The Vancouver market is making headlines the world over. We face unprecedented times, lowest interest rates in 6000 years, booming investment from Asia and now Europe, a local affordability crisis and a world that is looking to park its money for safety on desirable hard assets like real estate. The result? A real estate market the likes we have never witnessed!
However, there are some caveats that the markets in Vancouver may take a breather. After all, nothing goes up forever, and markets do have cycles. Michael Hudson, a renowned economist, printed a report in late 2017 that warned that a return to historic norms in lending rates would put Canadian real estate buyers into an untenable situation. This is certainly the black swan which could dampen the market in Vancouver and most of Canada. To make matters worse in the meantime, Vancouver real estate prices may increase especially with new taxes introduced by the province. The new taxes are the yearly Speculation Tax, which will start at 0.5% then 2% yearly, and the Foreign Buyer Transactional Tax, which was raised to from 15% to 20%. These taxes may contribute to the last uprise before a possible fall in prices. Already we are seeing prices dampen nation-wide with the new taxes and interest rate stress test: a 2% added qualifying rate on all Canadians when they attempt to qualify at the bank. This government mandated policy was placed so that it would buffer any potential spikes in price while the Government slowly raises rates.
Bubbles emerge when housing prices outpace inflation, household income, and economic growth. According to the Michael Hudson, factors that typically contribute to a bubble are low mortgage rates, low availability of housing stock, easy access to credit (low rates) and immigration. If we can examine these factors, we can start to make informed predictions.
Benjamin Tel, CIBC’s senior economist, has posited that both Vancouver and Toronto could be in the works for sustained demand and housing shortages, which will keep prices soaring. Tal mentions that both Toronto and Vancouver are lacking supply, especially in Vancouver, where Tal thinks development land is years away from being ready, especially with the Vancouver city bureaucracy, where a simple development permit takes 24 months to be approved.
The Canadian government is increasing immigration levels to over 1 million new immigrants in the next 3 years. This will further add pressure to the Vancouver and Toronto housing markets. According to Tal, pressure on these housing markets will continue to grow.
“Without significant changes to land and rental policies alongside a dramatic change to housing preference among buyers, those centers will become even less affordable,” Tel wrote.
The Real Estate Board of Greater Vancouver (REBGV) is reporting that residential property sales in the region totaled 2,207 in February 2018, a nine percent decrease from the 2,424 sales recorded in February 2017, and a 21.4 percent increase compared to January 2018 when 1,818 homes sold.
“Last month’s sales were 14.4 on below the 10-year February sales average (see graph below). By property type, detached sales were down 39.4 percent over the same period, attached sales were down 6.8 percent, and apartment sales were 5.5 percent above the 10-year February average,” reported REBGV.
“Rising interest rates and stricter mortgage requirements have reduced home buyers’ purchasing power, particularly for those at the entry level of our market,” Jill Oudil, REBGV president said. “Even still, the supply of apartment and townhome properties for sale today is unable to meet demand. On the other hand, our detached Vancouver home market is beginning to enter buyers’ market territory,” he added further.
It seems that the market has a sharp contrast between detached homes and attached condos, with the latter type of product having much stronger demand, much lower supply and thus rising prices. Detached homes are lagging in demand and sales.
The full effects of the foreign buyers and speculation tax will remain to be seen.
For home buyers in Vancouver and other places within the province, the obvious question begging for an answer is this – will there be a direct impact of the taxes on the prevailing prices? A simple and straightforward response to this question is this – the tax will have a direct impact on real estate prices in Vancouver, Burnaby, Surrey, Richmond, Chilliwack and other major cities in the province. However, it may have the opposite effect of the intended use of the taxes by the government, which was to lower home prices. In fact, the new tax measures may actually raise prices as builders and sellers will almost surely pass the additional tax cost onto the final consumer.
Now, this means that Vancouver buyers will have a lot more pressure with these new taxes. In reality, BC home or condo buyers will ultimately have to pay the final burden for the upward shift in home prices with the Speculation and Foreign buyers tax implementation.
In addition, this new tax policy will affect rental rates of Vancouver properties as well.
Home and condo renters should expect the adjustments attributable to the taxes by next year. Property owners will most likely apply these additional taxes on rental values.
British Columbia is the first province that has adopted this new tax scheme. As the name implies, the Foreign Buyers tax involves the taxing of foreign owners who buy to hold or to rent. The BC speculation tax, on the other hand, applies to anyone in the province who buy a property to hold, rent, or to resell. Other provinces that have also adopted the Foreign buyer’s tax in Ontario. Toronto is the second city to adopt the foreign tax, albeit only 15%.
The BC government has recently announced that the implementation of the speculation tax will not be applied on home and condo rentals that are long term. They have also put geographical restrictions of where the tax applies in the BC province, namely wherever the market is hottest, including further way areas like Kelowna, Nanaimo, and Victoria.
What does it mean for the Vancouver rental market?
This new speculation tax will also most likely have an indirect effect on the rental rates of homes, condo units and commercial properties. This tax scheme will affect the prevailing property rental rates in indirect ways.
Landlords will now have to increase their rent to match the new increase in tax costs, which cut both ways, transactional and holding costs. The adjustment of rental prices will also affect the already high prevailing cost of living in western Canada. And of course, Vancouver real estate prices may also increase with the new taxes unless the government looks into alternative supply-side methods that may lower prices.
A consequence is higher prices, higher rents and possibly a slower economy for Vancouver metropolitan area and Western Canada, as high costs of living to deter consumer spending.