‘Ottawa’ Jack Mintz: How Vancouver’s Housing Tax on Foreigners Could Cost Homeowners and Warp the Labour Market
As of August 2nd, B.C.’s new 15 per cent transfer tax on residential property purchases takes effect for non-Canadians and non-residents buying houses in Metro Vancouver. By curtailing foreign demand, the government hopes to take the wind out of soaring housing prices.
Instead, the government may be blundering big time, distorting labour and housing markets while hurting homeowners — especially those with large mortgages. Foreign purchasers account for roughly 10 per cent of the investments in the Vancouver housing market, giving the new tax potentially large impacts.
Foreigners have many investment choices, including Boston, Melbourne, Toronto and San Francisco, making Vancouver a relatively small market subject to highly competitive housing prices. Under this competitive scenario, the impact of the land-transfer tax would fall on Vancouver homeowners, leading housing prices to decline by as much as the new tax’s full 15 per cent, using a basic economic model to determine “who pays the tax.”
This large decline could place many Vancouver homeowners underwater, with their house worth less than their mortgages.
The B.C. government may want that decline but to the extent prices fall, construction of detached, attached and condo housing will also decline, eventually boosting housing prices all over again: Based on recent studies of housing-supply responses, the long-run prices may only fall a few percentage points.
The tax will also distort the labour market. The new tax would hit foreigners considering employment in Vancouver, including non-Canadian hockey players the Vancouver Canucks will want to recruit, hindering businesses in attracting international talent.
On top of these economic effects, the new tax raises a significant issue regarding the allocation of taxing powers between federal and provincial governments. Currently, provinces do not levy tariffs on goods or withholding taxes on payments to non-residents. That power is left to the federal government, to avoid distortions in trade. Although the B.C. tax does not apply to Canadian citizens or permanent non-residents, any non-resident moving from other parts of Canada to B.C. would pay the tax. It further distorts international immigration, since this tax penalizes foreigners looking to work in Vancouver.
Of course, not all new foreign demand will necessarily shift elsewhere in the face of the tax. Some non-residents have jobs or prefer to live in Vancouver, where they have families or friends. Those with a specific attachment to Vancouver will, instead, look for ways to avoid paying the new tax.
We could see new contractual arrangements evolve, where Canadian residents buy houses in partnership with foreigners, allowing a non-Canadian family to rent it, and then sharing any capital gains if prices appreciate. Purchasers could also buy homes in other parts of B.C., although the provincial government has left itself an option to impose the tax elsewhere.
There’s a better policy choice. Demand for housing reflects economic prosperity facilitated by low interest rates, which will likely continue for some time. Obviously, it would be better to increase housing supply to help push prices down.
It is no accident that Canada’s only two hot housing markets — Toronto and Vancouver — for decades restricted land supply for residential construction (Ontario is now increasing the size of the Toronto-area greenbelt, thereby pushing up house prices). It is basic economics: More people and constrained land supply force up housing prices.
To counter higher land prices, municipal central planners encourage higher density neighbourhoods. In fact, dense housing is often difficult to build. Neighbours object to high rises and traffic. Overzealous regulations and high development charges delay approvals and increase housing costs.
While many singles, young people and seniors may be fine with condos and townhouses nestled in downtown entertainment districts, most people who want to raise a family end up fleeing to the suburbs for detached homes, draining human capital from the inner city. In The Human City, author Joel Kotkin argues that the key challenge for many large cities is to avoid high housing prices, which inevitably result in income inequality and massive poverty. Families want low-density areas with space, light and parks, not dense urban living. Cities need to provide a balance of both.
Vancouver is not the only city in the world with high housing prices, poverty and a middle-class being squeezed out. While putting a tax to curb foreign demand may reduce housing prices to some extent, the best answer is “build baby, build.”
Jack Mintz is the president’s fellow at the University of Calgary’s School of Public Policy.