New real estate taxes only created new problems

[Source: The Province,  May 18, 2017]

I’m not generally inclined to say “I told you so,” but the last few days have been quite validating for those of us who cautioned against government intervention through taxation in the Vancouver housing market. As most people know, the provincial government introduced a 15-per-cent property transfer tax on foreign buyers in August and Vancouver city council passed the empty homes tax, which also targets a lot of foreign buyers.

The taxes were designed to directly and indirectly improve housing affordability in Metro Vancouver, which suffers from the highest house prices and rents in the country. At first, the foreign buyers tax appeared to work in removing non-local money from Metro’s real-estate market and cooling prices.

But recent reports show that whatever effect it had has almost disappeared, with Statistics Canada reporting this week that Vancouver prices are rising again, and the Canadian Real Estate Association saying that prices are back above where they were in August. While we don’t know for certain where the market would be without the new taxes, prices are almost back to where they were when they were introduced. The Vancouver market is no more affordable than it was last summer, in fact rising 11.4 per cent from a year ago, according to an RBC Economics report.

Worse, RBC says, “the cooling effect of housing measures implemented last year may be wearing off in Metro Vancouver” and that prices will continue to rise this summer. RBC said “resales rose strongly by 15.6 per cent month-over-month” in April, the third month that has happened and a sign that the market is picking up.

And the foreign buyers tax had other consequences.

The tax — which only applied to Metro Vancouver, stretching from Lions Bay to the Langleys — caused home prices to soar in the Fraser Valley, the one region where people with normal incomes had a fighting chance of owning a home.

According to the Fraser Valley Real Estate Board, sales in the region last month were the highest in 10 months, with the benchmark price for detached homes up 14.5 per cent in April from a year ago to $776,500, while the numbers had risen 26.2 per cent to $353,300 for townhomes and up 29.8 per cent to $219,900 for apartments. Those sound like the rise in prices in Vancouver a year ago, suggesting that the tax has only moved the affordability crisis, rather than solved it.

If the tax was supposed to help young families just starting out, its impact in the Fraser Valley has been devastating.

Other unintended consequences of the tax have also become clear. For one, the tax spooked sellers, with Metro Vancouver homeowners pulling their properties off the market, fearing lower prices. That led to pent-up demand — more buyers chasing fewer listing, driving up prices.

It also pushed investors and their money to other markets beyond the Fraser Valley. Toronto and Victoria placed first and second on a list of the world’s “hottest” luxury markets released last week by Christie’s International Real Estate and Chestnut Park Real Estate of Toronto.

Victoria “saw significant growth from affluent international buyers who were deterred by Vancouver’s new 15-per-cent foreign buyers tax,” the report noted, meaning the tax just hurt people trying to buy homes there.

House prices in Toronto are up 32 per cent year over year, according to the Canadian Real Estate Association. And Seattle has had the “hottest real-estate market” in the U.S. for sixth months, with median home prices in King County last month climbing above $600,000 US for the first time, 15.7 per cent higher than a year ago, according to Seattle Times reports.

Some of the money from outside the region that was being invested in Vancouver, where it would also bring people who would contribute to the economy in other ways, has shifted elsewhere as a result of the tax.

These unintended consequences are typical of ham-fisted government interventions in markets. With house prices heading to new heights again in Metro Vancouver and in formerly more affordable areas like the Fraser Valley and Victoria, it’s hard to argue that the tax has been a success. It has just created different winners and losers than if the market were left alone.

With the NDP and Greens pushing for more real estate taxes, more of these problems are guaranteed.

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