Erratic Policy Can Crash Housing Market Overnight

On July 25, 2016, in the middle of the summer when many are on vacation and real estate market is generally slower and quieter, with no warnings, no prior public consultation, the British Columbia Government announced a sudden and unexpected 15 per cent tax on foreign buyers of homes in the metro Vancouver area, which includes a total of 22 municipalities and communities. 

The new law took effect on Aug 2, only 8 days after its announcement. Furthermore, any transactions that were entered prior to the announcement but not closed before Aug 2 will not be grandfathered, i.e., no exemptions. 

The following statement issued by Real Estate Board of Greater Vancouver President Dan Morrison probably best described how we real estate professionals felt about the tax policy:

"Housing affordability concerns all of us who live in the region. Implementing a new real estate tax, however, with just eight days’ notice and no consultation with the professionals who serve home buyers and sellers every day needlessly injects uncertainty into the market.

"Government has had a long time to take action on the affordability issue, yet they decide to bring this new tax in over a long weekend, with no notice, and no time to prepare. It would have been prudent to seek consultation from the people most knowledgeable about the impact.

"To minimize short-term volatility in the market, we’re calling on government to exempt real estate transactions that are in the process of closing from this new tax."

As a reminder, the real estate industry is a key economic driver in British Columbia. In 2015, 42,326 homes changed ownership in the Board’s area, generating $2.7 billion in economic spin-off activity and an estimated 19,000 jobs. The total dollar value of residential sales transacted through the MLS® system in Greater Vancouver totalled $39 billion in 2015.

One would think that a policy like this that has such direct impact on an important industry like real estate, not to mention the great effect on personal finances of hundreds and thousands Vancouver home owners, buyers and sellers, would deserve a rigorous public debate and extensive industry consultations before its implementation. 

After all, if the true objective of the policy is to deter foreign buyers, as claimed by the government, what is the benefit of the secrecy? 

Domino effect

It’s not hard to imagine what follows.

According to an article entitled Scuttled property deals, legal risks mount from Vancouver’s foreign property buyer tax: ‘It’s a domino effect’ by Financial Post, the new tax law is poised to derail more than 400 deals worth millions of dollars and may prompt calls for legal action.

"At least 427 deals are likely to collapse due to the new measure, according to Dan Morrison, president of the Real Estate Board of Greater Vancouver, citing responses from 27 brokers to an e-mail inquiry. The group didn't calculate the value of those sales, though they would be worth about $404 million based on the average purchase by a foreign buyer of $946,945."

That may just be the tip of the iceberg, because for every collapsed deal, chances are there are other deals that are directly or indirectly affected. When a seller sells a property, he/she usually enters an offer to buy a new property at the same time. If his/her sale doesn’t close as expected, he/she will most likely not be able to close his/her purchase deal either, which in turn will affect a third party down the line, thus the domino effect.  

Then there are those condos sold pre-construction but still being built right now. How many foreign buyers will decide it's better to walk away or unload them at fire sale price? And if they do, will they crash the market price for Canadian owners who had bought similar condos in the hope of making a profit?

"It's just shocking that a provincial government in Canada would choose to have a knee-jerk reaction in this way," said Barry Appleton, managing partner of law firm Appleton & Associates, during a phone interview with Financial Post.

Avalanche or Passing Storm

According to Bloomberg, early data from the Real Estate Board of Greater Vancouver (REBGV ) shows that home sales in Vancouver fell 51 percent to 758 transactions in the first two weeks of August from the same period a year earlier, with detached homes having the biggest decline of 66 percent. 

Price growth of the average detached home also slowed, slipping 3.4 percent from January to July to C$1.76 million.

The data is preliminary and may change by the end of the month, according to the board.

"Weakening demand has translated into weakening home valuations across Vancouver." Peter Routledge, an analyst at National Bank in Toronto, said in an Aug. 7 note to clients. 

Global News also reported similar signs of plummeting sales and declining prices. 

"There were only three home sales in West Vancouver between Aug. 1 and 14 this year, compared to 52 during the same period last year. That’s a decrease of 94 per cent," said Global News, quoting long-time realtor Brent Eilers, who’s been tracking the data with the same system since he joined the business in 1983.

Global News obtained MLS sales data from several key Metro Vancouver markets and found the number of homes sold during the first two weeks of August in Greater Vancouver dropped by 85 per cent on average.

Richmond experienced a 96 per cent drop in the number of sales and Burnaby North fell by 95 per cent. Vancouver’s West Side, West Vancouver, and Coquitlam also took major hits.

Zolo, a Canadian real estate brokerage, keeps track of MLS home sales in real time and reports prices as an average rather than the "benchmark price" used by the REBGV.

It currently shows a major correction underway in most Metro Vancouver markets.

According to the website, the city of Vancouver currently has an average home price of $1.1 million, down 20.7 per cent over the last 28 days and down 24.5 per cent over the last three months.

The average detached home is $2.6 million, down seven per cent compared to three months ago.

Richmond is no different. Zolo CEO Barry Allen says the market in Richmond has "gone off a cliff" with the average home now priced at $779,000, down 20.7 per cent from three months ago and 17.6 per cent from last month. Detached homes in Richmond took the hardest hit compared to other markets with a 10 per cent price correction over the last three months down to $1.7 million.

North Vancouver detached homes fell 10 per cent in price in three months down to $1.8 million. Their average home price for all properties fell 17.3 per cent in that time period to $1 million.

It’s more of the same in Burnaby and Surrey.

Illusion And Hope

The B.C. government said the goal of the foreign home buyers tax is to allow more Vancouverites to enter the red hot housing market rather than foreign buyers.

"I want to keep home ownership within the grasp of the middle class in British Columbia," B.C. Premier, Christy Clark said at a news conference in Victoria, as reported by CBC.

On explanation about the secrecy, Clark said "Tax policy is by necessity secret."

"If we had given a single hint that we were working on a foreign tax and collecting data so we could have implemented a tax, we would have had a huge rush on the market from overseas," she said.

We can perhaps understand the need for secrecy if this policy is about collecting additional taxes from foreigners. 

But it’s an illusion to think the new tax can help local home buyers while it won’t crash the market first.

According to the latest Housing Affordability Report by RBC dated June 22, 2016, in Metro Vancouver Area, owning a detached home requires 120% of median household income, although condo is a bit better, requiring only 46% of median household income.

When even a condo requires 46% of median household income, a detached home 120%, taxing foreign buyers will not be able to help local home buyers in any meaningful way, unless the market crashes. The math just doesn't work.

And yet, on whether the new tax will crash the housing market and result in diminishing equity for homeowners, Clark said "I don't think that is a likely outcome based on what we have seen around the world. We have chosen a 15 per cent tax deliberately because that is what they do in Singapore, it's what they do in Hong Kong."

"We are not going into unchartered territory because we have the experience of Australia where people did not lose equity. And we have the example of Singapore and Hong Kong where this is the number they chose."

Clearly, Ms Clark doesn't think home price in Vancouver will come down.  In this case, however, one has to ask how local home buyers are to be helped?  And is she really that naïve to think that when the time comes for those foreign buyers to sell their properties, they will not pass this additional 15% tax to the next Canadian home buyer, making home prices in Vancouver even more inflated?

We hope Ms Clark is right. We hope all the foreign buyers will continue to see value in a Vancouver home, no matter how high the price is. Without them, and their hot money, we Canadians earning local wages simply cannot support and sustain a market like this.

But what if Ms Clark is wrong? Could she be wrong?  

"We don't have an absolutely iron-clad notion or forecast or prediction of what the impact of this is going to be," said Michael De Jong, B.C. Finance Minister, about the unpredictability of the tax.

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Antonia Yan

Antonia Yan

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CENTURY 21 Leading Edge Realty Inc., Brokerage*
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