The Milk Cow

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“There’s a foot of snow in Edmonton today and its minus 20 with the windchill. The real estate market here isn’t much better than the weather. I think this home owner might have made things more difficult for himself, but he gets points for honesty!” – Blog Dog Cameron

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Joanie teaches school. Jason’s an accountant. She makes sixty grand after 11 years. He earns $120,000 and hopes to be a partner in his small company next year. They live in mid-Toronto where they have a kid, a dog and a Mazda SUV. And a $1,525,000 house.

“But we paid only $810,000 six years ago,” she says, “and that was a giant stretch. We still owe more than $400,000, and now it needs a roof. Plus I’m worried sick about mortgage renewal in three years since it’s only 3.2% now. One and a half million dollars? What a joke.”

But the joke’s on them, thanks to MPAC, the dudes who arbitrarily decide what your house is worth, then tell the government so you can be taxed accordingly. In Ontario, as in BC with the provincial assessment agency, residential real estate is turning into the cash cow that revenue-starved politicians are desperate to milk.

So MPAC last week told Joanie and Jason what their house is “worth”, which is $300,000 higher than four years ago, and at least half a million more than they figure they could sell it for, in a rapidly-cooling market. The increase will be phased in over four years, but the couple’s convinced their $9,000 annual property tax bill will be reaching skyward.

“Unfair and arbitrary,” Joanie says. “We get our garbage picked up once every two weeks, pay a big extra charge for water and sewer, and are screwed over by Toronto Hydro. I’ve had it.”

This is no isolated case. MPAC says the average boost in real estate assessments in Toronto is 23%, which will mean a 5.5% jump in each of the next four years. This compares to the average 6.2% that BC properties leapt last year, according to BC Assessment, where $6.2 billion in property taxes is collected based on these valuations.

But at least homeowners in Vancouver, where housing is fading faster than the NHL, get an annual review. In Ontario the next one won’t happen until 2016 – which means taxation will be based on an early 2012 market, when bidding wars were erupting everywhere and SFH prices exploding to unheard-of levels. Those were the days when asking prices turned into opening bids, when realtors created auctions by establishing offer days, and any move on a place in Joanie’s hood had to be accompanied by a certified cheque for at least $100,000.

The world has evolved since then. A million-dollar property selling for 125% of listing price last winter now changes hands for 95%. That’s a $300,000 reduction in the street value of the same place, an effective 30% decline in valuation, and yet taxes will be trapped at the higher assessment, even as conditions deteriorate.

And crumble they will, as the economy grinds into a low-growth phase, job creation stalls and CMHC’s decision to cease insuring million-dollar homes takes its inevitable toll in the areas where Audis migrate home at night. Four successive years of property tax increases, not to mention double land transfer tax in Toronto (buyers of Joanie’s home would pay an extra $55,000 just to transfer the deed), can only hasten the correction.

Of course, higher assessments do not automatically mean higher property taxes (which are the unfairest taxes of all, based on neither income nor consumption). If a home’s assessed value increases at the same pace as all other properties in the city, then there might not be an increase, says MPAC.

In your dreams.

Toronto has a structural deficit and over $4 billion in debt. The budget chief warns of a looming crisis in 2014. The cops say they need $949.1 million a year, or 140 officers will be axed. The transit boss wants an automatic 2%-a-year tax hike to sustain the system. And city politicians recently voted (quietly) to increase their office budgets. Does anyone really believe a 23% jump in property assessment won’t eventually equate to a 23% increase in taxes?

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So here’s a great example of what to expect over the next few years – cost inflation at the same time as asset deflation. Day-to-day prices keep rising, along with taxes, while the value of real estate erodes. In fact, one breeds the other. Most people are so indebted these days with borrowing at a record level, that layering on things like higher property tax only negates their ability to move up the property ladder. And just wait until all those former housing virgins in their downtown condos see what this does to monthly costs, while the value of their units plops. Snorkeling, anyone?

Like BC Assessment, MPAC is the greedy and voracious agent of governments patently unable to contain their costs. Cities and provinces should be ashamed at any taxation divorced from income or the ability to pay. Worse, basing future tax on past values is deceitful.

“I feel like protesting, or something,” Joanie says. “But we’re so busy.”

With a whimper.

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avatarGarth Turner - The Greater Fool posted Sunday, November 11th, 2012.

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