Market Commentary - November 2007
SALES COMMENTARY IS THE NEW CITY LAND TRANSFER TAX
We purposely delayed this month’s report so that we could comment on the impact of the new Toronto Land Transfer Tax. Key points of this tax: it will double the tax buyers pay in Toronto – Ontario also has a Land Transfer Tax, about the same amount as every other province, except Alberta and Saskatchewan which have none! Specifically it works this way: .5% to $55,000 of purchase price, 1% from $55,000 to $400,000 and 2% on the balance. The Ontario Land Transfer Tax is a little more expensive: 1% goes only to $250,000; then it is 1.5% to $400,000 and the same 2% over $400,000.
Is there any good news? Thanks to the lobby efforts of the Toronto Real Estate Board, first time buyers are exempted up to $400,000. As well, all Agreements of Purchase and Sale are exempted if they are entered into before December 31st of this year. That means people who bought into new condo projects over the past couple of years, but will not take title to their unit for another year or two are exempted. The actual tax kicks in February 1st of 2008, so in theory you could buy after December 31, and as long as the closing date is on or before January 31st, then you also would not pay the Tax.
Besides the illogic of this tax grab, how will the market deal with it? Consider a $380,000 purchase – about the average price on TREB. A buyer currently would pay the Ontario Land Transfer tax of $4,275 and will now pay another $3,525 City Tax for a total of $8,800 – just for the purpose of owning property and paying property taxes! Speaking of paying property taxes that was the reason why this tax was brought in. Toronto residential owners were supposedly already over taxed and we needed alternative revenue sources. The truth of the matter is that Toronto residential owners pay the lowest property taxes. For a property assessed at the average price of $380,000, an owner would pay $3,240 in taxes in Toronto. The same property assessed at $380,000 would pay taxes of $3810 in Mississauga, $3,890 in Richmond Hill and $5,140 in Pickering – all of which receive less municipal services! The good news is that people buying in Toronto will recover the extra City Land Transfer Tax (through lower property taxes) by living in their new accommodation for 6 years!!
In the short term – up to January 31st of next year, expect the market to be much busier than usual. Prices will probably increase in the period to negate any tax savings. Starting February 1st expect the market to slow down more than normal. In fact, there will probably be better opportunities for buyers at that time. And yes, the market will adjust to this tax over several months. For those who can remember the introduction of the GST, retail sales slowed for a few months and then everything went back to normal.
The challenge to this new tax is how will buyers adjust to having to come up with more money at the time of purchase? Younger people will simply take out a bigger mortgage and lenders will be happy to accommodate. We will simply have more 5% or 0% down payment mortgages. And now that 40 year amortization mortgages are prevalent, can 100 year be that far behind? After all, people in Spain already have 100 year amortization mortgages. So the real cost to buyers from this tax is that you will be paying more interest costs for a longer period of time!
RENTAL COMMENTARY WITH THE NEW CITY LAND TRANSFER TAX
Just because you are renting, don’t for a minute believe you won’t pay this tax! If the result of this tax is that fewer people can afford a down payment and are forced to rent, then this increase in demand will force up rents. At the same time, renters will be dealing with owners who have paid this City tax, which to them is just another cost of doing business that will be passed along. The interest cost on this Tax is about $20 per month. The large supply of rental condos has put a lid on rents so far, and a bigger supply coming up in the next few years will probably mean that rentals rates will not move upwards by more than $100-200 per month, depending on size.
