Matt Elliott over at Metro takes us on a stroll down memory lane today to recall the time last year when Doug Ford conjured a vision of Ferris Wheels and monorails. Ah, memories. But Matt does this on his way to making a point about financing infrastructure: you cannot build without money. And politicians, he rightly points out, are averse to raising money through taxes. So they come up with sophisticated-seeming bits of mumbo jumbo (tax-increment financing, undefined private sector involvement, development charges, air rights over subway stations) to try to conjure billions and billions of dollars painlessly out of thin air. The situation is slightly—maybe slightly—better in the Port Lands:
To their credit, Waterfront Toronto has realized that governments aren’t going to swing in with piles of cash for their plans. They’ve done some financial analysis—based on a total project cost of $1.9 billion—working from the idea that revenue can be raised through land sales and increased development charges.
It’s not an entirely unrealistic strategy but it probably won’t work—not anytime soon, anyway. At the heart of Waterfront Toronto’s financial analysis is the notion that there’s enough developer demand to build almost 10,000 residential condo units in the port lands area.
The condo market in this city is hot, but it’s not that hot, and there are signs that it may slow down in the coming years. Waterfront Toronto is already counting on condo sales to sustain development in the West Don Lands and East Bayfront. And even after those areas are built-out, port land condos will be competing with development in areas of the city that actually have existing infrastructure and amenities.
A massive slowdown in the condo market (which might already be on the way) will, obviously, throw a wrench in plans to finance infrastructure through condo development. But a slowdown in the real-estate market could be bad news for the city in other ways—it could be a disaster, I think, for the city’s operating budget and affect not just building projects but core services. When the Land Transfer Tax was launched in 2008, it was expected to bring in about $100 million a year. But every year, because of a hot real-estate market that sees rising prices and a lot of sales, it has brought in more than expected. Much more. Last year, the LTT brought in $324 million, over $100 million more than it was projected to bring in—that’s a big reason for the large surplus we saw in 2011.
That’s great. It’s a really effective tax, and that money is much-needed. However, if prices and sales volume dropped—not a crash, just a slowdown—it could have a dramatic impact on the city’s finances. In 2008, when the U.S. market collapsed in the global financial crisis, we experienced a slowdown here in Toronto. We bounced back from it quickly but, compared to 2007, according to these charts from the Toronto Real Estate Board, sales volume was down from about 90,000 sales to about 70,000—about 22 per cent—while prices stayed pretty constant. That is, people paid just about the same amount for the average house, but a lot fewer people were buying houses. We don’t have perfect numbers for land transfer–tax revenue from 2008, but since the memory of that slowdown is so recent—and seems so relatively painless in retrospect, as recessions go—it’s certainly within the realm of imagination to see us going back there.
In 2009, when sales volume rose to about 85,000 transactions—that is, 5.6 per cent down from 2007—and prices actually rose by about 5.5 per cent over 2007 from roughly $360,000 to about $380,000 by my reading of the chart, the land transfer–tax generated $181.7 million in gross revenue.
So: a slowdown in the real-estate market that sees prices and volume drop to 2009 levels—a time when the market was considered to be booming again after the crash, so not by any means a disaster zone in terms of demand—would mean a drop in volume from 2011 of about 5 per cent and a drop in price of about 13 per cent. And that could mean a drop in revenue for the city from the land transfer–tax of more than $140 million.
That’s a lot of money. It’s handy to remember that those KPMG reports that suggested a whole range of cuts and stirred up so much controversy would have saved the city a total—if all of them were implemented, including an end to fluoridating the water and plowing snow from side streets and all—of $100-$150 million per year. The much-hated Vehicle Registration Tax brought in just over $50 million per year. The total savings from contracting out garbage collection are supposed to be—according to the move’s fiercest advocates—$11 million per year.
So geez. A real-estate slowdown that costs us $150 million per year—or potentially more than $200 million per year if we slowed down further to a 2008-style real estate market—would hurt. Luckily, the city hasn’t been budgeting for the full revenue from the LTT, specifically because of fears of a slowdown. That’s why we’ve been having nine-digit surpluses these past few years under both mayors Ford and Miller.
But the possibility of a slowdown shows the need to keep thinking of ways to find revenue and to diversify the sources of it. Because if we’re banking everything on a constantly escalating real-estate market, we could get badly hurt in the event of a slowdown and destroyed in the event of a crash.
Photo: Tara Walton/Toronto Star