Before the Foreign Buyer Tax smash-up the market was humming along to another high in July. There was angst about the numbers of sales falling but the prices were still rising. Lower sales numbers reflected fewer listings. July’s sales were 6.5% above the 10-year sales average for the month. Benchmark for a detached home through all Metro Vancouver was $1,578,300, an increase of 38% from July 2015. The sales-to-active listings ratio for July is 38.6%, prices don’t start dropping until that ratio is below 12%. Not too likely.
False Creek by Colin Knowles
The Finance Minister held a conference in mid-July where he told everyone that his department was studying the stats in the report they had commissioned on who was buying BC real estate and escalating the prices into the stratosphere. Said report to be ready by the end of the year with action to follow. Also in July Madame Machiavelli (aka Premier Christy Clark) sniffed the populist wind and realized that she didn’t have any more time to set the stage for the May 9, 2017 election. The populace was calling for action, any action to lower house prices. She realized she had to take draconian measures whose results would settle down before the election.
Against all her previous pronouncements on the subject on July 25th she announced an additional 15% property purchase tax on every sale closing after August 2nd that was made by a party, personal or corporate, who was not a Permanent Resident or a Canadian citizen or corporately owned in Canada. This applied to contracts of pre-sold condos, of previously firm house sales. No exceptions and great hardship. The fortunate parties who were about to close sales were the ones who could persuade their foreign buyer to act early. Over two days at the end of July there were over 15,000 transactions registered with Land Titles. With 9,000 registrations on July 29 the system crashed three times.
There was a grave misunderstanding of the real estate process in the implementation of the tax---beware of unintended consequences among important voting constituents. The Finance Minister and his trusted bureaucratic minions designed the tax in total secrecy. No one contacted anyone knowledgeable about real estate transactions, not even their appointed lawyers who recently investigated the real estate industry or their head of Liberal fundraising who is a top realtor.
The picture will be clearer at the end of August or even later when new stats are published but it seems that many foreign buyers are walking away from their contracts. If their deposit is $100k and the additional property purchase tax is $300,000 it is easier not to close than to find the extra funds on short notice. There are sellers who sold in good faith who can’t close on their new purchase. They will be sued by that seller who can’t close on their purchase. Ad infinitum. Other sad stories include foreign citizens who accepted job offers here, registered their kids in school, bought a condo or townhouse and now have to pay up to $100,000 in additional tax on closing. Employers are already bewailing how hard it is to recruit employees to Vancouver despite its beauty and quality of life.
Now buyers both local and foreign are worried about a reduction in prices because homes didn’t close and may be more difficult to resell for the same amount as before. We can hope it turns out like the Brexit housing price drop in London. According to the Guardian the upper end of the property market there has now recovered and is higher than ever despite their expensive Value Added Tax on property purchases.
The problem as pointed out by Moody’s and other international real estate analysts is that the tax was targeted to demand when the real problem in Metro Vancouver is the lack of supply. Economist Adam Goldin of Moody’s Analytics as quoted by Garry Marr of the Financial Post states "...The single-family housing stock has been relatively unchanged since 1991, although multi-family stock has more than doubled over the same period. To make housing affordable the average price of a single-family detached home would need to be cut in half to $700,000...Because the new tax did not grandfather in deals that were already under contract, anecdotal evidence of foreign buyers cancelling their transactions is pouring in, leaving sellers alone at the altar...It may take several months to see how this plays out, but the law’s designers likely did not mean to cause such havoc".
There is pushback from high-profile realtors and the development industry who say that this is Canada and a free market economy, other legal gadflies state the Foreign Buyer Tax may be in breach of American rights under NAFTA. The Chinese consul general Liu Fei is also questioning the amount of the tax and how it was imposed. She is getting calls from Chinese buyers living here who bought a property and cannot pay the extra tax. Liu Fei is in favour of the government dealing with the supply side of the real estate equation. She is quoted in the Vancouver Sun as stating "This is a big country with a small population. It needs immigration to grow the economy". She advocates an approach to housing that would include transit infrastructure and taller buildings and growth that was informed by statistics and data. "Without a plan, everything is a disaster," Liu said. "We can send people to the moon --- housing is just a small problem". Of course it’s a big problem in Vancouver where 65% of the city is zoned single-family and there are huge outcries against higher buildings blocking views and sunshine. Add in the Liberal political calculus that they didn’t want to pay for transit since most voters drive cars and forced the Metro Vancouver Translink board into setting up a no win referendum. MM may find her chickens come home to roost on May 9, 2017 even if BC has the best economy in Canada. Best for who? may be the public response.
There is a world wide rising tide against globalization and in favour of nationalism. This makes ideas like the Foreign Buyer Tax seem reasonable. In fact there is general approval, especially by young people and renters but as always "the Devil is in the details..."