Why the foreign buyers tax isn’t making Vancouver more affordable

Opinion: The lesson, one year into Vancouver’s foreign buyers tax, is that real-estate supply may actually be the city’s biggest problem


 
View of the North Vancouver BC , Canada. (Romakoma/Shutterstock)

View of the North Vancouver BC , Canada. (Romakoma/Shutterstock)

Bob Dugan is the chief economist at the Canada Mortgage and Housing Corporation (CMHC).

Vancouver is one of Canada’s most attractive cities, but it also boasts one of the country’s strongest local economies. Job creation and good wages means more people want to live in Vancouver. A growing population adds demand for housing and in the absence of adequate supply, pushes prices higher.

For some time now, foreign buyers have shouldered some of the blame for this rise in home prices. In late July of last year, the government of British Columbia announced the implementation of a foreign buyers tax (FBT) on the Vancouver housing market. It came into effect on Aug. 2 and took the form of an additional property transfer tax of 15 per cent on home sales to foreign buyers—or, in simpler terms, buyers whose permanent address was not in Canada.

A few months after, CMHC took a look at the short-term impacts of the tax. The tax had the effect of pushing monthly sales to foreigners from a high of about 10 per cent of all sales to 0.9 per cent. Our analysis also showed that Vancouver was seeing a slowdown in sales, a shift to more condo sales and a downward trend in average prices before the tax was introduced. Therefore, it is possible the tax helped consolidate these short-term trends.

But Canada’s housing markets—and Vancouver especially—are complex, and are influenced by a variety of factors that are constantly in flux. Foreign buyers, to be sure, are an important one, but we can’t lose sight of the fact that they are but one piece in a complicated puzzle. Vancouver’s low number of listings in the resale market, the types of homes being built, and a very low rental vacancy rate—clocking in at less than 1 per cent—are all playing a role. But it’s the lack of adequate supply, not the intervention of foreign buyers, that remains the biggest factor at play in Vancouver.

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One year after the implementation of the foreign buyers tax, monthly sales to foreign investors now hover around 4 per cent of all sales. But our latest Housing Market Assessment, released in July, still shows a red flag for Vancouver—with particular concern given to overvaluation and price acceleration. Average prices in Vancouver have rebounded to where they were before the tax’s implementation. In between, there was a marked drop, but it appears to have been temporary. In short, Vancouver is largely right back to where it was before the tax.

The obvious question, then, is: why?

Any drop-off in demand from foreign investors, perhaps discouraged by the tax, appears to have been filled by domestic buyers. Vancouver has enjoyed strong growth in population, wages and job creation, all of which support house price growth. Town homes and apartments, which typically sell for less than single-detached homes, are in high demand for first-time buyers and families. This leads to multiple-offer situations and increasing prices. The number of homes under construction in Vancouver is at record levels, but is struggling to keep up to the demand. Vast parcels of land—currently zoned for industrial and agricultural use—aren’t available for housing.

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So while there are many things influencing house prices in Vancouver, supply is by far the chief factor. The very things that make Vancouver beautiful and unique—the ocean to the west, and the mountains to the north—also exacerbate the supply challenges the city faces when it comes to land you can build on, and in the face of sustained demand, those challenges drive prices higher.

In geographically tight areas like Vancouver, replacing existing single family homes with multi-unit dwellings is one potential way to solve supply issues. Land prices have also risen, which should in theory encourage this. However, Vancouver also appears unique in this respect as large numbers of existing single-detached homes are being torn down and replaced with larger, more expensive single-detached homes.

In fact, Statistics Canada data shows that for every home that was torn down in Vancouver in 2016, only five were built. In Montreal, in contrast, that ratio stood at 30 to 1. In Toronto, it stood at 20 to 1. And so rather than housing ten families where only one family used to live, we now have that same family living in a newer, larger, more expensive home.

Vancouver needs higher-density housing beyond its downtown core—buildings that can house many in a smaller footprint while still preserving the liveability factors that Vancouverites value. Simply put, we need to think about building upward, rather than building outward.

Correction: A previous version of this post suggested that the Rockies were north of Vancouver.

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Why the foreign buyers tax isn’t making Vancouver more affordable

  1. “The very things that make Vancouver beautiful and unique—the ocean to the west, and the Rockies to the north…”

    The Rockies are about 600km west of Vancouver.

    Peaks to Vancouver’s north are part of the Coast Mountain range.

    • Two possibilities:

      – Author is reusing content previously written about Calgary (“the Bow River, the Rockies…”).

      – Author is Rocky Mountain High.

  2. This article plays fast and loose with terminology: ” foreign buyers—or, in simpler terms, buyers whose permanent address was not in Canada” … which is it? The conclusion that buyers whose current address is not in Canada are ‘foreigners’ is specious as it ignores Canadians who are for various reasons living and working in another country for a period of time or at least six months of the year; according to the author, Canadians who work in another country are automatically foreigners (a novel twist on Canadian citizenship policy). But that was not enough for the author: suddenly instead of the above they become “foreign investors”, clearly an even less substantiated claim that foreign buyers – according to one or the other previous definitions of ‘foreign’ – are all investors as opposed to home owners. This is only marginally less misleading than other Macleans authors who insist that ‘foreign buyers’ are ‘rich Chinese’ ignoring the fact that the majority of foreign buyers comprises Americans, Australians and Canadians. Some even assign blame to so-called rich buyers without explaining how anyone other than the well-to-do might afford Vancouver real estate (do they think before they type?).

    Supply is constrained, more so than one would think as the mix of new housing units is dominated by small high-density housing units which frequently replace other units while high prices are led by single detached housing units which are in short supply and even dwindling away in many areas. This is no surprise as Vancouver was an early leader in adopting densification strategies and early to reap the ‘rewards’.

  3. If you look at all the vacant properties it may not be supply that is the core of the problem. When something becomes a commodity that people buy and do not use with the expectation of increased investment value the commodity falls more into the investment rather than the basic necessity category. Buying to rent and buying as second property to use as a weekend home are mixed into this too. Maybe it is time to tax to match reality, investment and rental income as business, property tax on investment and rental as business. Also stop creating loopholes where some people get to avoid the taxes. The problem with this is that all the politicians and bureaucrats are property investors too.

  4. The tireless real estate propaganda machine can talk about “supply and demand” until blue in the face, but the fact remains that there is simply no possibility that the tiny geographically constrained piece of land called Metro Vancouver will ever satisfy the real estate/money laundering “demand” of China, population 1,400,000,000.

    The only thing that will moderate housing prices in this unique circumstance of overwhelming foreign interest is government regulation of foreign money in our housing market.

  5. Just wonder who the author thinks is tearing down older Vancouver/Richmond/Burnaby……homes and building new, gigantic ones??? And many that just end up sitting empty.
    Not rocket science.