For years, Toronto’s finance officials have dutifully added an annual footnote to their budget documents, cautioning readers that a portion of the City’s revenues — namely the municipal land transfer tax (MLTT) and, to a lesser degree, development charges — is exposed to fluctuations in property markets. Or could be, except that Toronto’s property markets just kept climbing and climbing so those teeny-tiny actuarial red flags didn’t give anyone pause to contemplate what the downward slope would feel like.
For example, between 2015 and 2019, MLTT revenue increases averaged 12.9% per year while DC income surged by 29% annually. The land transfer skyrocketed 46% between 2019 and 2021, then levelled off in 2022 to $1.04 billion — more than enough, by way of context, to pay for the City’s entire fire and parademic operation. Meanwhile, development charge revenues in 2023 were nosing their way up to half a billion, the bulk of which is spent on outlays like transit maintenance and expansion, library construction, social housing, and other city-building expenditures.
Yet all these bullish growth figures reflected a world premised on ridiculously low interest rates and therefore an exceptionally frothy real estate sector. That world, however, is gone, maybe not forever but certainly for the foreseeable future.
Even though the Bank of Canada has reduced its core lending rate now that inflation is more or less under control, the city’s real estate industry seems to be stuck in neutral: Pre-sales of condos have flat lined. People who invested in income-generating units at the height of the market are underwater. Rents, mercifully, appear to have crested. They’re still ridiculous, but coming down a bit, which is good news for tenants and not-so-good news for investors.
It’s time to revisit those cautious footnotes because what appears to be a bursting asset bubble now spells trouble for the City’s finances — although you wouldn’t necessarily know it from the preliminary budget documents released yesterday. Council, however, very much needs to extract its collective head from the sand on these two financially consequential line items and figure out how to better fund city operations without leaning so heavily on a highly speculative real estate market that is not nearly as profitable as it once was.
Going back almost a decade, City officials budgeted that the MLTT would account for about 5% of overall revenues. In the latter 2010s and early years of this decade, the actual MLTT revenues — tabulated in the audited year-end financial statements — well exceeded that 5% estimate, sometimes significantly. Until 2023, that is, when actual MLTT revenues plunged $287 million, from $1.04 billion to $751 million; the latter figure is a good deal less than the amount budgeted.
The 2024 budget projected $880 million for the MLTT; there are no audited financial statements for 2024 yet, so the actual figure isn’t available. But it will be interesting to see whether that decline has reversed or accelerated. My guess is the latter, although the City’s 2025 budget again anticipates that 5% of Toronto’s overall revenues will come from MLTT.
The economic activity underlying the MLTT is existing home sales and market prices; since both slowed, the MLTT has fallen. Development charge levies, on the other hand, are tied almost entirely to new construction, and this slice of the market is even grimmer. A development industry source told me over the holidays that builders are actively fretting about what the market will look like two or three years hence, when all the projects currently in the pipeline are done. If there’s no recovery in pre-sales, developers will pause or cancel projects, which means the anticipated DCs will not materialize.
DC income is also exposed to another, and possibly even more intensive, form of pressure. The political narrative around DCs — that they not only drive up the cost of new homes and condos but account for an ever-larger portion of those prices — seems to have consolidated in the past year. The City of Vaughan has paused its DCs; others will follow. The building industry’s lobbying efforts to seriously role back these levies will produce dividends sooner or later. Indeed, if there’s federal regime change later in 2025, I wouldn’t be surprised at all to see a new Pierre Poilievre government make federal infrastructure/gas tax transfers directly contingent on sharp reductions in these fees.
A spokesperson told me the City expects to bring in $577 million in DCs in 2025, and added that the annual average over the past three years has been almost $800 million. Unless the Bank of Canada’s interest rate cuts nudge the condo pre-sale market out of its doldrums, this year’s actual DC revenue may well slump, although the impact will be felt not in City operations but rather council’s long-term capital budget. The 2025-2034 capital budget estimates that development charges will yield over $6 billion, or more than 10% of the City’s total outlay. To my eye, that estimate seems hopelessly optimistic, given the current political and economic trade winds.
It’s worth acknowledging the bigger picture: Mayor Olivia Chow’s property tax hikes from fiscal 2024 and presumably this year, plus the New Deal with the province, all go some distance towards reducing the City’s reliance on what are fundamentally unstable sources of revenue. Yet the spending plan released yesterday does propose a $1.3 billion draw on the City’s reserve funds in order to achieve a balanced budget, which is not a sustainable strategy, either.
The amount to be extracted from those rainy-day reserve funds, oddly enough, is almost precisely what the City expects to collect from DCs and the MLTT in 2025. It’s difficult to imagine a more precise warning about the risk to the City of getting hooked on the dubious bounty of an out-of-control real estate market that finally, and predictably, capsized.
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Minor note about the sustainability of reserves. The chart from page 51 of the budget launch does show $1.3B in revenue from reserves, but it doesn’t show contributions to reserves, so you don’t see the net impact on reserve levels. We’ll likely get a briefing note about net impact before the January 24 budget committee meeting.
But there’s actually a separate issue that we’re pretty terrible at estimating the net impact on the reserves. If you look at last year’s Budget Briefing Note 35 you’ll see that the net impact in 2024 was budgeted to be a net $795M decrease on the reserves. But by September 30 of 2024, the reserves had *increased* by $1.8B and will likely finish the year even higher. Moreover this exact same thing has happened every year I’ve looked at. So is it accurate? No. But is it sustainable? Apparently yes.