Bob Aaron: "Home prices would plummet, as they did with the new levy in ’74. I vividly recall that the housing market crashed overnight."
My award for the worst real estate idea of the year — possibly the decade — goes to Toronto city council for approving a motion to push for a provincial tax to stop home speculation and home flipping.
Coun. Mike Colle introduced the motion and it was approved by a 21-4 vote at council last month.
The motion claims that “out-of-control housing prices are fuelled by real estate speculators and home flippers (‘investors’) who are buying multiple properties other than their principal residence.”
Colle’s motion completely ignores record-low interest rates and demographics, which are the prime factors driving market price increases.
With the record low rates, and more “real” buyers entering the market, the demand for real estate increases — investors or no investors.
Colle’s motion fails to make the necessary connection between the rise in home prices and the involvement of investors in perhaps 25 per cent of the market.
The motion also does not consider the inevitable effect of a speculation tax on the residential real estate market.
Colle is a former economics teacher who was in his twenties when the Bill Davis government introduced a 50 per cent land speculation tax on April 9, 1974.
In the motion’s preamble, Colle says that tax is credited with “slowing the extreme increase in property values.”
That’s a wild understatement. The Davis government’s land speculation tax caused what was probably the worst market crash since the Great Depression of 1929.
I was a young lawyer when the “spec tax” was introduced, and I vividly recall that the housing market crashed overnight. I spent days fielding call after call from panicked buyer clients who wanted me to do anything at all to get them out of pending deals after the values of the properties had crashed. And numerous calls from worried sellers who wanted to make sure their deals closed as written.
Lawsuits between buyers and sellers dragged on for years and the tax turned out to be a bonanza for litigation lawyers. Figuratively, there was blood in the streets as homeowners saw their equity wiped out overnight.
A new provincial land speculation tax would cause home prices to drop sharply as they did in 1974. It would also result in years of litigation, foreclosures, powers of sale and bankruptcies as millions of Ontario homeowners would see their home equity wiped out. The damage to our society would be incalculable.
Government intervention in the real estate market rarely produces positive results. A sharp market crash followed the Ontario government’s introduction of the 15 per cent Non-Resident Speculation Tax on April 21, 2017. Litigation in the wake of that crash is still ongoing.
In my own practice, a number of clients walked away from hundreds of thousands of dollars in deposits when they could not sell their existing homes for enough money to finance a signed purchase agreement for a second home. At the same time, their lenders cut back on the amount they were willing to advance in the face of a significant drop in market value.
My message to Premier Ford is this: please do not interfere in the Ontario real estate market. No good things would result from a new speculation tax.
Image credit: iStock/Getty Image
Bob Aaron is Toronto real estate lawyer. His column appears on this blog, Move Smartly, and in The Toronto Star. You can follow Bob on Twitter @bobaaron2 and at his website aaron.ca.
February 17, 2022
Policy |