Canada housing market: A sweeping speculation tax in the offing in 2022?



Mr. Kunal Sawhney, CEO, Kalkine Group

Is housing a fundamental human right or is it a tradable commodity, or is it both? The rise in the income levels of people made housing a commodity like a company’s stock or gold, which investors speculate on and trade to make profits.

But ground realities cannot be ignored. According to the Canadian Real Estate Association (CREA), the average house price in November 2021 was C$720,000, up 20% from last year. As we bid farewell to the year, Canada’s hot housing market remains one of the biggest headline makers, thanks to the frenzy that is refusing to subside.

2021 was all about new records

The market cannot be justifiably termed hot unless sales volume and prices grow simultaneously.

By the end of November, the number of houses that changed hands in 2021 was already more than in 2020, which itself was a record year in terms of volume. Almost 100,000 more homes may be sold by the end of 2021 on CREA’s MLS compared with 2020. Though low inventory is cited as one reason for prices going north, such high sales volume reveals the more significant role of demand than supply.

The average house price was as high as C$716,000 in March, but a lean phase over the new few months in 2021 triggered debates about corrections and even a crash in the market. In August 2021, the number of houses that sold was down 14% compared with August 2020, with the average price cooling down to C$663,000. The bulls are back in the housing market, and November levels indicate why a correction may not be on the horizon, let alone a crash, despite all the prophecies in 2022.

Voices for corrective actions

High prices of Canadian homes could be justifiable had they come at a time of overall economic boom. But 2021 was a year of subdued growth, even negative in the second quarter, with the pandemic to blame.

In September, the employment could regain pre-pandemic levels, but the ongoing wave of the new Omicron variant is threatening to deride the momentum. Amid this, high house prices raise fears of inequality creeping up in one of the world’s most advanced and progressive economies. These fears are not unfounded. From the federal finance minister to the governor of the Bank of Canada, many have shared the concerns about housing becoming unaffordable, so much so that governor Tiff Macklem at one point said that skyrocketing housing prices is one of the biggest vulnerabilities facing the Canadian economy.

Besides vaccine mandates, house prices became one of the critical issues in the closely-fought snap election. Both Liberals and Conservatives announced new ways to make the market affordable for first-time buyers, but things are yet to change on the ground.

Relentless speculation

Speculative bidding has played a role in turning housing assets costlier.

A report suggests that investors who flip houses to make capital gains are now the biggest buyers in Ontario. The report, published by Toronto-headquartered Teranet, reveals that multi-property buyers, who can be termed investors, not dwellers, are now one-fourth of the total number of buyers.

An investor always looks for assets that can quickly appreciate in value, which is what made them turn to the housing market amid a gloomy global economic phase. The irony is that new retail investors with small pockets are in the driver’s seat in the stock market, but deep-pocketed investors are the ones shaping sales volume and price growth in the housing market. The federal government resorted to a levy on vacant homes owned by foreigners to deter them from crowding out first-time buyers living in Canada as citizens or permanent residents, but speculation is going on unabated.

Speculation tax on housing

The speculation tax is already in place in British Columbia and Ontario provinces. And hence, when Councillor Mike Colle of Toronto recently spoke of introducing such a tax in the city, it was about adding domestic speculators under its purview.

In essence, speculation tax deters investors from trumping buyers that purchase the property to occupy it. In British Columbia, foreign owners of Canadian homes fall under the purview. In Ontario, non-resident speculation tax (NRST) is levied over and above the regular land transfer tax. Speculation tax has become a significant revenue-generating source, and B.C. has earned over C$230 million in the last three years, which the provincial government has used to increase the housing supply. B.C.’s speculation and vacancy tax are drivers behind turning vacant units into rental homes.

That being said, not many seem to be talking about the speculation tax that the provincial government of Ontario introduced with a 50% levy in the 1970s. This levy is said to have reined in rising prices of houses that were growing at nearly 30% annually. It was probably the first time such a tax was introduced in North America, and it is said that house price growth after the tax slowed to single-digit. Some also argue that other factors like high mortgage rates also played a role in cooling down the market.

2022 can be the call to action

Not many things may change in 2022. A new variant is threatening economic revival, inflation on basic goods is a big worry for families, and despite all pressures, the Bank of Canada has yet to hike rates.

Mortgage rates may continue to remain at record-low levels in 2022. But does a low mortgage rate, which is being blamed for the market frenzy, has any role to play when it comes to deep-pocketed investors? In June 2021, the Office of the Superintendent of Financial Institutions (OSFI) set a new minimum qualifying rate to make obtaining mortgages tougher, but this could have adversely impacted the first-time buyers. A steep hike in mortgage rate will be detrimental to vulnerable buyers, not to the investors that consider housing assets a commodity.

In 2022, the federal and provincial governments can be under pressure to rid the housing market of the dominance of investors – foreign or domestic. This can start a broader debate on a sweeping speculation tax, followed by its eventual adoption as some populist measures can be good at times of high inflation and an uncertain macroeconomic landscape.

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