures,” Caranci wrote.

As for next year, higher mortgage rates and fewer affordable properties will likely cut the growth rate to 3 to 5 per cent, though a lack of clarity on housing speculation makes predictions difficult, Caranci said. A housing market driven by speculators seeking a quick profit boosts the risk of rapidly unwinding price gains at the same time homebuyers are contending with larger debt burdens, she said.

Hard Landing

A possible foreign buyer’s tax, which has been the focus of policy debate on how to cool the market, has been effective in other cities worldwide in the short-term, but also can trigger unintended consequences, Caranci wrote. A tax imposed in Vancouver last year pushed foreign investment into other areas, including Toronto. And a tax focused solely on foreign investors wouldn’t discourage speculators from Canada, Caranci said.

Bank of Montreal Chief Economist Doug Porter said that Toronto is clearly in the midst of a housing “bubble.” Caranci called the bubble debate a distraction because it’s usually not clear what’s happening in an economy until the cycle ends.

“What we can say is that when comparing this housing cycle to previous ones that lack a happy ending, Toronto appears to be moving in that direction,” she said.

Meanwhile, Canadian Finance Minister Bill Morneau is committed to working with provinces to tackle housing affordability, a spokeswoman for Morneau said in response to a request from Ontario that Ottawa do more to clamp down on housing speculation.

In a letter to Morneau, Ontario Finance Minister Charles Sousa urged the federal government to consider options to improve housing affordability beyond the measures Morneau announced last year. According to Sousa, there are “a number of policy levers” available to Ottawa.

“In particular, speculation in the housing market could be addressed by changes to the capital gains treatment of sales of residential housing,” Sousa wrote. “For example, increasing the capital gains inclusion rate of 50 per cent on the sale of residential housing that does not qualify for the principal residence exemption could reduce the incentive for people to make speculative purchases.”

Observers have speculated that Ontario might introduce a foreign buyers’ tax to dampen investment by overseas buyers, as British Columbia did in August 2016 for the Vancouver market, which has since cooled.

Toronto, on the other hand, has continued to boil, with frequent bidding wars driving up prices, and economists continuing to speak out, referring to the local housing market as being a bubble.

Canada’s finance department launched risk-sharing consultations in October to force banks and mortgage insurers to take on more responsibility for the loans they dole out. Within the next several weeks, Morneau is set to announce his second budget as well as new rules on risk-sharing between lenders and the government.

Increasing the capital gains tax might be something addressed in the budget, but there’s also been a growing buzz around a foreign buyers tax in Ontario – or maybe even just in Toronto. Scotiabank, however, released a report arguing the effectiveness of such a proposal. In the report, SVP and chief economist Jean-François Perrault and economist Adrienne Warren caution that it wouldn’t truly address the problem.

“We do not think a foreign buyers’ tax would be the best tool. There is no solid data on the number of foreign buyers in the GTA, though the Ontario government has committed to implementing new procedures to track citizenship information on home purchases. Anecdotal evidence suggests foreign buyers account for roughly 5 [per cent] of the market in Toronto, as opposed to the 10 [per cent] in Vancouver prior to the implementation of the foreign buyers’ tax. Moreover, recent developments in Vancouver’s housing market suggest that a foreign buyers’ tax may not have the sustained cooling impact on prices it hopes to deliver.”

Instead, they suggest, the key is to curb speculation in the GTA housing market.

“Since much of the increase in prices likely reflects speculative activity, tackling speculation directly has the potential to affect the housing market in a more timely manner,” the report reads. “The idea, simply, would be to raise the cost of speculation, without excessively interfering with the market mechanism. Stricter enforcement of property owners paying a capital gains tax if the home is not a principal residence will begin to address speculation but more specifically targeted measures are needed. A number of possibilities exist to do this, such as introducing a tax on sellers who flip a property within a certain period of time.”

They contend that the main factors driving GTA housing markets remain strong domestic fundamentals, which include low borrowing costs, solid job gains, aging millennials, provincial in-migration, increased immigration, and a lack of supply. Even though housing starts are “well above the rate of household formation,” the inventory of completed homes and homes for sale, adjusted for population growth, is below its long-term average, and active listings in Toronto are at their lowest in more than 10 years.

“In our view, it is clear that more must be done to increase the supply of housing in the GTA. This could include, for example, zoning amendments, increased density allowances in established neighbourhoods, a streamlined development approval process, and incentives to encourage more rental unit construction. There are a range of options at the provincial and municipal level to encourage this. This is, however, a measure that would only affect the supply-demand imbalance over an extended period of time. It is unlikely to affect price dynamics or affordability in the near-term.”


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