Tuesday, December 09, 2008

Mayor's land-transfer tax helped sink Toronto real estate market, study says

Amid a sinking Toronto real-estate market, Mayor David Miller's controversial new land-transfer tax is to blame for a significant chunk of falling sales and house prices, a study released by the C.D. Howe Institute today concludes.

According to the study, Mr. Miller's tax – a levy of up to 2 per cent on top of the province's existing levy – is responsible for a 16 per cent drop in sales and a 1.5 per cent drop in house prices in the city compared to its suburbs.

City finance officials had pledged that the new tax would have little effect on the city's real estate market before it was implemented in February. But the C.D. Howe study, called Sand in the Gears, concludes that the levy actually was to blame for two-thirds of the drop in the number of houses sold in Toronto from February, when the tax was implemented, until August, when the real estate market's slide began to accelerate.

“The evidence really suggests a very large impact,” C.D. Howe Institute policy analyst Benjamin Dachis said in an interview. “I'll let the evidence speak for itself.”

The study says the new tax, implemented after months of political battles at city hall, can be blamed for an average $6,400 reduction to the price of a Toronto home, and has forced some homeowners to stay put instead of move.

In order to isolate the effect of the new tax from the rest of the winds hitting the real estate market, the study looked at the three kilometres of real estate on either side of Toronto's border with Peel, York and Durham Regions, where no new tax exists, from February to August. It found a deeper slide inside Toronto, where the new tax applies, than outside.

The new land-transfer tax, and a new tax for automobile registrations, caused a months-long political battle at city hall after council narrowly voted in July 2007 to delay the new taxes and Mr. Miller charged that the move put the city in a financial crisis. The new taxes were later approved in October.

Von Palmer, a spokesman for the Toronto Real Estate Board, said the study shows his group's warnings against the tax were right, and urged the city to repeal the tax.

"This validates what we've been telling people," Mr. Palmer said in an interview. "... The reality is that it has hurt the market."

City Councillor Shelley Carroll, the mayor's budget chief, said the city had anticipated some effect on the market but that it should stabilize after at least a year. She added that the market was artificially inflated in the run-up to the implementation of the tax as some rushed to buy a home before it took effect. (The study's authors say they took this factor into account in their analysis.)

"The ebb and flow of the market that's caused by the land-transfer tax was not unanticipated," Ms. Carroll said.

Ms. Carroll seized on the report's suggestion in the report that an 8 per cent increase to the regular property tax would have been preferable to the land-transfer tax. She said such a move would have seen seniors on fixed incomes forced out of their homes, while the city's land-transfer tax was meant to keep property tax hikes lower.

Taxing the sale of a home means "you look for an up-front one-time investment, only from those who can afford it, when they can afford it," Ms. Carroll said.

Source: by Jeff Gray, Globe and Mail

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