Industry veterans are pointing to one city’s second land transfer tax as a major drag on the market, especially considering the CMHC’s increased insurance premiums, which took effect on June 1.
“A lot of people are hesitating to move or trade up or trade down because they don’t want to pay up on closing,” says Omer Quenneville, a Toronto-based mortgage broker with Centum Regal Financial Corp. “They’d rather stay put and renovate.”
Quenneville says Toronto’s municipal land transfer tax adds a $13,725 fee that homebuyers must add on closing, assuming a home purchase price of $900,000 – which is fairly common for a detached property in the country’s largest city.
“People spend years to accumulate equity, then they end up with a bill of $12-, $13-, or even $15,000,” he says. “If (clients) have enough equity (they can) incorporate it into their mortgage; otherwise they have to pay out of pocket.”
The CMHC announced in April its plans to distance itself from Canada’s real estate market by raising mortgage default insurance premiums for certain homebuyers – a move the Canadian Real Estate Association suggests could impact the market in the coming months.
“CMHC announced in April that effective June 1 it was hiking mortgage default insurance premiums for homebuyers with less than a 10 per cent down payment, so some buyers may have jumped off the fence and purchased in May to beat the increase,” said CREA president Pauline Aunger, pointing to the 3.1 per cent increase in national home sales in May.
“It’s one of the factors that could have affected sales last month.”
Second-time homebuyers, though, are most impacted by the double tax. Those clients who need to move out of the two-bedroom starter condo are finding themselves stuck, says Scott Nazareth, an agent with Mortgages.ca, or even priced out of the city altogether.
“The land transfer … adds a bit of hardship to families trying to purchase in Toronto,” he says. Especially for (second-time) homebuyers, they’ve never had to budget for it (as a result of the federal tax credit), but that’s the cost of living in one of the fastest growing cities in Canada.”
Nazareth says he suggests outlying areas to his clients who cannot afford a larger property in the city. Suburbs like Mississauga or Pickering are close and well-connected to the city, but don’t come with the municipal land transfer tax that often hinders a client’s ability to move into a larger home.
For his part, Quenneville suggests clients make the biggest jump up the property ladder that they can afford, so as to avoid paying more land transfer taxes than necessary.
“(Before the municipal land transfer tax), most people were trading up within three to five years, but people are delaying it because of the land transfer tax,” he says. “(I tell my clients,) buy what you think you’ll want in three to five years, not what you want today. The lack of trade up is what’s causing the lack of listings.”