Toronto Land Transfer Tax Exaggerates Housing Price Decline

John Pasalis in Toronto Real Estate News

Last month I wrote a post that briefly discussed how the City of Toronto land transfer tax inflated real estate prices during the final quarter of 2007 and how these inflated prices are now exaggerating the current decline in prices. See Toronto Real Estate Prices Down 15% in October.

Last week realosophy.com released a report that reviewed this subject in a little more detail.  You can be first in line to receive these reports by subscribing on our home page at realosophy.com.

Download the complete report here.

 

 

John Pasalis is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John

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Comments

[Rob]

Thanks.

This is an interesting theory and makes a good deal of sense, though it's just one local factor in the mix of what has happened in TO this year.
In a flat market, this would be something bigger to target. I realize you're not assessing blame on the City to the same extent as the spinners at TREB are, but I feel the need to have some sense of scale here.

While real estate markets are local, economies and people's jobs are not. Global and regional economic stats must be taken into account and it points to a deflationary run that will be taken at assets of all kinds -- as other classes too have had their prices and/or sales blown up by cheap credit.

Though I'm being unscientific about it, by the same conclusion, you could also say that the 'rush' [the flurry of SOLD signs in otherwise dead sales areas of the city that lasted about a week or two] to buy pre-Oct 15 for 0/40 prospects also spurred sales numbers and likely held up the downward correction in prices somewhat, so what we're seeing currently isn't quite as ugly as it is and will get as the seasonal market turns over.

[dontcallmeshirley]

Let's play contrarian.

All other things equal, the land transfer tax should have reduced the purchase price of homes.

If a buyer had $1 million to spend, the city gets 2% and the seller gets 98%. In the absence of the tax the seller would have gotten the whole $1 million.

And lets quantify the tax. On a 1 to 2 million dollar transaction the land transfer tax would mean an additional $150 to $250 per month in mortgage payment. Will this amount sway anyone in that tax bracket? It's equivalent to a cellphone bill or a manicure.

C'mon John, just say the market is weak. Lots of people are stuck between two houses and can't sell.

Heck, Sarah Richardson can't get rid of 61 Lacewood and she's dropped $30k already.

[John Pasalis]

@Rob

I'm not sure if the cut off for zero down and 40 year am mortgages had nearly the same effect. Many banks stopped offering these products shortly after the feds made the announcement.

@dontcallmeshirley

I certainly was not trying to suggest that the market is not weak. I think the sales numbers speak for themselves.

The fact is that there was a significant increase in sales of $1M+ homes during Q4 2007 and this skewed average prices higher. I happen to believe that this was caused by the land transfer tax, but even if something else triggered these sales it doesn't change the fact that average prices were affected. As a result, our decline today looks worse than it really is.

I can tell you that my experience with buyers is that the tax is impacting their purchasing decision. Between the drop in amortizationss from 40 back to 35 and the new tax, buyers can buy less today than they could a year ago. I'm also finding that investors looking for properties have a preference for buying in the 905 because they don't want to pay the premium just to be in Toronto. Not exactly scientific but it's what I'm seeing.

[dontcallmeshirley]

John,

Fair enough, perhaps the November numbers will be free of the land transfer tax effect and provide a purer indication of price.

I appreciate your comment on reduced buying power. Refreshing.
When can we expect sellers to accept this truth and moderate their ask prices? A month? 4 months? Longer?