Not even the promise of a new national tax on foreign homeowners may be enough to chill a Canadian housing market that has been showing signs of warming up again.
Liberal leader Justin Trudeau triggered an election campaign this week, and his party has already vowed that if re-elected, they will “address the impact of foreign speculation, which drives up housing costs.” To do so, the Liberals say they would implement a one-per-cent speculation and vacancy tax on applicable residential properties owned by “non-resident, non-Canadians.”
The new tax would be in addition to measures the housing market has already been digesting, such as a stress test for uninsured mortgages and foreign-buyer taxes in British Columbia and Ontario. Those measures, along with higher interest rates, helped put a damper on real-estate activity.
“Further analysis of regional markets across the country is required to understand if a new speculation and vacancy tax will help increase the supply of available housing over the long term or aid with affordability,” the Canadian Real Estate Association said Thursday.
In July, however, there was a pick-up in activity, which prompted a Royal Bank of Canada economist to declare that “Canada’s housing market correction is over and the recovery is on.”
“We are seeing more balanced supply-demand conditions as (policymakers) appear to have engineered a soft landing,” said Dave McKay, CEO of RBC, Canada’s biggest bank, during the lender’s third-quarter conference call. “We are seeing positive developments in key markets including a return to growth in Toronto and a healthy Montreal market.”
Bank of Montreal chief economist Doug Porter doubted the Liberals’ proposed tax could dent the housing market’s comeback, if and when it were ever implemented.
“I don’t rule out that it could have an impact on cities other than Vancouver and Toronto, but I think they’re much less influenced by non-resident purchases,” Porter told the Financial Post in an interview. “And what’s driven the housing market has largely been healthy job gains, strong population growth and, yes, a pullback in long-term mortgage rates this year.”
Porter, however, said he also didn’t necessarily take issue with such a policy.
“In a world where, especially in the big cities, housing affordability is such an issue, I don’t really think we can afford to allow any forms of speculation, especially from outside of the country, to be influencing the market.”
The Liberals say their non-resident speculation and vacancy tax would be modelled after that of British Columbia. The province said this week there were 9,386 non-exempt properties and 11,783 owners paying the annual speculation and vacancy tax as of Sept. 3, including 4,621 foreign owners. The tax rate is currently set at two per cent for foreign owners and 0.5 per cent for Canadian citizens.
In a world where … housing affordability is such an issue, I don’t think we can afford to allow any forms of speculation, especially from outside of the country, to be influencing the market
Doug Porter, chief economist, Bank of Montreal
More than 99.8 per cent of British Columbians are exempt from the tax, which launched in 2019, but the province says the measure brought in $115 million in revenue for its 2018-19 fiscal year.
Even so, the Real Estate Board of Greater Vancouver reported earlier this month that homebuyer activity in Metro Vancouver “increased to more typical levels” over the summer months.
Barclays Capital analyst John Aiken said the proposed speculation tax looks to be another “incremental factor” for the housing market, which may only slightly reduce demand.
“Realistically, the inelasticity in demand that these type of buyers have, I’m not sure if this is going to have an overly material impact on pricing or the housing market,” Aiken said.
The Liberals have also vowed to expand their existing first-time homebuyer incentive, which is a shared-equity mortgage with the government.
Conservative leader Andrew Scheer, meanwhile, has previously pledged to “re-work” Canada’s mortgage stress test. The real-estate industry says it wants the qualifying rate to be adjusted according to the economic environment and interest rates.