A luxury tax on houses? We are playing Monopoly!

We’ve previously talked about how Monopoly got at least one thing right when it comes to real estate and we’ve recently heard talk about the introduction of another element of the board game into the Toronto real estate market.

There is the potential for Toronto City Council to increase the Municipal Land Transfer Tax (MLTT) when it meets next week to approve the City’s 2021 Budget.  We have previously seen deliberations by the City’s Budget Committee, which voted down an attempt to increase the MLTT on homes priced over $2 million by an additional percentage point – a 40 per cent tax hike, even though inflation in Toronto was below one per cent in the Toronto CMA in 2020 and will likely approach two per cent in 2021.

It is possible that this proposal will be tabled again at City Council when they meet to approve the 2021 City Budget on February 18, 2021.  Let’s take a look at why this is a bad idea.

Only a problem for the 1%?  Try the 38%.

When we think about homes over $2 million dollars, it seems like we’re talking about something that only impacts the wealthy.  Let’s dive into that a bit.

We checked what’s for sale right now in Toronto and if we look at houses (anything that isn’t a condo), we’ve got 1,261 houses for sale.  478 of those houses are listed for more than $2M.  That means that more than a third of the houses on the market would incur this potential luxury tax if it were approved.  That takes the land transfer tax for a $2M house from around $73,000 to around $93,000.

Here’s the break down of the list price of currently available (as of February 12, 2021) freehold houses for sale in Toronto in a handy pie chart.

One thing that jumps out from this chart is that only 20% of the houses for sale right now in Toronto are listed at under $1M.  It wasn’t too long ago that a million dollar home was a mansion with stables for the horses and quarters for the butler.  Now, it might very well be a fixer upper on an OK street in Toronto.

While we’re clearly dealing with a lack of supply compared to demand, real estate prices have increased over time and are predicted to continue to increase.  Over time, this luxury tax will impact more and more home buyers.

Discouraging move-up buyers isn’t helpful.

The housing market depends on buyers and sellers for its existence.  The fewer sellers there are, the more prices go up for the buyers who are competing for what’s for sale.

Even more crucially, any buyer who is already in the housing market (i.e. owns a home) may choose to wait to sell their property until they have bought a home.  In a seller’s market, this is a wise approach.  What happens when this move-up buyer can’t find a home they like or can afford?  They delay their sale.

When we increase the cost of purchasing, it has an impact on what people can afford and a seller may decide to renovate their existing home rather than move.  This is helpful to the renovation industry, but it decreases the level of sellers who enter the market.  Here’s how that trickles down:

• Consider the person who decides to renovate rather than sell their $1.5M detached home because the $2M is now even more costly.
• The buyer who was eager to move from their $1.2M semi into that $1.5M detached home gives up because of lack of inventory.
• The buyer who was looking to go from their $1M townhome into a $1.2M semi can’t find many options and decides to stay put.
• The buyer who was ready to sell their $800K condo and buy a $1M townhome sees little on the market and faces tons of competition to stays put.
• The renter who was ready to enter into the housing market at long last can’t find a good $800K condo that meets their needs.

The last one may seem a bit far-fetched given the condo market right now, but the property ladder is very much a real thing and anything that impacts one part of the ladder has an impact on all other levels.

Do we want to make Toronto even more expensive a place to buy?

We know that prices are high in Toronto, but many people don’t know that Toronto already has the highest land transfer tax in the country at almost 4% of the property’s value.  These homes get no additional city services or provincial services despite paying this tax.  By adding an additional one percent, you increase the cost for someone to buy a more expensive property in Toronto.

With the increase in the number of people who are given the ability to work from home during the pandemic, we’ve seen many people leave urban centres like Toronto for smaller communities or rural homes.

Toronto is the only municipality to have their own land transfer tax, effectively doubling the cost of this tax for buyers within the city limits.  By adding a luxury tax on homes over $2M, we make it even more appealing for this subset of buyers to consider living outside of the city.  While a $2M home may not be the sole purview of the uber-wealthy anymore, the buyers who can afford such a home often make significant contributions to the local economy by patronizing local business and employing residents.

It is challenging to impact the cost of real estate in Toronto but we can avoid making it even more expensive to buy a home in the city.

While a luxury tax on homes over $2M sounds like it is a problem for only the wealthy, it impacts a surprisingly high amount of buyers.  In addition to the direct impact, we will see it affect housing affordability across the board and homes down the property ladder, as well as having an overall negative impact on the economy as more people choose to buy and live outside the city.

We believe that instead of a luxury tax, the focus should instead be on helping first-time home buyers with the MLTT rebate, which has not kept pace with inflation. Most first-time buyers now pay a MLTT of about $25K on the average home.

If you’re looking to buy or sell a home in the $2M or higher price point, you need to work with agents who understand how the segment works.  Please feel free to get in touch with us to talk about next steps.