Toronto’s runaway house prices could threaten the city’s economy if even the wealthiest 1 per cent of earners find themselves priced out of the market, as is now happening, the Bank of Montreal is warning.
BMO Chief economist Douglas Porter crunched the numbers and found that someone earning $225,000 a year — right at the cutoff point of the top 1 per cent — will not be able to buy an average-priced single-family home in Toronto.
That’s despite the fact this earner would be considered rich under present tax laws. Anyone in Ontario earning above $220,000 pays a combined hefty top marginal tax rate of 53. 53 per cent.
Taking into account the “stress test” for mortgages that the federal Liberals instituted last year, Porter estimated that a pair earning $225,000 with $100,000 for a down payment will be able to buy a residence price up to $987,289.
The median price of a single-family home sold in Toronto in February was $1.57 million.
“It will be incredibly tough to attract talented folks… if they are not able to buy a house and yet still pay income taxes of over 50 per cent from their income”, Porter said.
So of course, the question becomes, who’s buying homes at $1.57 million? Some have pointed at foreign cash buyers, others at cash-rich speculators.
But the single largest benefactor may be move-up buyers — those who’ve seen the value of their home soar in recent years, and need to take a mortgage for a relatively small portion of a brand-new home’s value.
Toronto’s housing market is “principally being driven by move-up buyers leveraging the equity in their existing residences,” David Madani, senior Canada economist at Capital Economics, said.
“Since these move-up home buyers patently already live in a home that are largely responsible for the large growth in residence prices, it stands to reason that there isn’t a major shortage of housing making housing prices to escalat,” he added.
“Investors are the other reason for rising residence prices. There are always shortages of housing for people wanting to buy their third, fourth or tenth belonging!”
Source: Huff Post Business