Yup, Toronto has a speculation problem too. Last week we used natural language processing to comb through listings in Vancouver, and determined that 1 in 10 listings for resale were never occupied. This was done by analyzing the listings for language that implied, or outright stated, that it was “never occupied.” Doing the same thing in Toronto, we found that 1 in 3 listings being resold have never been occupied. This is a strong indicator that prices are being driven by speculation, not fundamentals.
How Is Toronto Worse Than Vancouver?
It’s not. Vancouver’s real estate vacancies last for years, whereas Toronto’s only last a few months. Earlier this month, our algorithm found 4,162 available listings, of which 1,346 were identified by the listing agent as never occupied. Most of them were in buildings that were built just over a year ago. So while there’s more listings unoccupied, they stay like that for just over a year. In my opinion, that’s much better than the multi-year unoccupancy parking that’s happening over on the West Coast.
Purchased To Flip
Since a large number were just over a year old, it’s safe to assume these places were bought at pre-construction for the purposes of flipping. Each seller adding a premium before selling it to the eventual occupant. It’s a fairly common tactic adopted by real estate developers, but when a third of all units get a middleman premium – we have a speculation problem. Rising prices have less to do with fundamental demands, and more to do with middleman markups.
Best Job In Town
Who can blame them? Owning a home has been one of the best jobs in the city, so it’s no surprise a lot of people have two…or more. In October, the average benchmark home in Toronto had increased by $132,721 over the previous twelve months. That’s close to twice the median household income in Toronto. When coupled with the fact that property prices have moved faster than income levels, it’s not really a surprise that this is happening.
The median household income in Toronto rose less than 1% over the past 30 years when inflation adjusted, with the average home increasing by over 188%. If you have the capital, this has been one of the easiest ways to increase your income over the past 30 years. However, the past 30 years of performance isn’t always an indicator of future performance.
Should Toronto Add A Flipping Tax?
The real question is if Toronto will tackle the issue, or let prices continue to inflate until they can’t be supported. I’m guessing it’s the latter, since the city eliminated potential declines of property values in their latest financial forecast. If they did want to tackle the issue however, looking to Hong Kong and how they are aggressively tackling speculation might be a good start.
In 2010 they implemented a measure to curb speculators called the Special Stamp Duty (SSD). The SSD essentially penalizes short-term sellers with a fee that would wipe out profits. Any property sold less than 3 years after purchase gets hit with a tax of up to 20%. This is in addition to the normal property transfer rates. The rate drops every six months that you hold the property, and if you held it for over 3 years there’s no SSD. This removes a lot of the incentive to flip properties for a few extra bucks.
The city’s speculation problem isn’t necessarily a bad thing by itself. Afterall, there’s nothing wrong with the inherent concept of making money. However, it does create artificial demand that makes it difficult to tell if people can support prices at this level and for how long. Judging by the fact that absorption of resales is lower this time vs last year, we might be seeing that speculative capital drying up.