- Vancouver housing tax aimed at damping foreign buyer demand
- Market showing signs of slowing after home prices soar
Canada’s westernmost province, British Columbia, enacted a 15 percent tax on foreign home buyers in Vancouver, the country’s most expensive market. It’s the latest move by government leaders to tame booming housing prices in the country, which also are sweeping up in Toronto. The tax is intended to make housing more affordable in Vancouver, but critics say it doesn’t go far enough and early data shows prices and sales were already cooling. Foreign buyers, it turns out, are only one reason prices continue to rise, though slower than last year.
1. Why is Canada’s housing market so hot?
Rich foreigners -- particularly from China -- have been blamed by government and locals for soaking up the limited supply of houses and condos. The average low-rise home price has shot up almost 70 percent to C$1.58 million ($1.23 million) in Vancouver in the last five years and about 60 percent to C$785,500, in Toronto. Sales in the two cities hit a record in May, and price growth up to then outpaced even Manhattan, according to custom data from Zillow. Now residents priced out of Toronto and Vancouver are moving out and driving up sales and prices in sleepy nearby towns.
2. How did we get here?
Blame a perfect storm of depressed interest rates, limited housing supply and city planning policies. Armed with cheap debt, buyers are overextending themselves: An overnight lending rate near a record low means some mortgage rates are as low as 2.28 percent. Vancouver’s sprawl is limited by the Pacific Ocean on one side and mountains on the other, Toronto’s by an ecological reserved territory, the Green Belt. And since the 1980s, the Canadian government has been encouraging offshore investment, at one point even establishing a national investor program to fast-track citizenship applications.
3. What are officials doing about it?
Vancouver’s 15 percent transfer tax on non-Canadians purchasing residential property -- announced and implemented within one week -- is only the latest attempt to cool the heat. In December 2015, the government raised down payment requirements on homes over C$500,000. The government also may ask banks to hold more money backing property loans in case of default.
4. Where else have steps like this been tried?
In Australia, foreigners generally now need to seek approval before buying residential real estate, are required to pay extra fees and can be penalized heavily if they don’t comply. Switzerland doesn’t allow any purchase of residential real estate by non-residents, though investors can get around the rule by applying for a Swiss residence permit. Hong Kong taxes non-resident home buyers an additional 15 percent. On Canada’s east coast, Prince Edward Island limits purchases by non-residents -- even Canadians from other provinces -- to five acres.
5. Will it work?
According to experts and history, not really. After Canada raised down payment requirements, home sales went on to post records in Vancouver and Toronto. Even as Australia implemented its offshore buyer rules, home prices continued rising and investment increased. To skirt tighter bank rules, buyers can go to non-bank lenders, aka the shadow market. Rich investors from abroad can find ways around the crackdown.
6. What’s next?
Though the market has cooled from record highs, Canadian governments are considering additional steps. Vancouver has been granted power by the province to tax empty homes. In Ontario, Finance Minister Charles Sousa said he’s keeping his eye on the effects of the foreign owner tax, though Toronto Mayor John Tory is doubtful anything will be implemented in the near-term. Meanwhile the country’s housing agency, which insures home loans under C$1 million as well as securitized debt, has been looking at ways for banks to have more skin in the game for at least two years.
The Reference Shelf
- A Noah Smith column on China sending real-estate bubbles to North America.
- Scenes from Vancouver, playground of the rich.
- A University of Alberta China Institute research paper on foreign investment in Canadian real estate.
- A story, based on a C.D. Howe report, about the risk of a mortgage meltdown.