Burning down the house

After spending several years watching house prices in the Toronto region spiral ever higher, and facing a looming election in the spring of next year, Ontario's Liberal government is finally taking action.  Ahead of this morning's announcement by Premier Kathleen Wynne, officials had promised a "suite" of measures, and for once this was not an exaggeration.  There are sixteen new measures in all, although most of the attention will fall on just two of them: the imposition of a tax on non-resident foreign buyers, and the extension of rent controls to encompass the entire rental housing stock.

The 15 percent tax on non-resident buyers is not a new idea; it's a carbon copy of a similar tax imposed by the government in British Columbia last year to curb soaring house prices in and around Vancouver.  That tax is generally seen as a success, and Wynne will be hoping for a similar result here.  One small surprise is the extent of the area to which the tax will apply: the whole region designated as the "Greater Golden Horseshoe" is affected, which basically means anywhere within about 100 kilometres of the city of Toronto itself. This includes my own area in Niagara, which has seen a considerable influx of foreign money as well as buyers from the Toronto area in recent years, with prices rising sharply in response.

The devil may well be in the details here.  Obviously it is not the intention to tax new immigrants moving to Ontario; the focus is on speculative buyers looking to turn a quick profit.  However, deciding which is which may not be easy.  To take what appears to be a common example, rich Chinese sending their children to school in Ontario often buy condominiums for them to live in.  Will the taxman look primarily at the student,  who is at least temporarily resident,  or at the parents, who may never set eyes on the condo and very likely hope to profit by selling it when the student finishes school?  No doubt realtors and lawyers are already figuring out ways to structure deals so as to avoid the tax.

As for rent controls, the existing system, which applied only to properties built before 1991, was clearly past due for an overhaul.  The new plan extends controls to all rentals, limiting annual increases to the rate of inflation unless that rate rises above 2.5 percent.  Rental providers are predictably up in arms about this. Although other measures in the "suite" of sixteen are designed to increase the supply of new rental units, these will take time to work, assuming they work at all.  However, if the goal is to win next year's election -- and it is -- Premier Wynne is evidently prepared to let the future take care of itself.

The main opposition parties have accused the Premier of acting out of purely political motives, which is of course entirely true.  However, considering the rate at which prices have been rising in Toronto (33 percent in the year to March),  and considering that the one step that would definitely rein in the market --higher interest rates -- is not in the Province's control,  Wynne may well have felt that she had little choice.  No doubt those same opposition politicians would have been the first to criticize if the market had fallen victim to a sudden correction.  Better to try to deflate the bubble gently, though whether today's measures will be able to achieve that delicate task, time alone will tell.