This week, the provincial government announced a major policy change when it comes to overseas buyers – that foreign nationals or corporations not based in Canada must pay an additional 15 per cent in Property Transfer Tax on Vancouver residential real estate, as of August 2.
The new tax comes as a surprise to many and, on the surface, marks a notable change of tune from Victoria, which had previously made a point of staying out of the housing market and the influence of foreign buyers.
Or does it?
The Premier claims that the move is intended to make it a little more difficult for overseas buyers to get into the market and ultimately make Vancouver housing more affordable for middle-class families and individuals.
But logic tells us the only thing that will make housing more affordable for regular local folk is a considerable reduction in prices. And we all know that Christy and her clan would never do anything that they believe would crash the housing market and reduce the $1.5 billion already being scooped up each year in Property Transfer Tax. Nor should they, as that would leave many households underwater.
So what are they actually trying to achieve? And will it work?
It’s no coincidence that this move comes in a pre-election year. With many people citing housing affordability as their biggest concern in polls, the Liberals have to be seen to be doing something in order to gain enough votes to stay in power.
This new additional Property Transfer Tax is arguably a smart move on their part, aside from the bungled immediate implementation, which has left the real estate industry scrambling and blindsides existing buyers with its retroactive nature. Still, to the general public, it looks like a strong measure that is fighting for the homeownership rights of local (voting) people. In reality is unlikely to do much to the housing market. That would be a win-win for the Liberals.
Why wouldn't it significantly affect the market? Because even if the latest figures are accurate, many purchases of local properties by overseas buyers are, or easily can be, made by proxies who are resident in Canada – usually family or associates. The typical scenario is that of a foreign national who lives and works overseas but whose spouse and/or adult children buy and live in the Vancouver property. That’s why we’ve seen case studies of Chinese-named owners of West Side homes who report their occupation as “housewife” or “student” more than any other occupation.
There’s nothing illegal in this, and the new Property Transfer Tax will not apply in these cases. Furthermore, it will happen even more now that the province is also putting its support behind the City’s new vacant home tax, which means it makes the most sense to have somebody living in the Vancouver house, and for the house to be in their name.
Other options that won’t incur the new Property Transfer Tax include locally resident associates buying a property on a foreign national’s behalf, or the overseas investor buying a Vancouver company and then that company buying a property. This is happening fairly frequently already, and will likely just happen more in future, in order to avoid the new taxes.
All in all, there are already relatively few overseas-based individuals or corporations simply buying up Vancouver houses and leaving them empty – some, yes, but not many in relation to the big picture – so the new 15 per cent tax will apply to a relatively small group. For those buyers, it will either just become the cost of doing business, or they will just buy a house elsewhere in BC, such as Victoria or Kelowna. And that might make a small difference in some desirable Vancouver neighbourhoods, but won’t be enough to dramatically affect the overall supply of housing.
The new tax itself is, therefore, probably quite harmless in the long term, but also probably ineffective. It’s not a terrible idea, as it may at least raise some money for the province’s new Housing Priority Initiatives Fund, which is a laudable initiative. But you’ll notice that the Liberals are not correspondingly reducing the Property Transfer Tax for local residents – they know that the new tax won’t raise enough money to pay for that, so they’re introducing the new fund instead.
Overall, the tax is very unlikely to make real estate more affordable for local, middle-class residents – unless you happen to qualify for whatever housing initiatives the new fund creates.
The only possible significant (and unintended) consequence is that it might spook some investors or cause them to renegotiate prices, and we might see a small contraction in high-end homes sales and prices, which might bring down the average home price without really reducing low- to mid-range prices. But that might in turn cause an overall nervousness about the market, a rush of new listings and an over-correction in prices across the board. But that’s not very likely, considering the demand for homes in Vancouver.
I agree with Professor Tom Davidoff of the University of British Columbia that a more effective levy, both in terms of overseas buyers and vacant homes, would be one that taxes residents who don't contribute to the Canadian economy by paying local income taxes (with exemptions, of course). Here's a summary of his proposal, which I think is too bad the provincial government has dismissed.
Finally, the other thing the new tax won’t do is affect the huge injection of overseas funds into local commercial real estate, including multi-family developments, office towers, industrial space and leisure properties such as hotels, wineries and golf courses. But that’s another story. Head over to our sister website Western Investor, Western Canada’s leading commercial real estate news and comment source, to get up-to-date insight into what’s going on in that market. It’s all connected.
