Foreign Buyer Tax NOT The Answer

There is plenty of talk in the media lately about the government introducing a foreign buyer tax here in Toronto to cool the market. While there is no denying something needs to happen to stop the madness, I don’t think this kind of tax is the answer.

Why I Don’t Think A Foreign Buyer Tax Will Be Effective

Here are some reasons why I think the tax is a bad idea:
– The tax could be unlawful and creates prejudice in Canada on how we treat others from other countries. We should say international investors not “foreign buyers” because there are far too many ignorant people think a foreign buyer is anyone who wasn’t born in Canada.
– The tax would only targets a small segment of the market. Don’t get me wrong, I think that 5% number is way too low, and since the changes in Vancouver I think Toronto is a prime market for investors. Unfortunately though there are plenty of Canadians with lots of money playing the same game. This is the market we created.
– The tax will slow down building, which will only tighten the market even further. I think the segment where international investors are the strongest is the pre-construction condo market. Take away these buyers and projects will take longer to complete in a city that is expecting huge increases in population over the next few years which will lead to higher prices.
– International Investors will find a loophole or way around the tax. Maybe they will put the property in a Canadian friend or family’s name, or buying could be handled by a business where these investors could park their money and benefit from the real estate appreciation.

How Can We Stop The Madness?

Here are some ideas which I think could be a better solution.

  1. Raise Interest Rates – I know we don’t want to hear it, but rates need to come up. It will help those saving for down payments to save faster and get more return on their money, and will increase the cost for buyers to slow things down a little. The only problem with this solution is I think it will penalize Canadians who aren’t paying all cash like some of the off-shore investors are doing.
  2. Go After The Speculators – When there are people buying houses and turning around to sell them immediately once they close for huge profits then this is an even bigger issue than any international investor. Here is one example where a house was bought and sold within 30 days for a $223,000 profit:
    Toronto Real Estate Speculation
  3. Follow The Money – There have been talks of money laundering in Canadian Real Estate for some time now, and it wouldn’t surprise me if it were true. When you constantly see people throwing piles of money well beyond any logic at properties you really have to wonder if this came from legitimate sources.
  4. Update The Landlord and Tenant Act – With rental prices running out of control we are beginning to experience a major affordable housing problem in this city. If future generations can’t afford to live here, the city will not grow. Cities are only as strong as their workforce and they need to be able to attract the best new talent but also keep people employed in service level jobs which are closer to minimum wage. To resolve this I think the current 1991 rule for rent control should be amended to apply only to buildings built within the last 5 years to give investors an opportunity to rent their units out at a lower rate during the occupancy period. This will make investing in rental properties slightly less attractive.
  5. Go After The Unoccupied Property Investors – As I have said before, I don’t think Toronto has a huge problem with vacant properties. But, there are investors who don’t want to deal with any headaches so keep units vacant. I met a realtor on the weekend and he has a large investor client who does just that in Toronto. I don’t think it happens often but if someone is buying several properties in the city and not adding them to the rental pool or using them for personal use then these people should pay a vacancy tax. This also applies to builders sitting on vacant land and not building.
  6. Remove the Double Land Transfer Tax or Offer A Tax Credit For Canadians – The high costs associated with moving mean that fewer people will actually move for long periods of time. This tightens supply further and tightened supply leads to even crazier returns.
  7. Relax Zoning Bylaws And Build More – The best way to combat demand is to increase supply. I think it is time we start moving on things like Tiny Houses and look for ways to better use the existing land we have.  I know there are studies being done on this and pilot projects throughout the city, but by the time these come into effect it may already be too late.

Making a quick reaction to this market could have harmful effects long-term. Love it or not, we need international investments to help grow the city. This extra money helps get projects off the ground faster and creates more places to live for our growing population. Right now we are going through some very bad growing pains, and I would like to see the market stabilize. 20%+ returns every year while they may help some, have only resulted in a tighter supply with few people actually moving because it is so hard to find somewhere to go to and with our double land transfer tax it isn’t cheap to do.

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