On July 25, British Columbia’s provincial government announced a new 15% property transfer tax (PTT) to be added on all home purchases made by foreign buyers in Metro Vancouver. The tax, which went into effect on August 2, is in efforts to calm Vancouver’s steeply unaffordable housing market, reduce the amount of unlived-in investment properties, and to make it easier for locals to buy Vancouver real estate. Proceeds from the tax are to go to a new affordable housing fund run by the province.
On the surface, it appears the government is trying to effectively address some of the top issues plaguing Vancouverites priced out of homeownership – but the changes have caused quite a stir, with many asking whether such a tax is the right approach.
Was It a Publicity Stunt?
The Vancouver housing market has been the object of media scrutiny – and buyer frustration – for some time. Hardly a week goes by without a new headline decrying out-of-control prices and tales of rampant bidding wars. Priced out locals have expressed their despair via #donthave1million and petitions to the government. Clearly, action needed to be taken.
But agents are scratching their heads at how the tax was abruptly announced and implemented with very little warning, leading to speculation that it’s really a hasty effort for appearance’s sake.
“I am 99% sure that that was probably why it was done,” says Aman Brah, a real estate agent with Port Coquitlam-based Keller Williams Elite Realty. “Over the last year the media and the public in general has been all over realtors and the government, saying they need to do something.”
Casey Archibald, a Realtor with RE/MAX Crest Westside, says it doesn’t appear to be a well thought out decision.
“My take is that it’s definitely laid out poorly,” he says. “It was done over a long weekend, was just thrown at everybody, and they didn’t grandfather in past contracts, which was shocking. That to me was the scariest part of it all.”
Who Fell Through the Cracks?
While the tax is designed to target overseas real estate investors with no intention of dwelling in their Vancouver homes, local sellers are feeling the greatest immediate pain. Potentially hundreds of deals fell through following the announcement, leaving many sellers who had already purchased new homes without a buyer. They now risk losing hundreds of thousands of dollars in deposits, and could face litigation if they back out of their own deals.
“The repercussions of that are definitely being felt,” Brah says. “In our office and other offices, people have walked away from deals, and sellers have been left on the hook for their deposits that are just sitting there.
“There are petitions and stuff out there to say that anything signed before that date should not be affected by this because it’s a huge hit for someone who is buying a million-dollar home as a foreigner, and then they get hit with a $150,000 tax.”
According to The Bulletin newsletter from the British Columbia Real Estate Association (BCREA), several real estate associations have urged BC Finance Minister Mike de Jong to allow existing transactions to be exempt from the tax. “However, the minister was not all sympathetic to that request,” it states.
Archibald adds that the tax has also created complications for plenty of would-be buyers trying to reside and work in Canada.
“When you say overseas buyers, people think of the uber-rich Chinese buyers, but there’s a lot more than that,” he says. “There are a lot of Americans who have jobs here, people who are buying a place for their kid in school, Europeans who want to retire here – these people will all be affected.”
He adds, “The one thing I don’t like about this tax is it’s really going to affect companies who are trying to employ Americans because they want good talent, they want good people working here, and now someone who moves here and has a job here has to be 15% more – that seems a bit off to me.”
Will It Work?
The burning question – will a Vancouver foreign investment tax actually make real estate more affordable? Early data shows it might; the Real Estate Board of Greater Vancouver reveals home sales slowed 51% year over year in the first two weeks of August, with detached home sales down 66%. But the Board emphasizes these numbers are preliminary, and could change by the end of the month.
Some reports argue that the Vancouver market was starting to slow down anyway, possibly from the new increased down payment requirements introduced in December. National Bank Financial found home sales dropped 4.5% from May (when they hit a record of 4,769) to July, and that increased supply had pushed the average price down 3.4% to $1.76 million. In a note to investors, National Bank analyst Peter Routledge wrote, “Even prior to the foreign-buyer tax change, we found evidence of cooling demand.”
Archibald and Brah both say local buyers are taking a wait-and-see approach to see if prices do indeed come down.
“People want to wait a month or two to see how it all shakes out,” says Archibald, adding, “In September, we’ll see the stats for August – my prediction is that sales will be down slightly compared to August last year, but prices won’t be – they’ll still be up.”
“All of the factors that led to the Vancouver market being the way it was – none of those factors have changed. Interest rates are still super low, we still have a lack of supply, we’re still one of the nicest cities in the world to live in and have huge demand. Nothing fundamentally has changed.”
Brah says that any temporary price and sales drop as a result of hesitant foreign buyers will likely be countered immediately by middle-class locals previously priced out of the market.
“They probably see it more as an opportunity now because maybe foreigners are taking a bit of a pause to see how this plays out,” he says. “Locals that need to get into the market, they see this as a chance to sneak in there.”
Despite all this, BCREA announced this week it expects BC will hit record sales volume in 2016, with 113,000 homes sold – up 10.4% from 2015.
Is Toronto Next?
Will property-hungry investors set their sights on Toronto as a result of the Vancouver foreign investment tax? It’s possible, and real estate bodies are keeping a close eye on the developing situation. CTV Toronto reports an Ontario Finance Minister spokesperson said the province is very closely monitoring the Toronto and Vancouver markets and that implementing a similar tax hasn’t been entirely ruled out. However, the Toronto Real Estate Board says not enough data has been collected yet to determine the impact.
But both Brah and Archibald have doubts investors will flock into Toronto’s market. “I think the people that want to invest here, they’re still going to end up investing here, it’s just the cost of business for them,” Brah says.
Archibald adds, “When I talk to other people in the office, other agents – the consensus is it’s not going to change a lot, it’ll become the norm soon enough, but a lot of people are seeing how things will shake out.”
What do you think about BC’s foreign investment tax? Tell us in the comments!