In a surprise move, British Columbia introduced a new 15 percent property transfer tax on foreign real estate buyers in Vancouver on Monday, action intended to calm soaring prices. The new tax would apply to buyers who are neither Canadian citizens, nor permanent residents. The definition of foreign buyer appears to include international students and temporary foreign workers. The reaction so far has been mixed, but clearly it has raised issues on a number of fronts.
One concern is enforcement. The new tax, which is quite hefty, amounting to $300,000 on a $2 million property, could be difficult to enforce as foreign buyers might circumvent the tax by having Canadian residents buy on their behalf. It is suspected that many foreigners already buy properties through local residents. B.C. said it would introduce measures to prevent foreign buyers from bending the rules and threatened stiff fines – $100,000 for individuals and $200,000 for corporations – for those who don’t comply.
Another issue is effectiveness. Other jurisdictions have introduced measures to limit or reduce foreign real estate investment, but the impact of these measures is uncertain. We don’t know just how price sensitive foreign investors might be. We do have anecdotal evidence that some foreign purchases have driven up residential real estate prices very rapidly, especially in multiple-bidding situations, with little concern for inherent value. It is doubtful that the new transfer tax, even at 15 percent, will render housing dramatically more affordable in the Greater Vancouver region.
One of the major reasons that home prices have risen so much in Vancouver and Toronto is land scarcity. Thanks to geography and government restrictions on land usage, the supply of new single-family homes is extremely limited and even the overall supply, including condos , has been far less than demand.
The fact is we really don’t know the full extent of foreign buying in either Toronto or Vancouver. It is estimated to be around 5 percent of sales in recent months in Vancouver and less than that in Toronto. But government data collection is still incomplete and will be so for some time.
Housing prices cannot and will not continue to rise at a 30 percent annual rate. But, be aware of potential unintended consequences of government actions to deflate a bubble. A soft landing is what everyone hopes for, but soft landings are hard to engineer.
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