BC To Tax Foreign Buyers: A Good Decision, or Just Politics?

By Peter Kinch

Well, the Christy Clark government finally did it! They bowed to relentless public pressure to ‘do something’ about growing concern over the rising cost of housing in Vancouver.  The question is – what exactly did they do? Yes, I know on the surface, they implemented a new 15% property transfer tax on foreign buyers – but what will this really amount to?

Is this a well-thought out policy change that will bring about a slow-down to the runaway price escalations in Vancouver, or is it mere political posturing that appears to be a dramatic and bold move but in reality will have limited impact?

In my opinion, it is the latter. It is indeed a bold move, especially given that the tax is to be implemented the day after a long weekend with no consideration or relief for existing contracts that were signed prior to the announcement, yet close after August 2. But let’s examine what’s really going on here. To do that, we will need to analyze the objective the government is trying to accomplish and then analyze how and in what way this tax will help them accomplish their end goal.

The Main Goal:

Let’s assume that the main goal is to address the issue of runaway price escalations and prevent a pending bubble from bursting while at the same time address affordability for the average consumer. (For now, I’ll avoid the other obvious goal for the Christy Clark Government, which is to get reelected next year…)

To that effect, let’s make a list of the top five reasons Vancouver’s real estate market has become so exorbitantly expensive over the past five years:

1. Vancouver is growing into a major metropolitan centre and events such as the 2010 Olympics only served to showcase a beautiful city to the world and attract significant attention and investment. The city is bound by mountains on one side, ocean on another, a US border to the south and the Agricultural Land Reserve (ALR). This amounts to simple economics of supply and demand – as the demand increases with limited supply and a lack of room for growth – the result is increased prices.
2. Vancouver is a safe harbor for foreign capital which has resulted in an increase in offshore buying, specifically from mainland China. The largest single growth component in offshore buyers over the past 10 years has been from mainland China. Simply put, the sheer numbers of potential multi-millionaires in China looking to move money into this market can impact the higher end significantly.
3. US and other non-Asian buyers and investors. China is not the only international investor in the Vancouver marketplace. With the US greenback being so strong compared to the loonie, Canadian real estate is effectively 30% off for Americans – so in relative terms, it’s still cheap. Combine that with the fact that many are predicting the next wave of capital to choose Vancouver as a safe harbor are coming from the Middle East and we’ll see even greater upward pressure on prices.
4. Investors, flippers and people looking to profit from short-term jumps in this market. The majority of these players are not offshore or foreign – but rather locals or new immigrants. Their actions will definitely have an impact on the market.
5. Illegal activity – shadow-flippers and straw-buyers and money launderers. The proverbial ‘elephant in the room’. These buyers or players are the ones who are truly taking advantage of the market, the system and relatively slack government regulations on foreign buyers. They are buying properties in Vancouver under false pretense and then flipping those properties to buyers offshore – often either not reporting income, not paying taxes or in some cases purely laundering money from offshore. These characters are not only helping to inflate prices, but also not paying taxes so they are truly taking from the system and adding nothing in return.

The Impact of the New Tax:

So now the question is, how will the new tax proposed by the BC government impact these five areas and will it help to create the desired effect the Clark government is looking to accomplish:

1. As Vancouver continues to grow, both internal and external demand will not dissipate. This is fast-becoming a world-class city and is consistently voted amongst the most livable cities in the world. The tax will slow that down somewhat, but there are too many potential loop-holes to have a lasting impact. Ultimately, the economics of supply and demand will win out.
2. If someone is looking to get their money out of a country that is controlled by a Communist government – a country where the rules can change in an instant and the option is a 15% tax versus potentially losing your money – buyers will choose the tax. Keep in mind, amongst the countries that offshore investors target – we are one of the only ones who haven’t already implemented this type of tax. As such, the impact will be negligible.
3. The biggest impact will be on US buyers. If a big incentive was the spread of the dollar – a 15% tax may well offset the benefit. This will definitely cause a slowdown in Americans investing in Vancouver. As for the potential influx of Middle Eastern money – no impact.
4. This will have no impact on speculators who are Canadian citizens since the rules don’t apply to them and it begs the question – how many offshore buyers are going to use someone with Canadian citizenship to buy the property for them? To the extent the market may slow slightly, speculators may take the foot off the gas – but mostly out of fear of a correction.
5. Unfortunately, this new tax will not affect the real issue in my opinion. People looking to use the Vancouver real estate market to launder money are not likely to be deterred by an additional tax. It still probably beats their alternative.

Summary:

At the end of the day, the political pressure for the Clark government to ‘do something’ was mounting. They acted and they acted swiftly. Government data tells us the amount of offshore purchasers in the Vancouver market is somewhere around 6%. I’m curious to see how the other 94% react to this news.

Based on the summary above, the new tax should have a very limited impact on the market – however, the consumer psyche can be a fragile thing and it wouldn’t surprise me if we see a sudden surge of listings from a consumer public who falsely thinks this is the ‘end of the party’. This could well result in an unintended consequence for the Liberal government and what should be a soft landing may look more like a crash. We’ll have to wait and see how this plays out, but I can guarantee you one thing: there’s another Liberal Premier in Ontario who will be watching the fallout very closely. Toronto’s issues aren’t far off those of Vancouver and I’m sure Premier Wynne is more than a little curious to see how her BC counter-part fares with this decision.

In the meantime, for better or for worse, BC will have a new tax effective August 2^nd and Christy Clark can tell BC voters she did something!

Peter was recently interviewed on BNN and CTV about this subject. Watch his segments below:

BNN – BC Tax Will Deter the Wrong Foreign Home Buyers: Kinch

CTV – Breaking Down the New Housing Tax

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