Home Surtax Explored as Prices Continue to Rise
As new home prices marked the 20th consecutive month of growth, a new report backed by Canada’s housing agency called for a new annual tax to help address affordability.
The report, authored by Paul Kershaw, founder of advocacy group Generation Squeeze, recommended a deferrable surtax ranging from 0.2% for homes valued between $1 million to $1.5 million, and up to 1% on homes valued over $2 million.
For homes valued between $1 million and $1.5 million, that would work out to an annual surtax of $408, with the total amount payable when the home is sold or inherited.
"The proposed annual surtax will reduce the tax shelter that incentivizes Canadians to rely more on rising home prices as a strategy for savings and wealth accumulation than they otherwise would," Kershaw wrote. "This would slow the escalation of home prices and improve affordability; reduce inequalities, including between renters/owners and younger/older Canadians…"
According to the report, such a tax would apply to the 9% of principal residences valued at $1 million or more—or 13% of Ontario households and 21% of B.C. households.
The report was funded in part by Canada's national housing agency, the Canada Mortgage and Housing Corporation (CMHC), through its Solution Lab on housing wealth and inequality. Following a previous report from Generation Squeeze last year, former CMHC President and CEO Evan Siddall clarified that CMHC was not funding any studies on home equity taxation and that it did not "control the agenda nor the research base" of the report's author.
In November, Statistic's Canada's New Housing Price Index rose 0.8%, continuing an unbroken run of monthly increases since May 2020.
The agency noted that prices on new homes were up in all census metropolitan areas surveyed, with the largest gains posted in Ontario.
Increases continued in the resale market as well.
In 2021, the average annualized home price in the Greater Toronto Area surged 17.8% to a new all-time high of $1,095,475. At the same time, new listings for the year were up just 6.2%, falling short of the annual rate of sales.
It was a similar story in most housing markets across Canada (2021 full-year average price):
Calgary: $451,567 (+8%)
Vancouver: 1,230,200 (+17.3%)
Halifax: $359,225 (+23.2%)
Montreal (single-family): $495,000 (+24%)
Ottawa (single-family): $719,605 (24%)
Is taxation the answer to improving affordability?
While there's no doubt rising prices are causing a deterioration in affordability, critics say additional taxation isn't the answer to the country's current affordability issue.
The solution, they say, is to address the severe shortage in housing supply.
"History has shown that demand-side policies, such as additional taxation on principal residences, foreign buyers, and small-scale investors, have not been sustainable long-term solutions to housing affordability or supply constraints," said Analyst Jason Mercer Chief Market Analyst at the Toronto Regional Real Estate Board (TRREB).
"Looking forward, the only sustainable way to moderate price growth will be to bring on more supply," he noted.
Benjamin Tal, the chief economist at CIBC, agrees that bringing on more supply is key to addressing the affordability issue, not just for homeowners but renters as well.
Looming interest rate hikes expected this year are also expected to cool demand and help bring the market back to balanced conditions, he said.
"By late 2022, the housing market will look and feel more like it did in late 2019," he wrote in a recent research note. "The discussion will shift back to the lack of supply in light of immigration driving increased demand, and to the need to provide a permanent rental solution to Canada’s affordability crisis via increased purpose-built activity."