Government Policy Increases House Prices?

In my previous post, I suggested that Government Policy may be playing a role in rising GTA house prices. The constant Municipal push for “infill” causes many detached homes to be bulldozed in favour of ever-increasing density. While this increases supply of townhouses and condos, it makes the detached houses that remain a rare breed. Have a large lot, maybe a few trees? Rarer still. And rarity commands ever-higher prices.

In this post, I will suggest another aspect of Government Policy that may play a role to increase GTA house prices. Property taxes.

I live in Mississauga, and many of the houses in my neighborhood are being snapped up by foreign buyers. It is difficult to know for sure, as my new neighbors often seem disinclined to communicate. Some even refuse to wave. But from the looks of things, they may be mostly mainland Chinese? I will post later if this turns out to be accurate, once I start being successful in having a beer with the various new neighbors. (Wish me luck. Right now I am not doing very well on the welcoming beer category.)

But if I can generalize, the standard Modus Operendi of the recent buyer seems to be:
1) Buy house for $1.2-$1.8million;
2) Bulldoze existing house down to foundations;
3) Build New Monster House on existing foundations;
4) Disappear;
5) Come back occasionally for a few days – otherwise house sits empty.

I ask the readers of this post, “Why would foreign buyers be so interested in property in a neighborhood like mine?” My guess is that many foreign buyers are taking into consideration property taxes – in particular, RELATIVE property taxes.

Let us contrast two parcels of land in Mississauga to illustrate my point.

At the base of Mississauga Road, just north of QEW, there sits 4 reasonably new row houses. To build these 4 row houses, the developer purchased a single ranch bungalow and bulldozed it. The existing ranch had a stately, wide lot – so once bulldozed, it allowed for building 4 narrow row houses, with a shared driveway, fountain, and fenced security gate.

From the street, the row of houses looks impressive. Each house currently sells for around $1.8million – complete with immaculate interiors and a prestigious Mississauga Road address. The back yard of each of the houses is less than previously – not only because now it is shared between 4 houses, but also because the narrow design of the houses means that each house must obtain much of its square footage by being deep.

But that is not the main problem with these houses in my view. Each new row house comes with an annual property tax bill of around $38,000. And at the current property tax bill increase of 3% per year, that means in 10 years, the property tax bill will be cumulatively …. 33% higher, or around $50,000 PER YEAR! It is like a mortgage that never gets paid off, that just keeps going up year after year!

Contrast that to a house on my nearby street – still with a giant lot, single house, plenty of trees, and property taxes of around …$7000-$8000 per year. With annual 3% property tax increases, that means in 10 years, the property tax bill will be cumulatively … $9300-$10,600.

Does anyone believe that foreign buyers (or buyers generally) are stupid? Why would you choose to set up your finances so that you are paying $4000-$5000 a month just in ever-increasing property taxes? For the privilege of owning a house with a few inches between your neighbor, with a few square feet of grass? Would you not choose to buy the older home, with lower property taxes – AND with the larger lot, more trees, more grass? Would you not choose to pay a (huge) premium to avoid the outrageous property tax of a newer development?

AND as the City encourages “infill”, such older houses on larger lots (with lesser property tax bills) become rarer and rarer, replaced by higher-density housing that have exorbitant property tax bills. Great for the City tax coffers, but not such a great deal for buyers.

So – once again, I suggest that Government Policy encourages GTA house prices to increase. And regardless of what fiddling is done to the mortgage finance rules, prices will continue to appreciate, UNTIL SUPPLY OF DETACHED HOUSES IS ALLOWED TO MEET DEMAND.

That is my point with this post, and the last. If Government Policy is to allow for affordable housing in GTA, then reduce restrictions on density of development.

Said another way, allow for the building of detached houses that people wish to buy, not houses that maximize tax revenue.

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