In our work with clients on both the buying and selling side, we are regularly talking about what is going to happen next with the GTA real estate market, currently experiencing an absolute frenzy of competition and escalating sale prices.

In the latest market data (February 2020 to February 2021) we saw an increase in the average sale price in the GTA by 14.9%.  Freehold homes (detached, semi-detached and townhouses) in suburban areas saw growth of over 20% in the past year.  For a detailed review of the Toronto market, check out our latest analysis here.

Back in early 2017, we saw a market similar to this current market.  After an insanely busy start to the year that saw prices skyrocket, the Ontario government released the Ontario Fair Housing Plan on April 20, 2017.  It included a number of measures to make housing “fair” and immediately cooled the housing market.

This implies that the market reacted to the OFHP and said “Oh, OK then, let’s all take a step back”.  In reality, an understanding of market conditions often follows this pattern:

  1. Realtors and their clients actively buying and selling (or trying) notice a shift in the market.
  2. A while after we notice, the media starts picking up on the shift and reporting on it.
  3. A while after the media stories have become constant, the general public who isn’t buying or selling real estate understands what has been going on.
  4. A while after that, the market starts to shift again, as “everyone” says this is crazy and people start backing away from selling or buying.
  5. Shortly after that, the government steps in and takes some measures to intervene. The market had already shifted again, so it appears that the government intervention was very effective, but in fact it had already started to happen.

If you’ve ever had a friend or spouse who offers to help clean up after dinner as you’re just drying the last dish, you get what the government’s timing is typically like.  It seems to be the nature of how government reacts that by the time they take steps, the market has already started to shift.

While real estate agents and buyers and sellers carefully parse every latest sale and market data to try to see if a change is happening, as of the end of March 2021, we’re still seeing a very strong seller’s market with tons of competition driving prices higher and higher.

Given the buyers and sellers in the market haven’t yet taken a step back, it would appear we’re not quite at the point where we will see government intervention.

The Ontario 2021 Budget was just released and on April 19, 2021 we will see the Federal Budget released.  Let’s take a look to see if the government is taking any action to cool the market and if there are specific expectations for any real estate focus for the Federal budget in mid-April.

2021 Ontario Budget

The provincial budget that was released March 24, 2021 did not have any measures specifically designed to cool the housing market.

There was a considerable amount of speculation in the media as to whether steps would be taken similar to back in 2017, but the threat of a 3rd wave of COVID as well as ongoing concerns about the economy as a whole has resulted in no direct action being taken.  The frenzy in the GTA housing market, while making buying very challenging and increasing the gap between home owners and renters, is one positive spot in the economy.

The focus in the Ontario budget was on measures for mitigating and defeating COVID as well as supporting people throughout these challenging times.

The only real-estate related aspects to the budget were commitments to infrastructure building, and more indirectly, broadband internet access in rural areas, which is hugely important to real estate values in those areas.

2021 Federal Budget

The Federal Budget is focused on the country as a whole so it can be difficult to implement changes that equally impact all parts of the country.  With very different real estate markets existing across the country (urban vs rural, 416 vs 905, east coast vs west coast), any intervention needs to be broad enough to be applicable across the country, yet nuanced enough to be effective where it is required.

The easiest way to achieve that goal is to create federal policies or changes that support initiatives that provinces or municipalities could implement.  In essence, setting the stage for more local changes that accurately reflect the real estate markets we’re seeing.

We reviewed various ways in which the federal government might try to set the stage for helpful intervention into specific real estate markets.

  • Increasing the tax credit for rent paid to see more benefit for tenants paying higher levels of rent in the urban areas that see high rental rates. By increasing the tax credit, such high-end tenants save more money for potentially entering the real estate market as a home purchaser.
  • Modifying the capital gains payable on a rental property in a few ways. One would be to incentivize the owner to sell to the current tenant via a reduced capital gain on the increase in the value of the property.  This could provide more housing supply to the market, as investor owners agree to sell to tenants.  A second would be the ability to defer the capital gains if you purchase another investment property within a short time-period of selling.  This may not increase the supply, but it could provide added incentive to see turnover in the market.
  • Implementing a capital gains tax on principal residences, similar to how it operates in the US. Currently, we have no capital gains on the proceeds of the sale of your principle residence.  At the same time, we also do not allow the claiming of interest paid on mortgage payments, which is permitted in the US.  There is some talk about implementing some partial form of capital gains tax on principal residences, but it is likely to be strongly opposed by homeowners.  In our opinion, it would take a major financial crisis to allow there to be public support for such a measure.  Many Canadians view their home value as a significant, tax-free portion of their retirement plan and changing that will be deeply unpopular.
  • An increase in lending restrictions on investors, such as was recently done in New Zealand. Requiring a higher down payment on investment purchases (such as 40%) could restrict the number of investors in the market and take some pressure off of prices for end-users who plan to live in the home.  There are significant challenges in monitoring and enforcing such restrictions.  Such a change is not likely to be done directly by the Federal Government but measures to support such a change could set the stage for it being done in the future.

We may also see some measures that will support provincial or municipal tools to intervene in the real estate market (such as land transfer tax changes, vacancy taxes, etc.) but it is unclear whether the Federal Government will wish to muddy the waters much.  It is likely the Federal Budget will mirror our Ontario Budget in focusing on health and jobs.

Predicting the future is a difficult job at the best of times, and predicting government initiatives can make the crystal ball even foggier.  We spend lots of time thinking about the market and we’re always happy to chat about it.  If you want to talk, don’t hesitate to get in touch.