Wednesday, January 7, 2009

Land Transfer Tax Has Punishing Effect on House Sales

Study Says Land Transfer Tax Unfair and Wasteful

The City of Toronto's Land Transfer Tax (LTT), introduced last year, "has had punishing effects on the Toronto housing market, reducing transactions and lowering average prices," says a study by the C.D. Howe Institute. It also says that there's no advantage to using an LTT instead of simply raising property taxes, but there is plenty of downside to this type of tax.

In Sand in the Gears: Evaluating the Effects of Toronto's Land Transfer Tax authors Benjamin Dachis, Gilles Duranton and Matthew A. Turner say the Toronto LTT caused a 16 per cent decline in the number of single-family homes sold after January 2008 and a 1.5 per cent reduction in house values (an average of $6,400 per house). The Toronto Real Estate Board (TREB), which lobbied vigorously to defeat the tax before it came into effect last February, says the tax costs average home buyers about $4,000 in addition to a similar tax levied by the Ontario government. The board says the tax has also had a negative economic impact, estimated at $170 million in 2008.

"We calculate that in its first year, the LTT will cause a reduction in household mobility -- at least 3,500 families in the municipality of Toronto will stay in houses that are too big or too small, or are too far from their workplace or school," says the study. "The dollar value of this lost mobility is about $1 for every $13 of revenue that the LTT generated for Toronto's coffers, or about $12 million per year. We also find that the LTT has led to significant new administrative expenses."

The study argues that if the city had raised property taxes by eight per cent rather than introducing the LTT, it would raise the same amount of money but not discourage mobility. "It follows that the welfare of Toronto residents could be improved if the city reduced its reliance on the LTT in favour of the preexisting property tax," says the study.

City Councillor Shelley Carroll, the budget chief, told local media that bumping up property taxes would hurt seniors on fixed incomes, driving them out of their homes. Taxing the sale of a home takes money "only from those who can afford it, when they can afford it," she said.

The study examined real estate transactions near the border of the City of Toronto, and compared changes in transaction volumes and values with those of adjacent municipalities. Only single-family homes were included – TREB says that if condos are added, more than 5,000 resale transactions were probably lost in the first year of the tax.

"When people buy a home, they usually spend thousands of dollars on related things like renovations, furniture and appliances," says TREB president Maureen O'Neill in a news release. "Thousand of Toronto jobs depend on this spending. Any city policy that impacts housing sales has a direct impact on the city's economy and jobs."

The study says, "It is reasonable to expect that the effects of Toronto's LTT are similar to the effects of LTTs imposed by the Province of Ontario and by other provinces and municipalities. Thus, our analysis also suggests that welfare improvements are possible if these other governments decrease their reliance on LTTs in favour of regular property taxes. Other municipalities and provinces that currently levy LTTs, or are considering doing so, should consider an alternative tax to raise the equivalent funds."

In Canada, LTTs are used in British Columbia, Manitoba, Ontario, Quebec, New Brunswick, PEI and some Nova Scotia municipalities, says the study. The City of Winnipeg has the power to impose an LTT but hasn't done so yet. In the United States, 35 states and the District of Columbia impose LTTs, along with many municipalities.

TREB is now calling for the end of the LTT. "We believe that the Toronto Land Transfer Tax is unfair and now a study by respected economists is validating that view," says O'Neill. "Not only is this tax unfair to home buyers and sellers, but also to the thousands of people whose jobs depend on the housing sector."

However, it's unlikely the city will kill the tax. It was hoping to raise $240 million per year once the tax was fully implemented, but with the slowing real estate market, that may be optimistic. Work is now underway on the city's 2009 budget, and Mayor David Miller has pledged that he will try and keep property tax increases to between two and four per cent. Meanwhile, a recent survey showed his approval rating at 59 per cent, which is about the same as it was when he was last elected.

David Pylyp: When First Time Home or Condo Buyers start looking for their Dream Home they are often shocked at how much of their down payment goes to Taxes, New meter installations, Provincial Taxes on CMHC Insurance and Lawyer's fees. With a modest nest egg of often $ 20,000 a First Time Buyer may have $ 5 - 7,000 in expenses.

This impacts what they are able to buy, combined with the choices available to them. Given the locational choice of Humber Bay Shore or Etobicoke Condos or moving slightly west into the City of Mississauga, a Buyer is able to extend there buying power.

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