Office: 1-416-698-2090

E: baldo@baldominaudo.com

Real Estate and Business

Reality About Foreign Buyers

Information circulating about the significance of foreign buyers on Toronto home prices has been released from many sources. There are strongly opposing viewpoints and some of them are wrong. In this post, I will focus specifically on the impact, or perceived impact of foreign buyers on Toronto real estate.

Hot Toronto Housing Market
Toronto Housing Market

Toronto Home Prices

Toronto home prices have increased aggressively for years. Torontonians wanting to buy their first home are frustrated that prices have gone beyond their reach. The pressure is on as many would-be buyers are turning to the government for answers and solutions. Many believe that it is foreign buyers that lat are pushing up prices beyond what the average family can afford. In fact, as families look further and further to the outskirts of the GTA prices everywhere seem to be skyrocketing.

Tax Grab

The Ontario government is now looking at passing a Foreign Buyers Tax in reaction to pressure from Ontarians. Some believe that it is another move by Kathleen Wynne to extract more taxes because she has not explained how she would use that money to make housing more affordable for tax paying Ontarians. So, the assumption is that it is just another tax grab.

How Significant is Influence of Foreign Buyers?

The Real Estate Industry has been claiming that foreign buyers are only representing 5% of the buyer group. Then they go on to say that a foreign buyers tax is unnecessary and would hurt the real estate market. If in fact, foreign buyers are only 5% of all buyers, then a tax on them shouldn’t really affect the market. So, why are they so concerned.

To begin with, there is really no way of knowing how much of the overall market foreign buyers represent because there is no tracking or reporting in place. Even if the activity was being tracked, the individuals may not necessarily be accurately declaring their transaction. I will discuss this in greater detail in a bit.

What’s Happening During Bidding Wars

Having represented clients in several bidding wars over the last year, I was able to gauge who the other potential buyers were. By defining ‘Foreign Buyers’ as individuals or families with their head, who spend most of their time overseas or have a significant, if not all of their business activities overseas. Based on this definition, I can comfortably state, that in regards to the deals I was involved with, foreign buyers were a significant force. In some cases with at least 12 potential buyers they represented over 50% of the offers.

However, that’s not the most important thing. The real reason I saw some home selling for what seemed unjustifiable prices was something that most people would not expect. The foreign buyers were offering bids way beyond what was necessary to get the home.

For example, in one situation involving about a dozen offers. The winner offer was $100,000 (10%) over the next highest offer. I was told it was a foreign buyer who wanted to buy a home specifically in that neighbourhood because of the high percentage of Chinese living there and the strong reputation of the local school. I don’t know if the buyer realized how much more he was paying. I also don’t know how much and what kind of research the buyer’s realtor undertook and shared with the buyer.

This is just one example of how foreign buyers have, unintentionally, pushed up the prices, especially in some neighbourhoods.

Beating The Tax System

Now, back to not accurately declaring their real estate activity, let’s say, for example, a student wants to come from overseas to study at an university in Toronto. Having no money, his family friend could give him some or all of the money so the student can purchase a condo in his name and live in it for the three or four years. The friend could then have a legal side agreement where it is understood that the friend owns the condo, though it is in the student’s name. Since the student resides in it, when he sells it at a much higher price, he doesn’t pay any capital gains, and therefore, neither does his friend the real owner. The student would do this in exchange for not having paid rent, or paying reduced rent for that period.

This also leaves the door open for money laundering.

A better solution for the Ontario government would be to have a non-citizen buyers tax. In other words, if someone is here for 3 or 4 years as a student, they would still have to pay the foreign buyers tax. To work effectively, the Canadian government would have to do a better job at qualifying, screening and orienting new Canadians.

Rooming Houses

Many homes bought by foreign buyers are converted into student housing on a room-by-room basis. Foreign students don’t declare rent they pay as they’re not supposed to be working and therefore the landlords are collecting rent, which they may not be paying taxes on. There are homes in Toronto with as much as 8 or more rooming tenants. At $800 per room, 8 rooms would produce $6,400 every month. That gives the owners justification for paying much more for the house than say an average Torontonian working in an office and paying full income tax would be able to afford.

AirBNB

The rooming house scenario also applies to AirBNB rentals, which the CRA has already begun to target.

Conclusion

So you see, the whole point of percentage of buyers of Toronto homes that are foreign isn’t what we should be looking at, but rather the impact they have.

The bottom line is that average citizens are upset because they can not afford to buy a home to live in.  In order to earn enough to afford a mortgage at this prices, individuals would be falling into the 54% income tax bracket. Then they pay 13% HST (VAT) on what they spend, which is pretty much all of what they earn after mortgage payments. With a 67% tax and keeping only 33% they simply can’t afford to buy their first home.

On the other hand, they are seeing new Canadians, foreign students and foreign buyers buying homes and prospering. Many are scratching their head trying to figure out how they are doing it. I hope this post will help discover some explanations.

Please contribute your comments and knowledge on the subject.

Baldo Minaudo, M.B.A.

Real Estate Broker in Toronto

Dir: 416-564-0245

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Fair Housing Initiatives announced by Ontario Government

Fair Housing; Greater Toronto Area and Golden Horseshoe
Fair Housing Initiatives by Ontario Government to address hottest real estate areas

Fair Housing Initiatives Press Release from Ontario Government dated April 20, 2017. After years of complaints about affordability and fair housing by average Ontario families, the government proposes some changes. Fair housing has been in the media and the Ontario government simply could not lay dormant on the matter any longer, as Ontarians anger reached new levels. Read for yourself the governments Press Release on Fair Housing below….

Ministry of Finance

Ontario’s Fair Housing Plan introduces a comprehensive package of measures to help more people find affordable homes, increase supply, protect buyers and renters and bring stability to the real estate market. The plan includes:

Actions to Address Demand for Housing:

  1. Introducing legislation that would, if passed, implement a new 15-per-cent Non-Resident Speculation Tax (NRST) on the price of homes in the Greater Golden Horseshoe (GGH) purchased by individuals who are not citizens or permanent residents of Canada or by foreign corporations. Ontario’s economy benefits enormously from newcomers who decide to make the province home. The NRST would help to address unsustainable demand in this region and make housing more available and affordable, while ensuring Ontario continues to be a place that welcomes all new residents. The proposed tax would apply to transfers of land that contain at least one and not more than six single family residences. “Single family residences” include, for example, detached and semi-detached homes, townhomes and condominiums. The NRST would not apply to transfers of other types of land including multi-residential rental apartment buildings, agricultural land or commercial/industrial land. The NRST would be effective as of April 21, 2017, upon the enactment of the amending legislation.

Refugees and nominees under the Ontario Immigrant Nominee Program would not be subject to the NRST. Subject to eligibility requirements, a rebate would be available for those who subsequently attain citizenship or permanent resident status as a well as foreign nationals working in Ontario and international students. See technical bulletin for further information.

 

Actions to Protect Renters

  1. Expanding rent control to all private rental units in Ontario, including those built after 1991. This will ensure increases in rental costs can only rise at the rate posted in the annual provincial rent increase guideline. Over the past ten years, the annual rent increase guideline has averaged two per cent. The increase is capped at a maximum of 2.5 per cent. Under these changes, landlords would still be able to apply vacancy decontrol and seek above guideline increases where permitted. Legislation will be introduced that, if passed, will enact this change effective April 20.?
  2. The government will introduce legislation that would, if passed, strengthen the Residential Tenancies Act to further protect tenants and ensure predictability for landlords. This will include developing a standard lease with explanatory information available in multiple languages, tightening provisions for “landlord’s own use” evictions, and ensuring that tenants are adequately compensated if asked to vacate under this rule; prohibiting above-guideline increases where elevator work orders have not been completed; and making technical changes at the Landlord-Tenant Board to make the process fairer and easier for renters and landlords. These changes would apply to the entire province.

Actions to Increase Housing Supply

  1. Establishing a program to leverage the value of surplus provincial land assets across the province to develop a mix of market housing and new, permanent, sustainable and affordable housing supply. Potential sites under consideration for a pilot project include the West Don Lands, 27 Grosvenor/26 Grenville Streets in Toronto, and other sites in the province. This builds on an agreement reached previously with the City of Toronto to ensure a minimum of 20 per cent of residential units within the West Don Lands are available for affordable rental, with an additional 5 per cent of units for affordable ownership.
  2. Introducing legislation that would, if passed, empower the City of Toronto, and potentially other interested municipalities, to introduce a vacant homes property tax to encourage property owners to sell unoccupied units or rent them out, to address concerns about residential units potentially being left vacant by speculators.
  3. Ensuring that property tax for new multi-residential apartment buildings is charged at a similar rate as other residential properties. This will encourage developers to build more new purpose-built rental housing and will apply to the entire province.
  4. Introducing a targeted $125-million, five-year program to further encourage the construction of new rental apartment buildings by rebating a portion of development charges. Working with municipalities, the government would target projects in those communities that are most in need of new purpose-built rental housing.
  5. Providing municipalities with the flexibility to use property tax tools to help unlock development opportunities. For example, municipalities could be permitted to impose a higher tax on vacant land that has been approved for new housing.
  6. Creating a new Housing Supply Team with dedicated provincial employees to identify barriers to specific housing development projects and work with developers and municipalities to find solutions. As well, a multi-ministry working group will be established to work with the development industry and municipalities to identify opportunities to streamline the development approvals process.

Other Actions to Protect Homebuyers and Increase Information Sharing

  1. The province will work to understand and tackle practices that may be contributing to tax avoidance and excessive speculation in the housing market such as “paper flipping,” a practice that includes entering into a contractual agreement to buy a residential unit and assigning it to another person prior to closing.
  2. Working with the real estate profession and consumers, the province is committing to review the rules real estate agents are required to follow to ensure that consumers are fairly represented in real estate transactions. This includes practices such as double ending. The government will modernize its rules, strengthen professionalism and improve the home-buying experience with a goal to make Ontario a leader in real estate standards.
  3. Establishing a housing advisory group which will meet quarterly to provide the government with ongoing advice about the state of the housing market and discuss the impact of the measures in the Fair Housing Plan and any additional steps that are needed. The group will have a diverse range of expertise, including economists, academics, developers, community groups and the real estate sector.
  4. Educating consumers on their rights, particularly on the issue of one real estate professional representing more than one party in a real estate transaction.
  5. Partnering with the Canada Revenue Agency to explore more comprehensive reporting requirements so that correct federal and provincial taxes, including income and sales taxes, are paid on purchases and sales of real estate in Ontario.
  6. Making elevators in Ontario buildings more reliable by establishing timelines for elevator repair in consultation with the sector and the Technical Standards & Safety Authority (TSSA).
  7. Working with municipalities to better reflect the needs of a growing Greater Golden Horseshoe through an updated Growth Plan. New provisions will include requiring that municipalities  consider the appropriate range of unit sizes in higher density residential buildings to accommodate a diverse range of household sizes and incomes. This will help support the goals of creating complete communities that are vibrant, transit-supportive and economically competitive, while doing more to address climate change, protect the region’s natural heritage and prevent the loss of irreplaceable farmland. As part of the implementation of the Growth Plan for the Greater Golden Horseshoe, 2006, enough land was set aside in municipal official plans to accommodate forecasted growth to at least 2031. Based on discussions with municipalities across the region, the government is confident that there is enough serviced land to meet the Provincial Policy Statement requirement for a three year supply of residential units. The Greenbelt provides important protection of natural heritage and farmland, and neither the area of the Greenbelt or the rules about what can occur inside of it will be weakened. The upcoming Growth Plan will promote intensification around existing and planned transit stations and will promote higher densities in the suburbs to support transit.

See map “Greater Golden Horseshoe”.

Actions to Date

The government has taken a number of actions over recent months and years in order to support homebuyers, increase supply of affordable and rental housing and promote fairness. These include:

  • Helping more people purchase their first home by doubling the maximum Land Transfer Tax refund for eligible first-time homebuyers to $4,000. This means eligible homebuyers in Ontario pay no Land Transfer Tax on the first $368,000 of the cost of their first home.
  • Modernizing the Land Transfer Tax to reflect the current real estate market, including increasing rates on one or two single-family residence over $2 million. Revenue generated from the increased rates is being used to fund the enhancements to the First-Time Homebuyers Refund.
  • Making it easier for not-for-profit affordable housing providers to buy surplus government lands.
  • Introducing an inclusionary zoning framework for municipalities that will enable affordable housing units as part of residential developments.
  • Amending the Planning Act and the Development Charges Act to support second units, allowing homeowners to create rental units in their primary residence and creating additional supply.
  • Freezing the municipal property tax burden for  multi-residential apartment buildings in communities where these taxes are high.
  • Collecting information about Ontario’s real estate market to support evidence-based policy development

Appendix: Data and Trends on the Real Estate Market

Ontario’s housing market has seen very dynamic growth in recent years, with prices in the Greater Toronto Area and the Greater Golden Horseshoe rising significantly. This has been supported by economic fundamentals, including a growing population, rising employment, higher incomes and very low borrowing costs.

House prices have been rising at a robust pace in the Greater Toronto Area since the end of the 2008-09 recession.

After two consecutive years of double-digit gains, average house prices in the Toronto region reached $916,567 in March 2017, up 33.2 per cent from a year earlier.

See image “Toronto Home Resale Prices”

The Greater Toronto Area showed the sharpest rise in home prices in Ontario over the past two years.

While the growth rate of prices of homes in the Greater Vancouver Area have been slowing since August 2016 after the introduction of B.C.’s foreign-buyers tax, home prices have been climbing steadily in the Greater Toronto Area.

See image “MLS Home Price Index”, “Greater Toronto Area Price Increases Outstrip Other Cities” and “Housing supply in Ontario seems to be aligning with demographics”.

According to Urbanation, the average rent per square foot for new leases in the Greater Toronto Area condo market rose 11 per cent in the last quarter of 2016 compared to a year earlier, the fastest pace of growth since at least 2011.

See image “% change, year-over-year, GTA”.

The number of owners with more than one residential property has been rising steadily since 2000.

See image “Number of Owners With More Than One Residential Property in the GTHA: 2000-16”.

Media Contacts

  • For Media Inquiries only:

TTY: 1-800-263-7776

1-800-337-7222

 

  • Jessica Martin

Minister’s Office

jessica.martin@ontario.ca

416-212-5181

 

  • Scott Blodgett

Ministry of Finance

scott.blodgett@ontario.ca

416-325-0324

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