It’s only been just over two weeks since the new 15 per cent additional Property Transfer Tax for overseas buyers was implemented, and already we’ve seen a host of sorry stories of undeserving folk who have become collateral damage. These tales range from vendors looking at their home sale collapsing, to first-time buyers on work visas facing massive additional tax bills that they cannot pay, to local companies having to renegotiate salary packages to recruit international talent.
I can’t imagine – and certainly don’t like to think – that the BC government anticipated these kinds of situations when they aggressively brought in the tax with only a few days’ notice, no grandfathering clause and no exemptions for those living in the region on work visas.
Of course, those are just the initial tales of people affected by the immediate implementation of this new tax. And sure, the long-term results could be as (purportedly) intended – to reduce the overseas buyer influence in the market, stem the rise in home prices (or maybe even reduce prices in some segments) and raise funds for affordable housing initiatives.
But even if it is successful in doing all those things, there could also be long-term negative side-effects that go hand in hand.
For example, what happens if overseas buyers really are put off buying Vancouver houses, and detached home prices consequently drop? Does that actually mean housing becomes more affordable overall? Let’s take a hypothetical but highly possible scenario.
Vancouver baby-boomers, let's call them the Yorks, have been in their mortgage-free Dunbar home for 35 years, and are now empty-nesters and retired. They now want to downsize to a downtown condo and raise some money for their kids and for their own retirement. Their three adult children all would love to buy homes of their own but are earning very average Vancouver wages and have no savings.
In mid 2016, the Yorks would have sold their home for, let's say, $3.5 million to an overseas buyer. Then they would have spent $1 million on their new condo, saved another million to boost their retirement fund, and given their children $500K each to buy their own $800,000 home, as their kids can each only afford a $300K mortgage. (Which, by the way is how one home sale easily funds four other home purchases, and is one of the major reasons our real estate sales numbers and prices are so high. But that's another story.)
Now, however, let's say it’s 2017, the Yorks’ overseas buyer isn’t biting because of the new tax, and West Side detached properties have dropped in value dramatically. The Yorks can only get $2.5 million for their home. They still need $900,000 for to buy their new condo (downtown condos not being as affected by the price correction) and they still need a million for their retirement. Now they can only offer their three adult children $200,000 each. So each of those young people can now only buy a place for $500,000 instead of $800,000 – and mid-priced homes have not dropped by anywhere near that amount.
The knock-on effect, when extrapolated across the market, is lots of young people being less able to afford homes, not more able, than before the tax was implemented. Of course (before you all shout at me), this is an extreme example, and highly simplified – but you see my point.
Another possible consequence was raised in an excellent column by Jeremy Kronick in the Globe and Mail last week. He said, “If foreign nationals continue to believe Vancouver real estate is a good investment, they may move into the cheaper portion of the market between $200,000 and $2 million, and deal with the additional, though lower – at least in absolute terms – cost of the tax. If this occurs, there may be little housing affordability relief, as some relatively affordable housing increases in price, and tax revenues are lower than expected.”
Kronick adds another pertinent point: “If foreigners start to worry about taxes hurting their return on investment in Canada, they will be more likely to spend in other countries. And while this may be a good thing for the overheated housing markets in Vancouver and Toronto, it may not be for Canada in general.”
All of this brings up the wider issue of unintended consequences from housing affordability measures, including other policies that could be brought in to try to dampen our home price growth. There are many initiatives that could be implemented, and their primary goal may be achieved – but at what peripheral cost?
I was interested by, and wrote a brief article on, a research report by CIBC chief economist Avery Shenfeld that was published last week. As well as worrying over the possible economic effects of a waning Vancouver housing market in the wake of the foreign buyer tax, Shenfeld also warned policymakers about the likely consequences of raising interest rates or toughening up mortgage rules in order to quell the market.
He stated, “Interest rate hikes or much tougher mortgage policies could put a damper on house prices, but at the expense of economic growth” – based on the argument that making housing more expensive for Canadians would damage consumer spending.
I'd like to think that the feds would not be foolish enough to do this. Indeed, it would be comforting to believe that all our political and economic leaders examine every possible outcome before implementing a policy of any type – especially when it comes to the crucial sector of housing affordability. But it is clear from this month’s actions by the BC government that this is not always the case.
So please, policymakers, all we ask is... think it through.