When Vancouver’s residential housing market overheated and Greater Vancouver house prices climbed to stratospheric heights – unrelated to local salary levels and construction costs – high foreign demand was identified as the main cause. On August 2, the provincial government responded by introducing the 15% foreign buyer tax, giving rise to heated debates revolving around questions as to who would benefit and whether this policy was appropriate.
Generally, every government offers public services, such as a proper law system and security, which taxpayers demand, and for which no one pays directly. All taxpayers expect a government to work efficiently and to impose efficient taxes. Because taxing house transactions does not dramatically reduce the number of transactions and still cools the market, it is an efficient tax.
It is also directly linked to a related public service and therefore is a fair tax. When a government transfers agricultural titles to construction land titles and the land price shoots up, the government, not the landowner, creates additional value. The same is true for house prices. Vancouver’s modern infrastructure, nicely maintained local environment and secure investment climate brought the recent astronomic price increases, not individual homeowners.
The foreign-buyer tax made it more expensive for foreigners to buy a house in Vancouver and, as a result, the total demand and the average house price dropped. Because foreigners are still coming to Vancouver and buying, the tax creates extra public income and helps make the market more affordable. Meanwhile, the risk of an abrupt change from boom to bust seems low as many potential sellers live in their homes, and leaving a home or even a city is not that easy. Potential buyers, however, are more flexible. Without government intervention, house prices could have climbed higher – and so would the probability of a sudden crash. If the self-fulfilling prophecy of increasing house prices changes to expectations of lower prices, buyers would stop buying. In this case not only homeowners and government would suffer but also the business community because of widespread bankruptcy.
Because buyers are more flexible than sellers, a tax imposed on buyers is mostly paid by the sellers (through lower prices) and not by the buyers (rule of tax incidence). The tax reduces the number of foreign buyers and therefore the total demand. With an inflexible supply, this leads to lower supply prices for all buyers and fewer transactions. Domestic buyers buy more but foreign buyers buy even less because they still have to pay the 15% on top of the seller price. Is that bad? Not for young Canadians who want to buy a house in Vancouver; not so bad for sellers who owned a house for some years. But it’s tough for people who bought around the peak in February 2016, because the situation has seriously worsened. If they become over-leveraged with a fixed mortgage but a lower house price, they face a problem when renewing their mortgage. Another problem for many buyers could be higher interest rates on their mortgage. However, this has little to do with the extra tax. The new mortgage rules for first-time buyers are designed to mitigate this risk.
Is the government taking sides against the older homeowners in favour of younger buyers? Unlikely, because homeowners still get windfall profits, and the price rises of recent years cannot be sustained indefinitely, anyway. The government’s role is to calm economic fluctuations – which is what we see already happening.
Is the government discriminating against foreigners? To a certain extent, yes, because only non-residents have to pay the tax. But immigrants are normally the biggest winners in international voluntary migration, benefiting from all kinds of arbitrage possibilities and better common goods in their destination country.
Greater Vancouver house prices might rise again in the long run if the demand overcomes the supply. In the meantime, while some may regret the short-term development of price reductions (estimates are about 10%) caused by the foreign-buyer tax, from an economic point of view a policy to break the stratospheric price trend was long overdue. Ultimately, the tax is a beneficial policy that protects the interests of the public and those of individual businesses in the Greater Vancouver area. •
Erich Buerkler is an economics professor at the University of Applied Sciences in Basel, Switzerland, and a former telecom-sector strategy consultant and CEO of companies in Europe and Southeast Asia. He is on sabbatical at Capilano University.