Ontario’s non-resident speculation tax (NRST) is expanding in size and location. The NRST was a 15% tax on the purchase of residential real estate in the Golden Horseshoe (Greater Toronto). As of March 30, 2022, it’s now 20% and applies to the whole province. Low revenues might have some believing it hasn’t been very effective, but that’s not the case. BMO wrote to clients this week to urge people to look at Windsor real estate if you want to see its impact.
Windsor Real Estate Is Gaining On Toronto
Windsor real estate provides fuel for an interesting case study. They look at the ratio of home prices in Windsor and Toronto. A higher ratio means the gap with Toronto has widened, and a smaller one means Windsor is getting closer. Since Toronto and Windsor are at different economic phases, a smaller gap might indicate Windsor values are getting frothy.
Toronto real estate prices cooled almost immediately after the foreign buyer tax. “The vertical line marks the introduction of the non-resident tax in the Toronto region in the spring of 2017,” says Douglas Porter, BMO’s chief economist. “It basically instantly doused a fiery housing market in the area, while—arguably—fanning a fire in the rest of the province.”
Canadian Real Estate Investors Look To The Suburbs
The roadblock for international investors in Toronto sent them to the suburbs. In the chart above, the first leg of the falling ratio is due to prices briefly correcting. The second half of the decline in ratio was due to Windsor outperforming for annual price growth. A similar trend can be seen across the province, in small towns just outside the reach of the tax.
Investors began to look outside of Greater Toronto to avoid the tax, according to the bank. “Soon enough, investors began migrating outside of the GTA,” explains Porter. “Smaller cities like Windsor, London, and Barrie soon began to see blistering gains, which only gathered steam after rates were slashed in 2020. Some of these cities have seen prices double in the space of three years, washing away decades of underperformance versus Toronto.”
Porter doesn’t elaborate on this point, but they’ve said it enough times — this is about market psychology. Removing foreign capital has a knock on effect, greater than the size of capital taxed. By taxing foreign buyers, they didn’t just deter them. They forced investors to consider where that money would go next.
Similarly, as those foreign investors moved to new regions, domestic capital observed. They followed the trend, producing a greater impact than foreign capital itself. Foreign investors clearly know something others might not.
As the non-resident tax applies to the rest of the province, it’s likely to have a big impact. An impact greater as a psychological tool, than the capital driven elsewhere.