There have been a lot of fingers pointed in Jim Flaherty’s direction lately. His mortgage rules that went into effect in July have cooled markets all across the country (with the exception of Calgary,) and it’s now much harder to buy a home. But when it comes to Toronto, there may be something else at work that’s keeping you out of the market.
That’s the land transfer tax, introduced by then-Mayor David Miller in 2008. The land transfer tax (or LTT) places a certain amount of tax on a property, that’s payable by the purchaser, and it’s applied to just about every home on the Toronto market. The LTT hasn’t gotten a lot of attention since its inception, but let’s remember what the housing market was doing at that time. Nothing was going to stop shoppers from buying homes during that time. Not high home prices, not bidding wars, and certainly not LTTs. But things are different now. Mortgage rules have tightened, housing markets all across the country are slowing down, and now, the LTT is making a huge difference in Toronto.
Just how huge?
Senior Policy Analyst at C.D. Howe Institute, Benjamin Dachis has broken it down into a full report that you can find here. Within that report you’ll see that in addition to the $12,100 in provincial LTT you’ll pay on an average Toronto mortgage, you’ll also have to come up with a way to pay the addition $11,400 the city will charge you for the LTT. That’s a huge difference when people are already having trouble coming up with a down payment of about $80,000 or more for a Toronto home in the current market.
The impact of course, is that this Toronto LTT keeps people out of the market because they simply can’t afford a home. But just how many people are affected? That’s just what Mr. Dachis’ report was to find out. He did a number of comparisons with homes in Toronto and homes just outside of the city that don’t have the city tax applied to them. Comparing these numbers both before and after the city tax was implemented, he found that the Toronto LTT is keeping about 16 per cent of buyers out of the market.
But the LTT causes more problems than just those for buyers.
“Because the LTT raises the cost of moving, it has also meant that Toronto residents have more often decided to renovate their current homes, upgrading their living spaces rather than relocating. So higher transaction costs, owing to the LTT, clearly cause some households to tolerate living in ill-suited homes for longer than they would have otherwise desired. Other potential effects of the LTT include government revenue volatility, commercial real estate market distortions, and higher construction costs,” Mr. Dachis said in a Globe and Mail article showcasing his report.
The LTT is a huge debate around the City of Toronto, as it’s the highest statutory transfer tax rate in North America, once you combine it with the province’s own LTT. City councillors though, love the tax because it drives in more profit for the city. But Rob Ford is not one of them. He used it as part of his 2010 campaign to get into office, saying that if he did, he’d wipe out that costly LTT for Toronto residents. This summer, he spoke of his plans to do just that.
“It’s hard to say,” he said at a speech in front of the Toronto Real Estate Board. “Like I said before, I’d like to start maybe at 25 per cent if we can, but it’s hard to put a number on it. I think we can take a little bit at a time and I think that’s what we’re going to do.”
But Mr. Dachis doesn’t think that’s enough. And he thinks that any other regions considering this tax should take a closer look at what it’s done to Toronto.
“It is time for Toronto’s city council to abolish its LTT to make it easier for Torontonians to find homes where they want to live and work. And municipalities elsewhere should beware: This is one bad idea that should not be spread.”
