British Columbia’s move to increase the tax levied on foreign buyers of Vancouver property has been cast as “political” by some housing experts, who argue that the new NDP government simply succumbed to pressure from a population that to a large extent, is blaming sky-high home prices on the influx of foreign money.
“It was obviously a political move,” Vancouver realtor Steve Saretsky told VICE Money. “They picked up a hot potato from the B.C. Liberal government that had done nothing about house prices for so long so they were under immense pressure to get real estate in order.”
The NDP’s first provincial budget tabled Tuesday took a hard aim at the real estate market, increasing the foreign buyers tax from 15 percent to 20 percent, and introducing a new rule that will tax people who currently own a vacant property, but pay no income tax.
“This will penalize people parking their capital in our housing market simply to speculate, driving up prices and removing rental stock,” said B.C. Finance Minister Carole James.
The new levy, or “speculation tax” will slap a two percent tax on property that is unoccupied — someone that owns a $2 million property in the Metro Vancouver area who does not live in it or rent it out, for instance, would have to pay $40,000 in taxes each year.
The new measures make it undeniably clear that non-residents are the target, despite the fact that official statistics peg non-resident ownership of Vancouver-area property at roughly five percent.
“I don’t know if government’s expect these rules to have a significant impact, but what’s important is that it increases revenues for governments,” said Benjamin Tal, CIBC Deputy Chief Economist. “Pure foreign investment is only maybe five, six or seven percent. It’s new immigrants that are bringing in a lot of the foreign money, so I’m not sure how much of an effect the rules will have,” Tal told VICE Money.
Vancouver’s housing market has become a flashpoint for debate about inequality, affordability and the role of foreign investors in Canada’s economy. Before the former Liberal government imposed a 15 percent tax on foreign buyers back in August 2016, home prices in Vancouver averaged at $1.03 million, unaffordable for most domestic residents.
Indeed, the tax policy succeeded in cooling the market slightly, but by February 2017, prices were steadily going up again. As of January 2018, the average price of a home in Metro Vancouver was still $1.03 million, according to the B.C. Real Estate Association.
“I think the government was responding to the sentiment that foreign buyers are making money off the gain in real estate prices, and they aren’t paying any taxes on those gains,” Hilliard MacBeth, author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash told VICE Money. “I think the speculation days are now over in Vancouver. The whole climate is going to change.”
Last April, Ontario slapped a 15 percent tax on foreign buyers, following B.C.’s initial implementation of the rule back in August 2016. Now economists like Benjamin Tal are saying that there’s a strong likelihood Ontario will again follow suit, raising its own foreign buyers tax from 15 percent to 20 percent.
“The minute you have one province going to 20 percent, you’ll see another province benefit from that — foreign money will start coming in,” said Tal. Cities like Montreal, according to Tal, have seen an increase in home prices — concentrated mostly amongst condominiums — since the foreign buyers tax was imposed across the Greater Toronto Area.
In fact, between January and March 2017, months after B.C. had instituted its own foreign buyers tax, home prices in Toronto soared an average of 30 percent, due partly to foreign investors flocking from West to East.
In response to a query from VICE Money, Ontario's Ministry of Finance did not confirm, nor deny that there were future plans to raise the foreign buyers tax. "Recent data shows our [Fair Housing Plan] is working: non-resident speculators have decreased, average home resale prices have moderated and the housing supply has grown steadily. We will continue to monitor housing data to ensure everyone in Ontario who wants to buy or rent a home has the opportunity to do so," said the Minister's office in a statement.
But the role of foreign money in Canada’s urban real estate markets is a contentious one. The latest data from the Canadian Mortgage and Housing Corporation (CMHC) shows that non-residents in Vancouver own just 4.8 percent of property in Vancouver, and 3.4 percent in Toronto. Critics say that tracking home buyers according to their citizenship status does not come close to capturing the true impact of foreign money on the housing market, simply because some buyers with offshore money are citizens or permanent residents.
And then there’s the question of loopholes. Ben Rabidoux, an ardent housing bear recently floated the idea that foreign buyers can potentially avoid a tax on property if they purchase a condominium unit in the pre-construction phase. In a series of tweets, he points out that if you purchase a pre-construction condo, you will have “several years to get permanent residency in Canada either directly or through a family member to whom you can assign the unit and avoid paying the tax.”
Rabidoux in fact highlights that there has been a jump in the number of non-permanent residents in Ontario and B.C. after the implementation of the foreign buyers tax.
Regardless of the extent to which foreign money is driving Canadian real estate, housing experts like Saretsky warn that none of this might end well. “I don’t see a happy ending here. Somebody’s going to get hurt and it’s most likely the hardworking family that made enough money to afford property.”