Move over Vancouver, Toronto is now home to Canada's hottest real estate market

Sep 14 2016, 8:21 pm

The tides in Canada’s real estate market have seemingly turned with Toronto now trumping Vancouver in becoming Canada’s most active housing hub.

A shift had already been happening months before the BC provincial government’s recent decision to implement a 15% tax on foreign investors, but analysts say the tax was the tipping point.

Home sales in Vancouver were down by 30% year-over-year in August as foreign investors, particularly from Mainland China, participate less and less in the market.

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“The market already started fracturing before the tax was implemented,” Diana Petramala, a real estate economist for TD Bank, told Daily Hive. “Ultimately, it is only going to underscore that shift in interest from Vancouver to Toronto that we think was already underway before the tax was introduced.”

The Australian example

Petramala points to the foreign homebuyers tax recently introduced by the Australian state-level governments of Queensland, New South Wales, and Victoria, where the major cities of Brisbane, Sydney and Melbourne are located, respectively. Like Vancouver and Toronto, all three cities have experienced a huge influx in Chinese capital in recent years, leading to affordability issues that almost mirror Vancouver’s situation.

However, in contrast, the taxes enacted in Australia were much lower – at just 3% or 4% for Queensland and New South Wales, respectively. The tax is highest in Victoria where the so-called stamp duty charge was recently raised from 3% to 7%, and there is an indication that property taxes could be hiked in the coming years.

In response to the taxes, there has been a shift in foreign investment from the three states to other Australian states that didn’t implement a tax. Some have also speculated that investors have even fled as far afield as markets such as Canada and New Zealand as a result.

The tides are turning

“The 15% tax in Vancouver could have had a fairly hefty impact on the market,” said Petramala. “The government estimates that 15% of all real estate transactions by the time of implementation were foreign buyers so it seems that the reduction in foreign investment, plus people getting worried about the effects of the tax, started moving to the sidelines. This also includes domestic buyers and other speculators.”

She adds that the draw to Toronto is likely a function of Toronto’s relative affordability,especially when compared to cities such as Vancouver, London, Los Angeles, and New York. For example, the average home in Vancouver costs $200,000 more than the average home in Toronto.

Toronto also generally has more supply than other hot markets, especially Vancouver’s, and the completion of a record number of new condominium units over the coming months and years should help moderate prices to a certain extent.

Following in Vancouver’s footsteps

Petramala adds that if Toronto’s market is left unchecked, the price acceleration – similar to what Vancouver has experienced since hosting the 2010 Winter Olympics – could last for three to five years. She believes that the Ontarian provincial government should enact policies that regulate the market, whether it be taxing foreigners or implementing macro-provincial regulations, to soften the likelihood of any potential collapse in home prices.

She says Ontario’s first step should be to collect data so that the risk is understood and decision makers will know what they are reacting to. This is something the BC government did not prioritize until recently.

“With data collection, we will be one step closer to knowing whether or not they will or should,” she said. “History shows that the longer you wait with these price accelerations unchecked, the deeper the downturn will be.”

The shift to Toronto could be even more pronounced in the years ahead with the City of Vancouver announcing today that it might implement an empty homes tax of 0.5% to 2%, depending on the assessed property value, next year.