New tax helped sink housing market: Study
A controversial city of Toronto land-transfer tax implemented this year has had "significant negative effects on the housing market" by reducing sales and lowering prices of homes, says a study.
The land-transfer tax that took effect in February has caused the average price of a single family home in Toronto to decline by 1.5 per cent, or $6,400, according to a report released yesterday by the C.D. Howe Institute.
The study estimates the tax, which adds an additional 1.1 per cent on to the purchase price of a house in Toronto, will cause about 3,500 families per year to stay in homes that may be "too small, too big or too far from their places of work or school" since it is a disincentive to moving.
Moreover, "funding the municipal government with a land-transfer tax has no apparent advantage over an ordinary property tax" and is actually more problematic, say the authors, University of Toronto economics professors Gilles Duranton and Matthew Turner, along with policy analyst Benjamin Dachis of the C.D. Howe Institute.
"This is simply not an effective tax," report co-author Dachis said in an interview. "The city of Toronto had a lot of other options that they could have used and didn’t." .
It may have been better economic policy to simply raise ordinary property tax rates by 8 per cent to 10 per cent to gain the additional revenue the city needs, the study said. That’s because property taxes do not discourage mobility and there would be no extra administrative expenses to deal with.
Moreover, the tax is simply unfair, the study stated, since it places the burden on "only a small subset of the population" and is "less consistent with ordinary notions of fairness than is an ordinary property tax."
Budget committee chair Councillor Shelley Carroll defended the tax and said the findings come as no surprise because the city’s own tax policy consultants had predicted a short-term dip in sales.
"The report said that this would affect sales and it did affect sales low cost car insurance. What they predicted it on was the basis of other jurisdictions whenever they instituted a land-transfer tax."
The consultants concluded that sales would spike before the date of implementation, followed by a decline lasting six months to a year, Carroll said.
"After that, it begins to stabilize because ultimately people have housing needs. They upsize, they downsize, they move in and move out."
But despite the hit, the city needs the cash, she said.
The Toronto Real Estate Board, which has been lobbying against the tax, applauded the report.
"This truly validates what we have been saying all along, this tax has been hurting the economy," said Von Palmer, chief government relations officer with the board. "If the city is really concerned about the economy and is interested in doing the right thing they would take steps to help the economy, and not hurt the economy, by rolling back the tax."
Palmer estimates that if condos were included in the C.D. Howe study, as many as 5,000 households are staying put instead of selling their homes, costing the Toronto economy tens of millions of dollars, since every sales transaction injects an estimated $33,000 in spending into the economy from fees, renovations and new purchases.
Toronto first considered a land-transfer tax in 2007 as a way to make up an estimated $576-million revenue shortfall. It was approved last October.
The tax is expected to raise $155 million in 2008 and $240 million once fully implemented.
"What this shows is it’s having an effect on the economy and it is making it more expensive to live in the city of Toronto," Councillor Denzil Minnan-Wong said.
The C.D. Howe study compared sales in the 416 with surrounding 905 municipalities and housing transactions that are near the border of Toronto.
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