Foreign purchase tax ignores crucial source of unaffordability in Vancouver—dearth of supply

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Appeared in the Vancouver Province, July 27, 2016

In response to the fear that foreign homebuyers are driving up Vancouver housing prices, the provincial government has decided to introduce an additional 15 per cent property transfer tax on foreign home buyers in Metro Vancouver. This move diverts attention from the underlying problem: the supply of new housing is not keeping up with demand—in large part due to onerous land-use regulations. Moreover, the tax may have negative consequences for both the housing market in Vancouver and the rest of the province.

The new tax comes in response to a recent provincial analysis, which estimated that 10 per cent of home purchases between June 10 and July 14 were made by foreign nationals (those without Canadian citizenship or permanent residency, as well as foreign corporations). While the new data suggests that foreign ownership may indeed be larger than previously estimated (bear in mind this is a brief six-week snapshot ), it’s important to remember that foreign buyers are only one component of the demand for housing in Metro Vancouver.

Rather than targeting a specific segment of the housing market for a tax hike, policymakers should look to factors hindering the housing supply from keeping up with all demand. Increasing the construction of new homes in the region would, eventually, put downward pressure on housing prices.

A recent study by the Fraser Institute takes a closer look at the gap between demand and supply in several large Canadian urban regions, including Metro Vancouver. It finds that long and uncertain approval timelines for building permits, as well as onerous fees and local opposition to new homes slow the growth of the housing stock. The result is that fewer new homes with a growing pool of buyers inevitably leads to rising prices.

In Metro Vancouver, the study found that a good deal of growth occurring in suburbs like Coquitlam or Burnaby would likely have taken place in more central neighbourhoods west of Main Street, as shown in the map below. This has likely contributed to the dramatic price increases in these highly sought-after neighbourhoods.

While the intention of the B.C. government’s new tax is to dampen demand from foreign buyers, it isn’t clear to what extent it will work. Local housing markets are complex. There are many factors that contribute to both the supply and demand of housing construction. Attempting to micromanage housing demand could lead to a whole host of unintended consequences. Plus, it will do little if anything to increase the supply of available housing, which is a key problem affecting affordability.

For instance, if this tax does impact demand for residential real estate in Vancouver, where might that demand migrate? The geographical limit of the tax may simply nudge buyers towards Victoria, Squamish or Abbotsford, not to mention Canada’s other major urban centres, presenting a new set of challenges. Additionally, it might send a signal to developers that they should build more outside of Vancouver where the tax won’t apply, which could theoretically exacerbate the underlying problem: a lack of new housing units in Metro Vancouver.

Policymakers are rightly concerned about housing affordability, but a jarring shift in policy could change market expectations, leading to unpredictable consequences. In the event that the tax does significantly shift demand, there could be serious negative impacts for some sellers. Long-time owners could lose out on equity they planned to use for retirement. Conversely, families having recently entered the market may find themselves in difficult circumstances if their home values suddenly decline.

Rather than attempting to tweak market demand for housing in the Lower Mainland, the province and municipalities should use the tools they already have to ensure that regulations allow for timely construction of new housing to meet pent-up demand.

While introducing a tax on foreign homeowners may seem like an easy and politically expedient fix, it misses the most critical driver of Metro Vancouver’s affordability woes: the housing supply is not keeping up with demand. Heavy-handed policies could have consequences that are worse than the problem they seek to fix.

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