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How do you cool a hot housing market

Vancouver borrowed Sydney’s policy tools — Toronto is on the verge of doing the same

Last week, Ontario Finance Minister Charles Sousa flipped a policy switch. For the last six months, neither Sousa nor his counterpart at the municipal level, Toronto Mayor John Tory, had entertained the idea of directly intervening in Toronto’s housing market to slow the almost unfathomable rise in home prices.

In September, for instance, when asked about Toronto’s apparent real estate bubble, Mayor Tory gave City Hall a vague answer: “I know there’s a problem with affordability … and as yet, there’s no one that’s reached any conclusions or given me any advice that there’s an identifiable problem that we can attach a solution to.” Sousa followed suit, shutting down any suggestion of imposing a 15 percent tax on foreign buyers of Toronto, a policy tool that was enforced in Vancouver in August.


But last Thursday, perhaps in response to various reports by bank economists warning of an unruly housing market, Sousa relented, hinting that his team was indeed looking into imposing a foreign buyers’ tax as one of the ways to regulate home price growth in Toronto.

“A year ago I was thinking, let market forces prevail. But now I’m concerned about the ability of people to enter the marketplace. There are bidding wars everywhere you go, it appears,” Sousa said.

Indeed, the pace of demand in Toronto’s real estate market is frantic, to say the least. A simple search on indicates that there are barely any single detached homes up for grabs. There aren’t many condominium units listed either — surprising, considering that just three years ago, there was a 21 percent oversupply of condo units in Toronto.

A one-bedroom condo in the Queen West neighbourhood of Toronto recently sold for $725,000, almost a quarter of a million above the asking price. Overall, home prices in Toronto are up 30 percent since this time last year.

But the question is — what is driving home prices in Toronto? How effective will a foreign buyers’ tax really be, if foreign money is not fueling this housing bubble?

Sydney, Australia

This coastal city has had its own hue and cry over soaring home prices. Between 2009 and 2016, the median house price in Sydney nearly doubled, driven in part by the same phenomenon that has swept much of the developed world — cheap lending.


In 2015, Australian policymakers intervened. Convinced that money from abroad was the main contributor to rising home prices, they imposed lending restrictions on property investors — people who were snapping up homes in Sydney not to live in but just as a place to park their money. Investors were now subject to a higher interest rate, and had to place higher deposits on homes.

“It was a contentious policy because it targeted foreign investors, but they were convinced that it would slow the market,” Louis Christopher, head of the Australian investment house, SQM Research told VICE Money by phone.

But the Australian government’s attempt to cool Sydney’s sizzling housing market didn’t quite work. “We saw a slowdown in the Sydney housing market, which lasted about seven to eight months in the second half of 2015 — then prices accelerated,” said Christopher.

Christopher, and other economists, attribute the policy failure to the difficulty in identifying what exactly was and still is driving home prices in Australian cities, the same problem Canadian policymakers are grappling with. Sydney, like Toronto, has been experiencing a very strong population growth over the last three years, somewhere in the range of 95,000 to 100,000 since 2014. That certainly fuels demand, but so does cheap lending.

“Foreign investors were not the real problem,” said Christopher. “If you raise interest rates, that might help bring home prices down, but you have to increase your supply stock of homes and [condominium] units to the market, to really address the affordability issue.”


Vancouver, B.C.

On the surface, Vancouver’s hot housing market phenomenon didn’t look much different than Sydney’s, which was what drove the B.C. government to draw from the Australian housing experiment. In August 2016, B.C. Premier Christy Clark and her team imposed a 15 percent tax on house purchases made by foreigners, indirectly blaming foreign money for Vancouver’s real estate bubble.

It seems to have worked so far. Home sales have declined every month in a row since August. In January, sales of homes in the Metro Vancouver area plunged 40 percent. Also in January, forecasting and advisory firm Oxford Economics came out with a report saying strong annual price gains in the Vancouver area “are now a thing of the past.”

According to a popular real estate website, which specializes in selling foreign property to Chinese investors, there was a 60 percent decrease in the number of Chinese interested in purchasing property in Vancouver since the foreign buyers tax was imposed.

Bringing a foreign buyers’ tax to Toronto

A November 2016 report by the Canada Housing and Mortgage Corporation (CMHC) pegged foreign ownership of condominium units in Toronto at 2.3 percent, and Vancouver at 2.2 percent. If these figures are to be believed, then it can be concluded that a foreign buyers’ tax would indeed help cool home prices in Toronto, at least temporarily.

“The Ontario government should do what the B.C. government did,” BMO Chief Economist Douglas Porter told VICE Money. Porter is convinced that foreign money is driving the development of condominiums in Toronto.

“I think there’s a minimum of 5 percent ownership by non-residents in the Toronto market. That might sound low, but in my opinion five percent is a big deal. If left to its own devices, the housing market will probably have another really strong year,” said Porter.

But at the end of the day, it is hard to design a perfect policy tool to calm a raging real estate market in a landscape the developed world isn’t quite used to — a prolonged period of cheap lending, and the free flow of capital due to globalization. That’s unfortunate, because so many of us will continue being priced out of housing markets in cities we call home.

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