Trish Bongard Godfrey

How Government Is Pushing Home Prices Up

09 April 2014
Trish Bongard Godfrey

Seriously, Toronto real estate prices must be headed for double digit increases this year. Even with all this cold, miserable weather, there seems to be no end of buyers in the $500,000–$1,000,000 price range and beyond. Lower inventory – of single family homes – meant fewer sales and bigger demand, and that pushed prices up 8.6%, year over year, for the month of February 2014.

Why are prices climbing so sharply? Let's at least partly look at the roles of the three levels of government. Here are a couple of ideas:

Land Transfer Taxes

For illustration purposes, let's say the combined Ontario and Toronto land transfer costs are just under 4% – we'll round up. True story: A well-designed, renovated, downtown property that was listed last fall and on the market for several weeks – in other words, it wasn't a fast sale. It sold and closed at the end of December in the high 800s. It was re-listed in February. The new sellers expected – in 6 short weeks – to be able to recoup their taxes and cover some of their commissions on the sale. That total cost could be as much as 9%. But here's the thing: at least three buyers accepted the premise that this was reasonable. The property received multiple offers, and sold again in February at 5.6% over the previous sale in December. Clearly, land transfer taxes are being built into pricing.

CMHC Insured Buyers

One of Minster Jim Flaherty's major concerns was the overheated real estate markets in cities like Toronto. It's a reasonable concern because the government, and "we taxpayers", have been guaranteeing these high-ratio mortgages.

According to The Globe and Mail in July, 2013, "This insurance guarantees lenders are repaid in full, even if borrowers default on their mortgages; this, for good or ill, lifts from financial institutions most of the risks associated with mortgage lending. Those risks are big: Through mortgage insurance, CMHC's gross loan exposure is now scraping its $600-billion legislated limit. Taxpayers are shielded in part by CMHC's $13-billion equity buffer, but nonetheless are exposed to the liabilities that will follow on an extended housing market downturn."

Well, of course it is great that young people can buy their own homes, settle down, take on good jobs, become active members of society, and pay taxes. I want that for the kids in my family, too. Homeownership has generally been a good long-term investment, and because of insurability, so many more people are able to jump into the real estate market. It is fuelling bidding wars and higher prices.

This isn't rocket science, but it means that buyers who have 20% down, who do not need insurance, and who have the income to carry a mortgage on a home over $1,000,000 will have an advantage over the 5%-down buyers, who are bidding up the market under, but only up to $1,000,000.

So, remember that house I just wrote about – those buyers likely had less than 20% down payment, so they needed insurance. Therefore, they also needed to make sure the property appraised at the right price, or the buyers can't get 95% insurance. Well, whether it did or not, the buyers of the next "comparable" house can thank these buyers because the next house will appraise based on this sale. It's the upward domino effect of sales and appraisals.

However, in case this makes you worried about an overheated market - I am not. Have a look at this report on global prices prepared by Frank Knight.

Clearly, Canada is the in low range of price increases in 2013, as compared to other markets globally.

Property is about location, and objectively Canada is a great place to live and raise a family. People keep coming here, and compared to the rest of the civilized world, our prices do not seem to have gone up extraordinarily.


...seriously, don't wait around until everyone else comes to the same conclusion. Inventory is low. If you are a year or two away from retiring to the country or downsizing, I offer a free property evaluation and a comprehensive home marketing plan. Call me today and just ask.