What impact have speculation taxes had on Ontario home price growth?

It’s no secret that home prices in Ontario have seen some of the most striking growth across North America over the past decade, with the COVID-19 pandemic only accelerating the province’s housing market boom.

Efforts to curb some of that runaway price appreciation include a provincial Non-Residential Speculation Tax (NRST), aimed at clamping down on purchases by outside buyers for investment purposes. That rate was hiked to 20% and expanded across the province in March of this year – but a new study suggests such measures have proven largely ineffective in stemming home price growth.

Research from the University of Waterloo investigated market behaviour across Ontario’s nine largest population centres between 2011 and 2021 and found that efforts to regulate the province’s housing market had had little impact in deterring outside investment and speculation.

That’s due in large part to what the researchers describe as the “spillover effect”: the fact that although some large Ontario cities have steep taxes on investors, others don’t, meaning that those buyers are often content to simply switch their attention to the next closest city and purchase there.

There’s also little that can be done to regulate the market in large metropoles like Toronto, with anti-speculation taxes usually representing a “marginal change in profits” for big investors, according to researcher Olaf Weber.

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Muhammad Adil Rauf (pictured), who co-authored the report alongside Weber, told Canadian Mortgage Professional that differing levels of taxation across various cities meant investors could simply purchase in a more favourable Ontario market if their first choice was taxed too prohibitively, contributing to higher prices across the board.

“For example, property taxes are local taxes, and the regional taxes are the speculation taxes,” he said. “But the former, property taxes, are there for every city based on their own local circumstances. This speculation tax applies only to one entire region but ignoring the adjacent region or cities close to those regions.”

While the NRST aimed to dampen speculation, it actually contributed in the opposite direction, said Rauf, because the housing market of recent years was so attractive that investors were willing to shoulder the extra cost.

“Why are the buyers not worried about [that]? Because they don’t care – they’re not going to retain [the property] for a long time,” he said.

“They are taking the inventory out of the market, and the prices increase for the first-time homebuyers who are actually looking for houses to have, to stay in, and keep for the long term. But the investors will keep it for six months, or one year, or one and a half years.”

With taxation seemingly ineffectual in reducing home price growth, there are few obvious solutions to the problems facing the province’s housing market, Rauf said, although he noted that controlling the ownership side – individuals owning a number of units – could be explored.

In China, for instance, many cities have rules limiting home purchases, although at least 13 cities there have recently introduced policies encouraging households with two or three children to buy more homes than current restrictions otherwise allow.

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One of the study’s chief conclusions is that the housing market’s problems are multidimensional and can’t be solved by the stroke of a pen or with a single policy approach, according to Rauf.

Weber noted that municipalities had clearly become frustrated by their inability to act, and that the only solution that appeared to have actually worked when it came to creating more affordable housing was cities purchasing, building, or managing properties and also setting their prices.

For Rauf, the political will was necessary to create a reasonable supply of housing outside of the open market, especially for first-time homebuyers who have too often fallen victim to being outbid by more established buyers.

“They should have access to a controlled inventory that shouldn’t be offered in the open market,” he said. “It’s like open housing, but if I buy it, I cannot sell it for 10 years or 15 years or whatever. Or if I own one house, I cannot own a second house as a family.

“So you need to find a political solution to address this and to take housing out of the commodity table. Otherwise, it will be like gold, or oil, or something that’s for sale in the open market.”