Why this is a problem for Toronto

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Every night before bed, Mayor John Tory and members of Toronto council should say a little prayer for municipal land transfer tax.

The tax – an additional municipal tax charged to the buyer on real estate transactions in Toronto – deserves huge credit for maintaining the city’s financial solvency over the past decade. It is no exaggeration to say that this was the salvation of the town hall.

Even though the mayor and council have struggled to find enough revenue to fund local services like public transit and homeless shelters, the LTT has been a cash bonanza. When the tax was introduced in 2009 by former mayor David Miller, the city estimated it could raise around $150 million a year.

They were far away.

The tax brought in $184 million in its first year, 2009. It broke the half-billion mark in annual revenue in 2015 and has never looked back. In 2021, annual returns topped over $1 billion for the first time.

Since the introduction of the Toronto Land Transfer Tax, annual revenue from the tax has increased by 540%. It’s not a typo. I didn’t accidentally put an extra zero in there. It’s really five hundred and forty percent. (Property tax revenue, meanwhile, rose 37%, much more modestly).

Even for those who opposed Miller’s decision to implement the tax, it’s impossible to deny that it quickly became a staple of Toronto’s municipal budget. So much so that, despite plans to scrap it immediately, Miller’s successor, the late Mayor Rob Ford, has learned to live with it.

What if the party was over?

Cracks are starting to appear

The town hall is right to be concerned about the LTT. To continue to generate revenue, the tax needs two things: a large number of real estate transactions and high real estate prices.

For this year, there is no good news on the first. The number of sales per month seems approximate, as the market is being hit hard by rising interest rates. The peak in 2020 and 2021 as people made pandemic-induced house moves is over. People don’t move like they used to.

Since April, the number of monthly home sales in Toronto has been far behind the previous year, and also behind the monthly average the city has seen since the introduction of the LTT in 2009.

READ: Home prices in the GTA drop every year in September for the first time since 2018

After a decent few months to start the year, things have been bad since June. The 2,422 home sales reported by the Toronto Region Real Estate Board (TRREB) that month were far behind the LTT-era average of 3,661 for the month. July, August and September of this year also represented comparable lows.

The silver lining: high prices?

From a cold hard tax revenue perspective — but clearly not from a housing affordability perspective — City Hall could find a silver lining in the other half of the land transfer tax equation. . Overall, average property prices in the city have held up quite well, although the number of sales has fallen.

In 2021, the average real estate transaction price in Toronto reported by TRREB was $1.05 billion. In 2022, until the end of September, the average price was $1.12 billion.

But the optimism here must also be tempered.

After a meteoric start, average prices fell during the summer. They are now practically equivalent to the monthly averages of a year ago. Still high, of course, but growth seems to have plateaued.

What does this mean for the budget?

The inherent variability of the real estate market makes it difficult to project land transfer tax revenue for this year. The number of sales for October, November and December is not available to us, because the development of time travel technology has been extremely slow. But if we project a few months ahead using existing trends, data from past years can give us a basis for making a series of projections.

In all scenarios, I assumed that the number of home sales for the remaining three months of the year would be 60% of the sales for the same month in 2021.

The best-case scenario would see the ratio of tax revenue to home sales and average price in 2018. This would see the city generate $956 million in revenue, about $8.2 million more than budget, but a down $221 million from 2021.

Meeting the budgeted revenue target would be a huge relief, obviously, but there’s no doubt the city was hoping for more. With a projected operating budget shortfall of $860 million this year and an even larger operating budget gap projected for next year, the extra money would have been very helpful.

But remember: this is the best case scenario. The worst case is catastrophic. If the numbers arrived at the same ratio as in 2014, tax revenues would hit almost half a billion dollars below 2021, blowing a $260 million hole in the budget.

The average projection, combining data from the previous eight years, isn’t much better, with a projected loss of $361 million from 2021 and a missed budget of $132 million.

Replacing LTT revenue is going to be a huge challenge for the mayor and council in the new term. It is a fiscal challenge that will come on top of a series of other fiscal challenges related to COVID and high inflation.

The challenge of the LTT, at least, would have been much easier to meet if the mayor and council had not come to rely so heavily on the LTT over the past decade. For many years, the Tories and the council have relied on the LTT as an offset to help keep property tax revenue increases below the rate of inflation. The LTT – a tax that hits movers and new residents – has, in effect, subsidized tax relief for long-term homeowners.

With this in mind, the LTT has always created some embarrassment, putting elected officials in the odd position of trying to talk about ways to make housing more affordable while quietly hoping that the high levels of property speculation continue – for fund their budget.

Beyond that, however, the real problem with building up much of your budget at the top of a housing bubble is, well, when the bubble bursts, so does your budget.

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