The way the government designed its property transfer tax scheme means that it will impose a stiff financial penalty on foreigners who locate here to take jobs
The Lower Mainland’s frothy housing market continues to attract a great deal of media and political attention. In late July, the B.C. government responded to mounting public anxiety over soaring housing prices by instituting a 15% property transfer tax (PTT) on “foreign” purchases of residential real estate in Metro Vancouver. This measure predictably has raised the ire of the real estate industry, in part because it has captured, unfairly in our view, many in-process transactions that pre-date the effective date of the tax.
It is unclear whether the higher PTT will dampen housing demand. Initial evidence does point to some slowdown in the pace of real estate activity. The fact that foreigners have been responsible for at least 10% of all residential property purchases in the Vancouver region suggests that the new tax should have some effect.
The government had ample reason to seek to tame an out-of-control real estate market. Prices of existing homes in Metro Vancouver jumped by one-third in the 12 months to June 2016, on the heels of significant price gains over the preceding two years. Across all types of housing (single-family, townhomes and condos), the average existing home price now sits near $1.1 million, dramatically higher than in other Canadian metro areas, including Greater Toronto ($712,000), which ranks as Canada’s second priciest market.
How to explain the astonishing surge of housing prices? Metro Vancouver’s expanding population is certainly one factor, along with persistently low mortgage rates and constraints on the availability of developable land. But rising foreign demand undoubtedly has played an important role in the upward march of property prices. Foreign individuals and entities have been pouring $1 billion a month into residential real estate in the region. Given a somewhat inelastic housing supply, this extra demand has had an outsized impact on prices. If foreign demand drops off as a result of the higher PTT, housing prices can be expected to soften.
Globally, the Vancouver region stands out for the magnitude of the apparent disconnect between residential real estate prices and household incomes. Consider that, in 2014, median census family income in the Vancouver metropolitan area reached $76,040, before tax. This was $2,800 below the comparable figure for Canada as a whole. And it was $17,000 to $28,500 less than the median family incomes reported in Calgary, Edmonton, Regina, Ottawa, Saskatoon and St. John’s, Newfoundland. Hamilton, Kingston, Oshawa, Sudbury, Thunder Bay and Kitchener-Waterloo in Ontario, along with Halifax, Quebec City and Victoria, also boast substantially higher incomes than Greater Vancouver, despite having far lower housing prices. True, the Toronto and Montreal metro areas also suffer from relatively low median family incomes. But housing in these two big-city regions is noticeably less expensive than it is in Metro Vancouver.
Why should we worry about a scenario in which sizable injections of foreign capital push up local land and housing costs? After all, many Lower Mainland residents have happily watched their net worth climb amid the torrid real estate market. There are, however, a number of downsides associated with the made-in-Vancouver housing boom.
One is that the region will become an increasingly unattractive place to establish and grow a business. Already, housing price “sticker shock” has made it difficult to lure outside talent to take jobs in the Lower Mainland; it is also prompting some skilled local workers to leave the area. Over time, sky-high housing costs threaten to precipitate a gradual hollowing out of corporate Vancouver, as companies shift jobs and business functions to other centres in Canada and the United States. Unfortunately, the way the government designed its PTT scheme means that it will impose a stiff financial penalty on foreigners who locate here to take jobs. In our view, non-Canadians who move to Metro Vancouver for bona fide employment reasons should be exempt.
Housing prices that are unmoored from the incomes of typical families also translate into rising debt loads for a growing faction of Metro Vancouver households. If interest rates eventually shift up and/or a significant economic downturn hits the region, many residents burdened with large mortgages will find themselves in financial trouble.
Finally, skyrocketing housing prices are spilling over to the rental market. One-third of Lower Mainland residents, including most of the entry-level workers who fill essential jobs in the local service economy, rent. Many are facing hardship as rents steadily increase. A cooling of the region’s red-hot real estate market would bring many benefits, not least an easing of recent upward pressure on rents.
Jock Finlayson is the Business Council of British Columbia’s executive vice-president and chief policy officer; Ken Peacock is the council’s chief economist