Foreign Tax Housing Policy Impact on Market

10 min read

Housing Policy Impact Assessment

foreign tax real estate data graphSince the implementation of the tax policy in April 2016 on foreign home buyers, it is unclear what the impact has been on the Toronto real estate market. The policy, meant to act as a cooling measure to control the market, singled out a small segment of the buyer population with little follow-up analysis on the results of the policy’s resulting impact.

Signal vs. Noise

foreign tax property data chartAfter reviewing the various media articles surrounding the topic, it became clear that there was a lot of distortion with wide-ranging opinions on the resulting impact. One media outlet would exaggerate the impact with little to no evidence sourced in their content while another would argue the complete opposite perspective with various opinion quotes from real estate agents mostly.

Data Analysis

real estate analysis data insightsThe goal was to separate signal from noise and clarify the impact through the careful analysis of real estate data leading up to the policy implementation and following the implementation. Data was sourced from the Toronto MLS board, organized and then data visualizations were developed using Tableau (data visualization software) to show the impact driven by data.

Data-Driven Content

real estate market research consulting resultsMultiple data visualizations were generated and a few of these were incorporated into the article. Filters were added to the data visualizations allowing viewers to configure the views for them to investigate the trends for specific communities or housing types among other variables. There were nearly 800 views generated on the data visualization directly (Tableau Public) and a few thousand on the article itself.


A Wider Perspective

Before taking a deep dive into the Toronto market and the particular impact the foreign tax policy has had, we can quickly examine some of the other few factors holding the significant weight that drive the market. Growth will continue to push needs, and government intervention with various regulation measures will only stifle the market in the short-term according to many industry specialists.

Following these regulatory measures including measures to deter foreign buyers, the market is predicted to resume its upward trajectory and remain on this stable track. As stated recently by Benjamin Tal, CIBC Chief Economist, “regulatory changes will work to reduce purchasing power, but the impact will probably be short-lived.” The upward pressure on housing prices boils down to simple supply and demand economics – “supply issues facing centers such as Toronto and Vancouver will worsen, and demand is routinely understated” according to Benjamin Tal.

When it comes to supply, it appears as though the bottleneck exists with local government regulations holding back the supply of available land for development as referenced in a recent report issued by PWC. Concerning demand, foreigners’ influence on the housing market is not only attributed from an investment standpoint but also from their need for their primary residence. Canada’s immigration quota is slated to rise from the current 250,000 figure to 300,000 and eventually to a target of 450,000. On November 1st the Immigration Ministry released a target of 340,000 by 2020, raising the annual immigrant intake by about 13%. Historically, the bulk of immigration tends to settle for living in Toronto and Vancouver spurring an ongoing demand for housing each year.

The most significant factor driving housing demand is employment (see employment chart figures below). Toronto’s real gross domestic product (GDP) was expected to grow 2.7 percent in 2017 and 2.5 percent in 2018, according to the Conference Board of Canada. Real estate naturally benefits from this robust economic performance and Toronto is currently outperforming any other major Canadian city in this department.

Employment statistics for real estate market research

Taxing Foreign Home Buyers Beyond Toronto

The issue of an overheated housing market is only really an issue in Toronto and Vancouver. Therefore, the foreign tax only applies to these two cities as opposed to a nationwide policy that would further depress home prices in cities where the housing market is not as strong. Other countries like New Zealand and Australia take a bit more of a radical approach to controlling foreign buyers where an outright ban exists on the purchasing of existing homes by foreign buyers.

We can examine the impact of the foreign tax implications in the Vancouver market to draw some insight into possibly predicting the trend that lays ahead for Toronto. The most recent data from the B.C. government indicates that the number of foreign buyers in Vancouver is steadily on the rise again, making up 5% of homes bought in the Greater Vancouver Area in September of this year. This is the highest they have been since August 2016, when the 15% foreign buyers tax was imposed. The following month after implementation, they were between 3-4%.

Canada Mortgage and Housing Corporation (CMHC) reported that the foreigner tax in Vancouver pushed monthly sales attributed to foreign buyers from around 10% of sales to 0.9%, putting a dent in average home prices. However, after about a year, prices rebounded to pre–foreign buyers’ tax levels and are now pushing new heights, especially in the condo market.

Home prices continue to rise, despite measures to deter foreign buyers and the Vancouver market doesn’t look like it will be cooling off anytime soon.

Toronto’s Real Estate Market in 2017

Let’s start at the beginning of the year when Toronto’s housing market was in full throttle for the first four months of 2017. Leading up to the implementation of the foreigner tax, prices climbed 33% in March compared with the same month a year earlier.

At the market’s peak in April, the average home in the Greater Toronto Area sold for $920,791, up 25% from the same month in 2016. Following the implementation of the foreigner tax policy, house prices in the GTA fell in May and June with an immediate 6% adjustment in average prices in May compared with April (Toronto Real Estate Board). In June, sales volume dropped 37% compared with the same month in 2016 as buyers were shying away from the market and waiting for the market to stabilize. By around mid-July, average sales prices continued on the downward trend in the GTA bringing the total percentage loss from April’s peak to 17%.

As indicated in the visualization below there is a definite pricing adjustment beginning in April and trending downwards until recovering in September.

The ‘Days on Market’ is another indicator of housing demand and we can see a positive correlation with the housing pricing trend. Following the implementation of the foreigner tax, the number of days taken to sell a home started to increase and began to trend downward in September. At the peak of the market, the median days required to sell a home in Toronto was at only nine days in April before reaching a peak of 23 days in August. This figure is quickly coming back to the levels seen in the first quarter of 2017 when the market was tight.

 

Stepping forward into September and October, the market is showing signs of recovering following a slowdown throughout late spring and summer. October witnessed a 12% gain from September in the number of home sales (7,118 homes in total). According to Toronto Real Estate Board President, Tim Syrianos, this increase from September to October is typical, “but more pronounced this year compared to previous years.” Sales momentum is on the rise and has brought the average selling price in October to $780,104.

Most of these gains are attributed from the condo and townhouse sector. The most substantial price gains have been experienced within the condo sector with a growth of 22% year-over-year followed by townhouses at 7.4%. As indicated in the graph below, year-over-year growth for the Toronto market has still seen a net gain of over 6% (Nov 2017 vs. Nov 2016).

Zoning in on the Foreigner Tax Impact on Toronto

While the total sales volume has dropped a little more than 10% from March before the implementation of the housing plan, how much of that volume drop is not easy to attribute to the foreigner tax measure. CREA’s chief economist, Gregory Klump, said sales momentum has started to recover this fall. It appears that confidence is progressively returning and that market conditions are healthier with the policy triggered correction seemingly run its course.

Foreigner home purchases between May 27 and August 18 were down to 5.6% from 7.2% as a percentage of total sales in Toronto according to data released by the Ontario government. For the GTA, the figure dropped to 4.7% which accounts for about 859 sales (out of a total of 18,282). Moreover, the impact of foreign purchases is more extensive in select communities and cities with Markham and Richmond Hill leading with the highest concentration of foreign home purchasers.

Chinese interest in Canadian homes still jumped 30% in the first half of 2017 compared to the previous year with Canada being ranked third by Chinese buyers according to China’s largest real estate portal – Juwai. Furthermore, about 75% claimed they were buying for their personal use, while roughly 33% of those surveyed mentioned buying for investment purposes. I suppose you have to wonder if this policy measure will curtail the interest of foreign buyers over the long-term. From their perspective, Toronto is still priced reasonably when compared to many other major worldwide cities.

Coming back to Vancouver, the foreigner tax that was imposed resulted in a cooling of the housing market for about six to eight months, before prices started to climb again. Toronto is about seven to eight months into this same tax experiment. On a longer-term perspective, Benjamin Tal offers some wisdom that cuts clear through a lot of the market speculation and confusion, “but when the fog clears it will become evident that the long-term trajectory of the market will show even tighter conditions. The supply issues facing centers such as Toronto and Vancouver will worsen, and demand is routinely understated.”