The government is only offering a Band-Aid solution to rising home prices.
The Ontario government hinted last week it would offer something “small” to first-time homebuyers in its fall economic statement and it didn’t disappoint. On Monday, the Liberals announced that starting January 1, 2017, the maximum provincial land transfer tax rebate for first-time homebuyers will double from $2,000 to $4,000. If you’re buying a home in Ontario for $368,000 or below, you won’t pay a dime in provincial land transfer tax (previously you’d only get a full rebate for homes $227,000 or below).
Where are the cash-strapped Liberals coming up with the extra money? They’re upping the land transfer tax rate on homes over $2 million from 2% to 2.5%. The move is expected to bring in an extra $105 million annually and help the Grits remain on track toward a balanced budget in 2017-18.
Land Transfer Tax: Frozen in Time
Land transfer tax brackets haven’t kept up with the times. In fact, they haven’t been updated since 1989. Back then $400,000 could buy you a mansion. How times have changed.
The average price of a home in Toronto last month was $770,480. When you buy a home in the Big Smoke, you’re hit with a land transfer tax “double whammy.” Not only do you pay provincial land transfer tax, you’re also on the hook for municipal (Toronto) land transfer tax – ouch! Even with the provincial rebate doubling, you’ll still owe land transfer tax of $14,994 on the average home (certainly not pocket change).
Will the city of Toronto step up to the plate and follow the province’s lead and double its land transfer tax rebate? It remains to be seen. (It would be a pipe dream to think that our city is in the financial position to waive it entirely.)
How About Waiving Land Transfer Tax?
Doubling the land transfer tax rebate is designed to provide some much-needed relief for property virgins buying in pricey markets like the GTA. But is it enough? They say not to look a gift horse in the mouth. Land transfer tax is the most costly closing cost for most homebuyers, so it certainly helps. (I dedicate an entire chapter to closing costs in my book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians.)
The move falls short of the Ontario Real Estate Association’s call to waive land transfer tax entirely for first-time homebuyers. Doubling the rebate only offers a short-term, Band-Aid solution. Similar Vancouver introducing a 15% foreign buyer’s tax, it only addresses the demand side of the equation. It doesn’t the chronic shortage of detached houses in the GTA.
The land transfer tax has been a financial boon for the province. Rising home prices have helped fill the province’s coffers. The Liberals are expecting to take in $2.36 billion in land transfer tax alone this year. That’s $314 million, 15% more, than predicted and double what the province earned just 6 years ago.
Instead of leaving it up to future governments to make ad hoc adjustments to the land transfer tax brackets, I’m calling on the government to adjust the land transfer tax brackets. It could be based on how much the average price of a home has gone up annually. This would be similar to how personal income tax and benefit amounts are indexed for inflation.
The government has hinted this is only the first step to ease the affordability of real estate. I’m just throwing this idea out there. How about as a next step, the government covers half the real estate lawyer fees and disbursements? With homebuyers spending roughly $1,500 in legal fees when buying a home, it would certainly help.
Looking for “Creative” Ways to Make Housing Affordable
With the federal government recently introducing new mortgage rules, buying your dream home just became a bit more challenging. But before you throw in the towel, there’s still hope. Homeownership is still realistic – you just have to be smart about it.
With creative living arrangement like living the basement and renting out the upstairs or living with a roommate, you can still afford a decent home and pay down your mortgage in about half the time. (I discuss this and provides tips to reach mortgage freedom sooner in my book.) It’s all about getting your foot in the door of the real estate market and building up equity when you’re financially ready.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.