Fitch: New measures should curb Toronto home price growth
Ontario’s proposed legislation aimed at tempering home prices in the greater Toronto area should help slow price growth and possibly lead to a price correction, according to Fitch Ratings. Toronto home prices are up more than 40% in the past three years, far outpacing the supporting economic fundamentals in the area.
Introduced by the Ontario Ministry of Finance last week, the measures include 16 actions intended to facilitate more affordable housing for both buyers and renters. Among the actions are a 15% Non-Resident Speculation Tax, a 2.5% cap per year on rent increases and greater flexibility for municipalities to use property taxes to influence the housing market.
Fitch believes the tax on foreign buyers, coupled with rent controls and other proposed measures, if passed, will likely have a more meaningful impact on home price growth and sales activity than in Vancouver, where a foreign-buyer tax was implemented last August without similar rent controls. Vancouver home prices dropped about 3% after the tax was introduced. However, prices started to rebound in January 2017 and are now close to their peak. Fitch believes that investor properties and speculators in the condo market would be most affected.
The proposed rent controls could dampen price growth in the condo market if the rent investors can charge tenants is limited. Investors who are highly leveraged may be forced to sell, which could begin downward momentum that leads speculators to follow suit. Further, if all measures are passed, municipalities will have the power to introduce a tax on vacant units to encourage sales or rentals of unoccupied units, which may discourage speculators from holding onto vacant properties.
The number of borrowers that own more than one residential property in the greater Toronto area and Hamilton grew by roughly 30% between 2014 and 2016, according to the Ontario Ministry of Finance and MPAC Property Assessment Records. Fitch believes that the growth in multiple owned units can be attributed to investors buying units for rental purposes due to the limited supply of rental stock and uncurbed rental increases. This in turn may be driving price and demand momentum from speculators buying properties in anticipation of high returns. Although the limited supply of rentals appears to be a valid supporting factor, the extent of the price increases does not appear to be supported by growth trends in population, income and employment.
Source: Fitch Ratings