15-PERCENT TAX ON FOREIGN HOME BUYERS
August 6, 2016 – By James Schouw
Last month the British Columbia government announced a property transfer tax surcharge of 15 percent on Metro Vancouver residential real estate purchases made by foreign nationals. The additional tax came into effect almost immediately – at the beginning of this month, August 2016 – and was effectively retroactive to purchase and sale contracts executed before the announcement and implementation of the tax. The existing British Columbia property transfer tax hierarchy – ranging from one to three percent – remained in effect for buyers with Canadian citizenship or permanent residency status, and also remained for foreigners, in addition to their new 15% tax.
The new tax will have many consequences – some intended and some unintended, including some that will be counterproductive. I’ll touch briefly on the political aspects, and then I’ll more thoroughly outline anticipated economic and market effects, some of which may seem counterintuitive.
First of all, the politics: The abrupt implementation of the tax was grossly unfair to foreign buyers who’d already negotiated and executed purchase and sale contracts in good faith. Simply put, it would be illegal for a company to create the retroactive circumstances inherent in the new tax legislation, and so it should be. To emphasize that point: those harmed will include a vast number of individuals and families who are not yet Canadians but who nonetheless live here legally with appropriate work visas – on a productive path toward Canadian permanent residency and citizenship – who’d recently scraped together enough cash and financing to buy a condominium or house, which they’d then contractually committed to – just before the 15-percent-tax gun was put to their heads. Some of those people won’t just be hurt; they’ll be financially devastated, resulting from the loss of their hard-earned deposits and other repercussions. Welcome to life in Canada.
Nevertheless, the affected buyers who do find the resources to fulfill their contractual obligations – having never actually agreed to pay the additional 15% when they negotiated and signed their contracts in good faith – will result in a short-term revenue boost to British Columbia’s tax coffers.
The tax is of course charged only to those who are ineligible to vote in British Columbia, and it’s quite possible that it will improve the British Columbia Liberal Party’s chance of being reelected to another term in government – despite the ethical faults in the tax’s implementation. Not often does a tax come along that has no direct cost to voters. Although unfairly implemented and discriminatory against those to whom life and investment in Canada had been promoted by our provincial and federal governments – without any apparent sense of irony – this tax may be politically smart.
That isn’t to say there will be no unintended political consequences. I note, for example, that many Canadians own real estate in certain international jurisdictions – not least Hawaii – where local or state governments routinely contemplate imposition of additional taxes upon foreigners. Now that British Columbia has instituted its own tax on foreigners – including Americans – I doubt that our federal government will have much influence on the United States or other jurisdictions with respect to local, state and federal tax laws that could penalize Canadian ownership of real estate.
Enough about politics. Regarding our own regional market and economic factors, I expect the new tax to have a variety of consequences, and I’ll reference them roughly in the order that I expect them to become significant:
Local realtors will feel the most immediate effects, for three main reasons. First, many non-Canadians will postpone or abandon their Metro Vancouver real estate acquisition plans, and some will also be apprehensive to buy elsewhere in British Columbia – or even across Canada – for fear of further tax surprises. Second, many existing foreign owners of local real estate will put off their aspirations to sell – because they’d now incur an extra 15-percent penalty for even moving to a different home on the same block. Third, the rest of the local residential real estate market will also slow down because it’s comprised of individuals, most of whom instinctively wait to see what others do when faced with market uncertainty – for a while. Basic market psychology. I expect transaction volume to be slow for months; not years.
Reduced market activity will not necessarily result in substantially reduced market values among many or most of Metro Vancouver’s neighbourhoods and housing types. Although many individuals and families will postpone their buying, selling and moving plans, that won’t change the powerful and often misunderstood underlying value influences: Metro Vancouver has minimal standing inventory of completed, unsold homes; regional construction starts began declining in June of this year; and population growth pressures are consistently strong. That said, certain housing types in certain neighbourhoods – especially some higher-priced ones – will be slower to sell and therefore easier to buy, resulting in some temporary local value corrections.
Next, I expect effects of the new tax to be felt by local rental markets, which may become quite troublesome. A greater portion of non-Canadian Metro Vancouver residents, notably with work and student visas, will now choose to rent instead of buying homes, due to the compelling 15-percent anti-ownership message they’ve just received from British Columbia’s government. This dynamic will exacerbate the difficulties and high rental prices that local tenants are already trying to navigate. That said, many non-Canadian local residents are dedicated to obtaining permanent residency status, at which time the new tax will cease to apply to them.
The tax will also discourage investment in Metro Vancouver by foreign would-be landlords, further restraining local rental supply. Among the historical foreign buyers of my project condominiums – including residents of USA, Mexico, UK, Spain, Iran, Dubai, Zimbabwe and Hong Kong – most have hired local property management firms and been enthusiastic contributors to Vancouver’s residential rental supply. I’m doubtful about how many of them would have invested their capital into our rental supply – which our region seems to desperately need – had they been additionally penalized with a 15-percent tax for doing so. I also note that each time one of those international landlords decides to sell a Vancouver rental property in the foreseeable future, they’ll likely reinvest elsewhere. Victoria, Toronto and Australia are evidently among favoured alternatives.
Another tax effect will likely be additional market pressure on other regions, caused by a diminished market of foreign buyers in Vancouver. Although I wouldn’t venture to estimate magnitude, I expect Metro Vancouver’s new tax policy to result in some additional market pressure in Victoria and Toronto.
Then there’s the matter of our local development and construction industries, which will certainly be adversely affected to some degree. Because Metro Vancouver’s standing inventory is sparse, I doubt that many major project starts will be delayed for long, however development investment will nonetheless proceed more cautiously, not least among nervous single-family and townhouse builders. For the foreseeable future, there will be fewer hours of work for tradespeople, managers and consultants than would be the case in the absence of the new 15-percent tax.
Consequently, home ownership will become relatively more challenging, on average, for building-industry employees – an ironic consequence of a tax that’s supposed to help facilitate home ownership.
Last but not least, even modestly reduced volume of new residential development during the foreseeable future will result in a lesser supply of completed homes at any particular time in the future than would otherwise be the case. In other words, markets will react to market pressures, which is what they do, and future residential values are as likely to be unaffected or boosted by the new tax policy as suppressed.
In summary, Metro Vancouver’s new 15-percent tax on purchases of residential property by foreign buyers will incrementally suppress future home ownership, incrementally tighten rental markets, incrementally suppress local real estate and construction economies – as well as employees’ aggregate earnings – and incrementally suppress future housing stock. Over time, Metro Vancouver will be an increasingly expensive place to live.