As Toronto's home prices continue to head for the stratosphere, a new report casts doubt that a foreign home buyers' tax alone will be enough to bring them back to earth.

A new report by Ryerson's City Building Institute adds to the growing chorus of voices calling for a strategy to curtail foreign demand in the city and surrounding regions, which some say is pushing home prices beyond what domestic buyers can afford.

The report re-ignites the debate over whether it's a lack of supply that's causing double-digit price increases — or a surge in demand caused by foreign investors and speculators targeting the Toronto real estate market.

Author Josh Gordon, an assistant professor at the Simon Fraser University School of Public Policy, says a levy on foreign buyers needs to be done soon to calm the market, but even that might not be enough.

"It's not going to be sufficient. They also need to have an annual property surtax that is offset by the income tax you pay," said Gordon.

"Those who own property based on foreign sources of income or wealth are hit by the surtax and everyone else is more or less spared. That discourages foreign ownership and that would bring prices down better than a foreign buyers tax."

Foreign buyers driving price increases: report

Although a long period of low interest rates has contributed to the issue, Gordon singles out foreign buyers as the main driver behind recent price increases in Vancouver and Toronto.

"Low interest rates definitely play a role in high prices, but other cities didn't see nearly the price- to-income ratios increases as Toronto and Vancouver," he said.

And while rates have been low for more than a decade, Gordon points to 2015 to 2016 price spikes that coincide with a massive flight of capital from China.

Almost $1 trillion USD left China in 2015, and nearly that much in 2016 which he said has flooded into property markets around the developed world where real estate is seen as a "safe asset."

Josh Gordon, assistant professor at the Simon Fraser University School of Public Policy, says a levy on foreign buyers needs to be done soon to calm the market, but even that might not be enough. (Simon Fraser University) Gordon said only a demand side tool, such as a foreign buyer tax, would work. The paper explores the argument that supply side factors such as a lack of new homes being built for a growing population are behind the price increases.

The average year-over-year home price in the GTA rose 27.7 per cent last month to more than $1.5 million. But while Ontario Finance Minister Charles Sousa said he is open to introducing a levy similar to British Columbia's he's not entirely convinced that foreign buyers are the cause and would like better data.

"There are options and there are many who have come forward with notions," he said Friday. "I still want to fulfil what I said I would do a year ago. Obtain the evidence. Obtain information. Get the data necessary and then make an informed decision as to what is happening."

Sousa said he has heard the argument that foreign demand is not the cause of the rapid housing price increase, but that speculators in the domestic market also play a role.

"This is one of the most frustrating aspects of the debate. Both federal and provincial [governments] have not gathered good data on this," said Gordon. "And then they turn around and say we can't act because we don't have good data."

Ontario Finance Minister Charles Sousa says he is not convinced a foreign buyers' tax is the only possible option to cool Toronto's housing market. (Chris Young/CP)

Gordon said governments could simply have a question on a property transfer form asking if the buyer is a Canadian citizen or not. Another option is comparing names on land titles with income tax returns to determine if income is from domestic source.

Gordon said even without good government data, the report reliably infers that there is a lot of foreign capital in the Toronto housing market and that it is having a significant impact.

"When we look at price patterns over time and across Canadian cities, the story only makes sense once we recognize the role being played by foreign capital. We also have evidence from jurisdictions that do collect decent data, and their experiences back up that conclusion," he said.

Gordon expects tax to come to Toronto

But Gordon said Vancouver's experience after imposing a 15 per cent tax was the best indicator of whether foreign capital was at play. Sales of detached houses are down 54 per cent overall from a year earlier, while sales of attached units are down 40 per cent. In the areas most exposed to foreign buying, the figures are even bigger: sales of detached homes in Richmond and West Vancouver are down around 65 per cent.

"The foreign buyer tax in Vancouver has really calmed the market. The main thing is that it seems to have affected buyer expectations and so some of the panic buying some of the speculation seems to have subsided," he said.

Peter Norman, Vice President and Chief Economist with the Altus Group economic consultants in Toronto, doubts that the city's price surge is caused by foreign home buyers. (Altus Group)

But Peter Norman, Vice President and Chief Economist with the Altus Group in Toronto said the effects of the tax in Vancouver are overstated.

"Arguably the new supply coming on stream in Vancouver after an extreme shortage for a couple of years probably has more to do with helping prices level off than anything to do with the tax," he said.

Still, Norman expects a foreign buyers' tax is coming to Toronto, whether it will have an effect on the market or not.

"It looks a lot like politics," Norman said. "This is a measure that brings in revenue. It's a measure that will bring positive press so it's surprising that we haven't seen it earlier. But it's not going to solve the problem of the supply shortage."