As of January 1, 2023, two new government programs came into effect with the intent to cool the housing market and provide more affordable housing.
The first program is Toronto’s Vacant Home Tax which is an annual tax that will be levied on vacant residences. A property is considered vacant if it is not used as a principal residence, occupied by a permitted party or is left vacant for 6 months or more during the previous calendar year. Those residences subject to Vacant Home Tax will be taxed at a rate of 1% of the property’s 2022 Current Value Assessment (CVA).
The intent of the Vacant Home Tax is to increase the supply of housing by discouraging owners leaving any secondary residences that they own vacant, rather than leasing them. All residential property owners in Toronto will be required to declare the status of their property (s) annually, even if they live there. Residences should have received notice in the mail from Toronto revenue Services. The declaration must be submitted by February 2, 2023.
Will speculative real estate investors sell their vacant properties? In February 2021, the Toronto Regional Real Estate Board (TRREB) released a report in which 40% of investors surveyed indicated that a Vacant Home Tax would prompt them to sell their investment properties. However, we have seen a strengthening in the rental market and higher rents, which may encourage investors to hold onto their properties throughout 2023 and wait for sales market prices to regain strength. Therefore, there may not be an influx of homes or condos listed for sale, and rent prices may continue to increase due to lack of affordable inventory to purchase - not the results many had hoped for. Foreign investors may just absorb the tax costs as part of doing business and live with the Vacant Home Tax just as every Toronto home purchaser has learned to live with the Toronto Land Transfer Tax, which is paid in addition to the Ontario Land Transfer Tax, as part of closing costs associated with choosing to live in the city.
The second program is the Federal Prohibition on the Purchase of Residential Property by Non-Canadians Act. This legislation will restrict anyone who is not a Canadian citizen, permanent resident or foreign commercial business from purchasing a residential property for the next two years. This marks the start of the federal government’s attempt to cool speculative foreign purchasing that is believed to be responsible for driving up the housing prices across the country, particularly in larger cities like Toronto and Vancouver.
Restrictive measures have been utilized in the past with limited results. In April 2017, the Ontario government implemented the Ontario’s Fair Housing Plan (HFP), a comprehensive package which included measures intended to help more people find affordable homes, increase supply, protect buyers and renters and bring stability to the housing market. It included a 15% Non-Resident Speculation Tax (NRST) on the prices of homes in the Greater Golden Horseshoe (GGH) purchased by individuals who were not Canadian citizens, permanent residents of Canada or were foreign corporations. This was meant to discourage speculative purchasing by non-residents. The implementation of this plan did result in a reduction of foreign buyer purchases from approximately 5-10% in 2017 down to 1.8% by 2019, varying from region to region. In October 2022, the NRST increased to 25% to further discourage foreign buyers.
What overall impact did the FHP have on house sales and sales prices? TRREB postulated that the psychological effect associated with the FHP contributed to an 18% decline in home sales in 2017. There was, in fact, a flattening of home sales through 2017 with the average sale price for a home coming in at $750,000. However, that did not last long. The previous upward trend in prices returned in 2018 and accelerated during the pandemic in 2020, hitting an average peak price of approximately $1.2 million in early 2022. It took a huge turn of events such as the war in Ukraine, rising interest rates and inflation to stall the climb in prices. In December 2022, TRREB reported that the average home price was $1,079,000.
Given that the real estate market has already experienced a reduction in non-residential purchases, there may be very little further impact on the housing market as a whole. Also, we cannot lose sight of further implications that the Purchase of Residential Property by Non-Canadian Act may have on our overall economic wellbeing. The Canadian Real Estate Association (CREA) stated, “Parliamentarians that supported the introduction of these measures need to recognize they will have a detrimental impact of Canada’s reputation, labour market, economy and severely hinder our ability to attract global talent”.
These two new legislative measures may not significantly impact housing availability or affordability. Time will tell.
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