New Buyer's "Home Buying" Tax Will Hit Sellers Too

By
Real Estate Agent with Right At Home Realty Inc.

A proposed land transfer tax, by the City of Toronto, will undermine affordability and property values. 

With the passing of the City of Toronto Act, that gives Toronto more powers to govern the city, many new proposals have been tabled to generate income for the city to cover the costs of services.  One one of these is a land transfer tax of around 0.5% of the purchase price on all properties in Toronto.  This may seem quite reasonable, except that we already pay the Ontario government a land transfer tax on a graduated scale from 0.5% to 2% with the average home being just over 1%.

Affordable housing has been a big issue in Toronto (Ontario, Canada) for a long time and this tax will only make things worse.  The average Toronto home ($380,000 in 2006) will have an extra cost of $1,900 in up front expense that can not be rolled into a mortgage. 

Many people are looking at this tax as a buyer's tax.  They say that it will burden the home buyer with extra costs.  However, the home seller, and the Toronto real estate markets, are likely to get hit even harder by this tax. 

Most first time home buyers are stretching their budget to find a house that they like and can afford.  Some are using 100% mortgage programs with the majority taking on mortgages for 95% of the homes value.  Even with a 95% mortgage they are often pressing their savings to make a 5% down payment and cover their closing costs.  So adding an extra $1,500 (on a $300,000 home/Condo) will drastically effect their buying power. 

Leveraging is one of the great wonders of commerce that allow us to acquire stuff, including homes.  A 95% mortgage is effectively a 20 times leverage of our down payment.  With this in mind if the buyer has to remove $1,500 from their down payment then they decrease their affordable purchase price by $30,000!!!  (This is one of the main reasons that it is critical that sellers pay for the buyer's real estate agent as well.)  This huge drop in affordability will cause the property values in Toronto to drop as much as 10% ($30,000 from $300,000) as buyers are still going to be looking to get a similar home for their money.

This may kick many home buyers out of the market, or at least delay their entering into the market, which would cause a decrease in sales and higher competition on the selling side.  The Toronto real estate market could find itself swinging to a buyer's market rapidly and prices could drop even more than 10% before affordability and buyer confidence are both re-established.

On top of this, it is believed that every resale home generates $27,000 in spin off spending (on average and according to a study commissioned by the Toronto Real Estate Board) on things like decorating, renovations, new appliance and even just stocking up on household supplies from local stores.  All of this spending boosts the Toronto economy and generates taxes.  So this new tax will not only decrease property values, without increasing housing affordability, but it will also decrease the taxes that are generated in spin off purchases due to fewer sales.

Higher price homes will also be affected as it will take longer for people to save up equity to move to the "next step" home and many people may just stick it out in their smaller home or move out of the city.  Homes in Richmond Hill and surrounding areas will seem much more attractive and affordable as they will not have the extra tax burden.

So what can you do? Send an email to Mayor Miller, here, to let him know that you do not approve of this tax. Also, contact your local councilors and let them know. You can find your councilor's contact information at the City's Councillors web page.

  

 

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Anonymous
Anonymous
I'm seeing a variation of this in the Hilton Head and Bluffton, SC markets.  Here the plantations and sub divisions are assessing a fee for home buyers that usually amount to about .25% of 1% x the sales price.  The idea is to build reserves for improvements and repairs if a major storm were to hit Hilton Head Island and Bluffton areas.  So far there hasn't been a great deal of opposition to this idea although I do agree that it will transfer over to a negotiation item with the seller. 
Mar 25, 2007 08:36 AM #1
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