Amid a sinking Toronto real-estate market, Mayor David Miller's controversial new land transfer tax is to blame for a significant chunk of falling sales and house prices, a study released by the C.D. Howe Institute concludes. The controversial tax implemented this year has had "significant negative effects on the housing market" by reducing sales and lowering prices of homes, according to the report.

The study revealed that the municipal land transfer tax that took effect in February 2008 has caused the average price of a single family home in Toronto to decline by 1.5 per cent, or $6,400, The study estimates the tax, which adds an additional 1.1 per cent on to the purchase price of a house in Toronto, will cause about 3,500 families per year to stay in homes that may be "too small, too big or too far from their places of work or school" since it is a disincentive to moving.

It may have been better economic policy to simply raise ordinary property tax rates by 8 per cent to 10 per cent to gain the additional revenue the city needs, the study said. That's because property taxes do not discourage mobility and there would be no extra administrative expenses to deal with.

Moreover, the tax is simply unfair, the study stated, since it places the burden on "only a small subset of the population" and is "less consistent with ordinary notions of fairness than is an ordinary property tax."

City finance officials had pledged that the new tax would have little effect on the city's real estate market before it was implemented in February. But the C.D. Howe study concludes that the levy actually was to blame for two-thirds of the drop in the number of houses sold in Toronto from February, when the tax was implemented, until August, when the real estate market's slide began to accelerate.

In order to isolate the effect of the new tax from the rest of the winds hitting the real estate market, the study looked at the three kilometres of real estate on either side of Toronto's border with Peel, York and Durham Regions, where no new tax exists, from February to August. It found a deeper slide inside Toronto, where the new tax applies.

"The housing sector is one of the most significant parts of Toronto's economy," said Maureen O'Neill, President of the Toronto Real Estate Board (TREB). "Unfortunately, the study shows that the Toronto Land Transfer Tax has had a negative economic impact, which TREB estimates to be $170 million in 2008."

The study found that the Toronto Land Transfer Tax has reduced sales of re-sale single-family homes (condominiums not included in study) by 16 per cent, which means approximately 3,500 lost re-sale transactions in the first year of the tax. If condominiums are included, the impact could be in excess of 5,000 lost re-sale transactions in the first year of the tax.

A separate recent study, conducted by Altus Clayton for the Canadian Real Estate Association, determined that every re-sale housing transaction in Ontario generates approximately $33,425 in economic spin-off activity on things like renovations, furniture, and appliances. This means that losing 5,000 re-sale housing transactions because of the Toronto Land Transfer Tax costs the City's economy approximately $170 million in consumer spending.

"When people buy a home, they usually spend thousands of dollars on related things like renovations, furniture, and appliances. Thousands of Toronto jobs depend on this spending," said O'Neill. "Any City policy that affects housing sales has a direct impact on the City's economy and jobs."