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.

Sociologist Morton Grodzins took the term “tipping point” from physics and applied it to his study of American neighbourhoods in the 1960s.  In essence, the tipping point is where “one too many” of any specific item or circumstance makes people change their mind to the opposite position.

With real estate, buyers approach any given property with a set of their own criteria as to what is valuable and necessary for their new home.  We can’t control that, but we can control the impression they begin to form as they explore a home.

We’ve taken our observations of buyers and developed three rules that we use with our listing clients to avoid buyers who are considering the home hitting the tipping point – and walking away from the home.

Rule # 1 – “If it’s cheap and easy to fix, fix it.”

The corollary to this rule is that no home is perfect.  Sellers can often get overwhelmed with the work that would be necessary to turn their home into a show stopper, and decide to not do much of anything at all.

As buyers go through a home, they aren’t concerned about the first imperfection they see.  They are forming an overall impression of the home and that impression is based on taking into account all that they see.

The exact number varies depending on the specific buyer but every buyer has a point where they say “Wow, this home needs a ton of work.”  When a buyer reaches that point, they may decide to not offer to buy the home, or if they do, they adjust their offer price to a lower level.

Some imperfections with a home would cost a lot of money and take significant time to fix.  Many imperfections, however, can be dealt with quickly and cheaply.  Here are some examples:

• Worn, fading or damaged paint can be easily painted.
• Discoloured, cracked or missing caulking can be easily fixed.
• Dirty windows, surfaces and fixtures can be easily cleaned.

Any minor imperfections that can be easily and cheaply fixed should be fixed.  They may not be impactful on a individual basis, but if we can avoid a buyer getting an overall impression of poor maintenance or care, it is well worth doing.

Rule # 2 – “Your best bang for your buck comes from turning a negative into a neutral.”

Another way to phrase this rule is that everyone has their own sense of style and taste, but no one likes something that is broken.

Buyers often want to put their own stamp on a property they buy and what one buyer considers tasteful is distasteful to another.  We’ve often walked through properties with buyer clients where they hate a renovation that was just completed.

A good principle for sellers to follow is that if something is broken, it needs to be fixed.

• A dated bathroom with pastel tiles isn’t appealing, but if the tiles are cracked and broken, you need to fix it. That fix should make it inoffensive, but it is not necessary to totally renovate the bathroom.
• Stained and dirty stair carpet that can’t be steam cleaned needs to be replaced. It isn’t necessary to replace it with hardwood even if most buyers prefer that, but you can’t leave carpeting that buyers will find very off-putting.
• A small, basic porch or patio isn’t going to get you any rave reviews, but if the wood isn’t rotten or damaged, you don’t need to replace it. If it is damaged and a safety hazard, you can’t leave it without giving buyers a strong impression of the home being a money pit.

Such examples show that sometimes you have to spend money to repair a problem even if the end result is still not something buyers will rave about.  What’s important is that you remove something that might make them decide to not buy your home.

Rule # 3 – “Turn unknowns into knowns.”

That may not be the most elegant sentence from a grammatical perspective, but the concept is crucial.

We are all predisposed to deal with uncertainty by assigning the worst possible case to it.  It’s how we avoid situations where things are terrible – by assuming they will be terrible and not moving forward.

In real estate, there are often aspects or elements to a home that are missing or inferior.  Adding or improving these aspects would absolutely add value to the home, but the cost is unknown.

• A basement with a low ceiling would be much more appealing if the basement was dug out by three feet. Getting a quote for that work and providing it to a buyer removes most of the uncertainty around that work.
• A home that needs a new roof should have quotes gathered on the cost of that work. It doesn’t need to be done, but you need to able to reassure a buyer as to the scope of the work.
• A condo that would be a good short or long-term rental means a buyer will want to know rental rates and if rentals are permitted. Finding out that information encourages buyers who might otherwise move on due to uncertainty.

It is easy to say that a buyer and their agent should satisfy themselves as to the answer to an important question – but it is far more helpful to share what information you can gather so you remove uncertainty from the equation.  While the information may result in a buyer deciding to not offer on the home, it avoids wasted time with deals that don’t go forward during the buyer’s due diligence phase.

Every potential buyer for a property is assessing and weighing different aspects of it against an internal list of what they want in a property.

If you can remove easily fixed imperfections, turn negatives into neutrals and provide useful information, you avoid buyers reaching the tipping point of deciding the home isn’t for them.  When you avoid that, you see more showings, more offers and a higher sale price.  If that sounds appealing, get in touch so we can help you with your sale.