Luxury Tax Will Make Toronto Real Estate Less Accessible to Average Buyer

What would a luxury home tax mean for the Toronto real estate market? On one hand, it would mean additional revenue, some of which would go to increasing the supply of affordable housing. But critics argue that a tax would do more harm than good, reducing overall housing supply in an already tight market. Either way, we could soon see how it all plays out, with Toronto city council meeting tomorrow to approve its 2021 operating budget. On the agenda is a proposed 1% increase on the existing municipal land transfer tax on homes priced $2 million or more. If approved, the new tax rate would be 3.5% of the final selling price.

 Pros & Cons for Toronto Real Estate

According to an operating budget briefing note issued by the City, the 3.5% tax on homes priced $2 million or more would add $18.68 million per year to the city coffers. In another scenario, a 3.5% tax on homes priced $3 million or more would generate $6.35 million in revenue. The proceeds would help fund much-needed affordable housing and transit.

“In reality, $18 million is not going to go very far in terms of affordable housing and transit developments,” says Christopher Alexander, Chief Strategy Officer and Executive Vice President at RE/MAX of Ontario-Atlantic Canada.

City staff have indicated that increasing the cost of luxury home sales in Toronto could incentivize buyers and sellers to transact below the $2 million threshold, theoretically reducing prices. However, Alexander warns that this is simply unrealistic. “Homebuyers in Toronto today are making decisions based on their current home needs. If a family needs four bedrooms and a big backyard, it’s near impossible to buy that in Toronto for less than $2 million.”

Furthermore, if approved, the tax hike could deter owners from transacting, or could unintentionally drive buyers out of Toronto entirely.

The briefing note identified other potential negative impacts of the upper-tier tax, including reducing the liquidity of real estate, and discouraging current homeowners from up-sizing to lower-end luxury homes, which could tighten housing supply for mid-value homes.

This last point is particularly concerning, given the supply challenges plaguing the Toronto real estate market.

“The tax would further tighten inventory and create another barrier for sellers to consider when they list their homes. What we’re hearing from consumers right now is, ‘I’d sell, but where am I going to go?’ This tax would only stiffen our already existing supply issue in Toronto, which is not what we need right now,” says Alexander.

The trickle-down effect would impact buyers across the board, from luxury down to first-timers. For them, Toronto is challenging enough. Discouraging owners of $2-million-plus properties from selling could lead to fewer options for move-up buyers, which would then decrease supply levels of entry-level homes for sale in Toronto.

Low Inventory, Rising Prices in Toronto Housing Market

Earlier this month, the Toronto Regional Real Estate Board reported just 24 days of housing inventory in the region in January. This is a significant metric, as it identifies how long it would take to liquidate the existing level of listings at the current rate of sales. This is down 11% year-over-year. Days on market were also down 10.8% year-over-year. Meanwhile, prices continue to rise. The average price of a detached home in Toronto reached $1,581,400 in January. This isn’t too far off the $2 million threshold for what is classified as “luxury” in Toronto.

More Supply, Not Tax, Needed to Improve Housing Affordability

“The negative implications of a luxury home tax will far outweigh the benefits,” says Alexander. “What we need is a national housing strategy that will boost supply at the development level, and is mindful of the supply challenges that exist in cities all across the country.”

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