|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 purchasers 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.
There are foreign-ownership restrictions in other countries. Here are some examples:
Foreign real estate ownership has long been a hot button Down Under, and the Australian government has gone to great lengths to curb it. December 1, 2015, the government introduced new Foreign Investment Review Board (FIRB) application fees and a new compliance/penalty regime. The application fees are sizable. It costs $5,000 just for the right to make an offer on a newly constructed home or apartment on a place costing up to $1 million, and $10,000 for each subsequent million-dollar jump in purchase price.
Foreign non-residents are no longer able to own any share of existing real estate properties (unless, in some cases, the existing home will be their primary residence, where rental is prohibited) and they must seek approval from the FIRB to buy new dwellings or vacant land for development. Foreign investors who break the rules can face up to three years in jail or a fine of $127,500. Individual real estate agents who help a foreign buyer circumvent the system can be fined up to $42,500, while companies could be hit with a $212,500 fine.
In 2014 a study revealed that 50,000 homes in London were vacant, while Londoners were struggling to find affordable housing. According to CBC Business News Senior Writer, Lucas Powers, U.K. citizens have long been concerned about ballooning home prices, especially in London. Lawmakers there have responded with a large capital gains tax. In Britain, the tax is between 18 and 28 percent on the capital gains from residential real estate that is not a primary residence. Foreign non-resident owners were not subject to this tax. In a effort to level the playing field, as of April 2015, the government now takes up to 28 percent at the point of sale on foreign-owned residential property. In June of 2015 they saw one of the largest declines in UK housing prices in months, and of course, Brexit is currently reeking havoc on prices as well.
The capital gains tax for overseas owners was introduced shortly after the government took steps to cool sales of luxury homes by boosting the so-called Stamp Duty — a progressive tax paid on most residential properties in the U.K. — for homes valued at more than 1 million pounds.
Singapore has a similar system of an 18 percent property sales tax and mandatory government approval for foreign purchases of real estate.
It is even more difficult for non-resident foreigners to buy residential property in Switzerland. Each year the government assigns quotas to each of the country’s 26 cantons. If approved, foreigners must use their Swiss dwelling personally–not for rental. In addition, each canton have authority to impose additional far-reaching restrictions.
Foreigners are allowed to purchase only one property for their own personal use, after having spent one year in the country. After that, if you become a permanent resident, you’re allowed to purchase one additional property for personal use.
Hong Kong, though part of China, has its own real estate regime. HK has the most expensive real estate in the world, with median prices at almost 20 times the median income of its citizens. For Vancouver, that multiple is about 11 or 12 times (and rising) and for Toronto, it is roughly 7 or 8 times. The HK government has responded with a 15 percent surcharge on homes purchased by non-permanent residents. A tax of 10-20% is also levied on anyone that sells a property less than three years after purchasing, effectively preventing flipping. In 2012, the city established areas with new dwellings that can only be sold to permanent residents of Honk Kong for the next 30 years.
Other countries (such as Mexico) have restrictions as well, but they are relatively easy to circumvent.
What Does This Mean For Toronto?
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. Hence, solutions like the one imposed in Australia–that foreigners can purchase only new residents–is not feasible in Canada.
The new BC tax has spurred questions regarding the impact on the housing market in the Greater Toronto Area. Price gains in the GTA, though more muted than in Vancouver, are still red hot and if foreign capital is diverted increasingly from Vancouver to Toronto, the Ontario government might consider similar measures–although so far, they say they will not.
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.
In addition, the federal government’s newly created Task Force on housing–with representation from industry and all levels of government–hasn’t had time to do the full analysis and make their proposals.
Ironically, while all of the furor is about excessive house price inflation, the federal banking regulator–the Office of the Superintendent of Financial Institutions (OSFI)–announced today that it is asking federally regulated lenders to stress test their books for a 40 tor 50 percent drop in house prices in Vancouver and Toronto.
Earlier this month, they warned that they want to see “sound mortgage underwriting procedures in place that adapt to the ever-changing circumstances….OSFI expects mortgage lenders to verify that their mortgage operations are well supported by prudent underwriting practices, as well as sound risk management and internal controls that are commensurate with these operations.”
House 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.
|Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres