Many of our Team Andruff clients want to know what the impact of the 15% Foreign Buyers Tax will be. One month in we are on a quest to find an appropriate answer. We listen to economists, review similar instances and rely on our experience to guide our clients and here is what we see so far:
Blog at a glance:
- Markets were cooling before the tax was instituted.
- We have seen a similar scenario with the transition from GST/HST – the market will adjust and rebound.
- Higher end homes (one-million-dollars-plus) will be slowed down – Resale condo market still robust.
- The fundamentals of supply have not changed while demand is on the sidelines in some cases but not in others.
- BC Government was politically motivated to make this move but foreign buyers will have ways around the 15% tax and this may push affordability problems to other markets.
- A strong Greater Vancouver and BC Economy with continued in-migration will still make Vancouver’s affordability a challenge over the long run.
The Rest of the Story
On an anecdotal note, leading up to summer, there was a sense of a turn in the market. The market was taking a more “traditional approach” or what would have been a more typical response to a hard press in pricing than what we had seen in the last few years of accelerated prices. There was some seasonality to the market where people took a step back and simply enjoyed their summer (which a few years ago was normal).
The Senior Economist with Central 1 Credit Union, Bryan Yu, indicated the tax will put further downward pressure on a market that already had a slowing, after a very strong spring. He further prognosticated the new tax on foreign buyers will cause a substantial but temporary 10 per cent drop in Metro Vancouver sales that will extend into 2017.
This is not unlike the transition from the GST to HST scenario in 2010. The market pulled back to see what would happen and then slowly returned to business as before.
We again get back to the tale of two markets (foreign and domestic). What we are seeing today is the higher end of the one-million-dollar-plus homes are slowing considerably (mainly affected by foreign money). While my experience over the last month is the resale condo market (read local market) remains fairly robust. The reasoning behind this is many (of course not all) foreign buyers were more involved in the higher end of the market and the new construction coming to market.
The 15% tax therefore is having less impact on the…let’s say…one-million-dollars-or-less type of properties, (mainly condos and mainly “locals”) and so we are still seeing things move at a fairly strong pace. The fundamentals of supply and demand are still driving the resale condo side of the market for the most part.
I dare say that The Foreign Buyer Tax was not all that well conceived. It appears to be a political, knee-jerk response by the BC Government. Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres share this sentiment stating, “Housing affordability is a hot-button political issue, so it is not surprising that the B.C. Government, facing an election in less than a year, has felt compelled to do something to dampen the fervor.”
A few of the flaws as I see it: It will have a mushrooming effect on non-Metro-Vancouver areas like for example Kelowna, and Victoria on Vancouver Island. By pushing the foreign money further out from Metro Vancouver, this potentially is passing the buck and creating affordability issues in these other areas too, perhaps even as far away as Toronto. Also, some of the buyers of presale condos are finding local friends or family members in order to assign their contracts, and hence sidestepping the 15% tax.
At the end of the day, some foreign funds will still be invested in the Vancouver Real Estate market. They still can and will. For now, there will be a shock to the system. Arguably the market is naturally correcting already which is good and healthy for the market. Remember there are always two sides to the story, and while Sellers have had their turn with a Sellers’ Market, now Buyers may see some opportunity. As density remains a focus at city hall and in-migration remains a reality with a strong local economy both in Greater Vancouver and BC, the underlying lack of affordability will likely remain. However, at this time the pace of the market will be slower.