Ontario Tries to Temper Rising Toronto Home Prices With New Tax

(Bloomberg) -- The Toronto housing market will get a new tax to fend off speculators and expanded rent-hike protection as Ontario attempts to slow record home-price growth.

Ontario officials announced a slew of measures on Thursday for Toronto and surrounding areas meant to control what some economists, investors and policy makers call a price bubble that’s putting the broader economy at risk.

The 15 percent levy will apply to non-Canadian citizens, non-permanent residents and non-Canadian corporations buying residential properties containing one to six units in the greater Toronto area, the provincial government said in a statement Thursday. Rent control will be imposed on buildings constructed after 1991 -- effective April 20 -- which limits annual increases.

Canadian Prime Minister Justin Trudeau sought to dispel any notion that Ontario’s proposed 15 percent tax on foreign homebuyers is a sign the country is shunning foreign investment.

“We are open to global investment,” Trudeau said in Toronto during an interview with Bloomberg Editor-in-Chief John Micklethwait. The levy aims to differentiate between buyers who are “living to move” or merely betting on the housing market, Trudeau said.

Data Dearth

Both Trudeau and the Ontario officials acknowledged that Canada needs better information on who is purchasing property in the country.

Canada faces “a dearth of data on whose doing what,” Trudeau said.

Ontario Premier Kathleen Wynne’s administration will also take steps to boost supply: the Ontario Fair Housing Plan includes 12 measures, such as a targeted C$125 million ($93 million) five-year program to encourage building of new rental apartment buildings by rebating a portion of development charges.

“In some ways, we have to realize that this is a good problem to have,” Wynne said Thursday in a briefing. The price increases reflect confidence in Ontario’s economy, but when young people cannot afford homes “we know we have a problem and we know we have to act,” she said.

‘Get Hurt’

Separately, Prem Watsa, head of Canadian investment firm Fairfax Financial Holdings Ltd., said on Thursday the Toronto real estate market is in a bubble that will end with pain for banks that financed the growth.

“Most banks can’t survive a 50 percent drop in real estate values,” Watsa said Thursday during Fairfax’s annual general meeting in Toronto. “It’s going to come down, and a lot of people are going to get hurt.”

The bubble warning and new housing measures came the same day troubled Canadian alternative-mortgage lender Home Capital Group Inc. fell as much as 21 percent, the most intraday in 11 years, after the Ontario financial regulator alleged that executives misled investors and broke securities laws.

The bubble warning and new housing measures came the same day troubled Canadian alternative-mortgage lender Home Capital Group Inc. fell as much as 21 percent, the most intraday in 11 years, after the Ontario financial regulator alleged that executives misled investors and broke securities laws.

Main Measures Proposed

Preventing Correction

The move comes a week before Ontario unveils its budget, due April 27, and two days after the province’s Finance Minister Charles Sousa said the government recognizes that “now” is the time to address the issue. Toronto’s surging real-estate market has triggered debate over whether non-Canadian speculators are bidding up homes and fueling unsustainable record price gains, or if a lack of housing supply and inadequate urban planning is more to blame.

Home prices in the Toronto region rose 6.2 percent in March, the biggest one-month gain on record, according to a benchmark price index by the Canadian Real Estate Association, and jumped almost 30 percent in the past 12 months. Bank of Canada Governor Stephen Poloz last week said there is no justification for such gains and warned of a price correction.

People “should be able to rent or enter the real estate market without making great sacrifices or taking on a huge amount of risk,” Wynne said. “At the same time, we recognize the need to protect the significant investment homeowners have made. This plan balances those needs to stabilize the market and prevent a sharp correction that would be harmful to everyone.”

--With assistance from Natalie Obiko Pearson and Scott Deveau

To contact the reporter on this story: Kim Chipman in Toronto at kchipman@bloomberg.net.

To contact the editors responsible for this story: Daniel Taub at dtaub@bloomberg.net, Steven Frank, Stephen Wicary