A study by Ryerson University’s Centre for Urban Research and Land Development has shown that Canadian homeowners in major urban centres moved less often in 2016 than in 2006, with the largest change (-7.6%) in the Toronto area. While renters also moved less often, the reduction in moving frequency was much less than for homeowners. The study explored several possible explanations for the change and found that:
- Growth in employment opportunities (one of the biggest reasons for moving) did not correlate with the reductions in mobility;
- Increases in home prices also did not correlate with frequency of moving;
- Changes in affordability (as measured by the proportion of homeowners paying more than 30% of income for shelter) didn’t correlate with mobility changes either.
Rather, the study found that the biggest factor in reduced mobility was the shortage of housing supply, particularly in the Toronto area.
This is perhaps not very surprising. The restrictions on land development for residential housing as well as the layers of bureaucratic red tape, have long since been identified as a major reason for the limited supply of new housing in the GTA and the resultant steady increase in prices.
Another factor unique to Metropolitan Toronto is the ‘double’ land transfer tax, where homebuyers must pay land transfer tax to both the Ontario government and the City of Toronto. For example, a home that costs $1,000,000 attracts a total land transfer tax of $32,950. This tax must be paid in cash on closing and cannot be added to the mortgage, so the buyer must save this additional amount over and above the down payment on the new house to afford the move.
If this buyer presently owns a house worth $750,000, he will also have to pay commission to a realtor out of the proceeds of the sale, and so the total transaction costs (commission plus land transfer tax) of making the move could easily exceed $60,000. If there is any way that the buyer can renovate and/or add on to his existing house to meet his needs, it will be much more attractive to stay where he is. After all, the transaction costs can go a long way toward financing the renovations!
Another factor limiting homeowners’ mobility is the mortgage ‘stress test’. When a mortgage comes up for renewal, the homeowner doesn’t need to pass the stress test, he can automatically renew. However, if he wants to refinance with another bank or if he wants to move and take on a new mortgage, he will need to pass the stress test. This strange feature of the stress test means that the bank has the owner over a barrel when renewal time comes and can increase the mortgage rate if the owner can’t pass the test at another bank; but it also means that the owner is tied to his current house.
All of these factors are contributing to reduced mobility in Toronto in particular and in Canada in general, and we have seen this reflected in reduced numbers of homes changing hands over the past couple of years. This is important because of the spin-off impact of home sales: as previously reported, each home sold generates approximately $64,000 of economic activity in the form of renovators, movers, furniture and appliance sales, realtors, lawyers and so forth, and this reduction ripples throughout the economy. Across Canada, there were 460,000 real estate sales last year, down from 515,000 in 2017, representing a reduction in economic activity on the order of about $3.5 billion. Not chicken feed to be sure. Given that we are nearing the end of a very long (if somewhat tepid) economic expansion, and likely facing a recession in the next 1-2 years, this is not a good thing.