Vancouver is an absolutely lovely city. One of my very favorites. I adore its vibrant, diverse streets, its proximity to the mountains and the ocean, I even kind of like the rain. I am not unique with my preferences; Vancouver has traditionally been rated as one of the most livable cities on earth.
It is also spectacularly expensive. Vancouver is one of the most expensive cities in North America, and home prices have been steadily climbing to spectacular heights, for about the last 10 years. The average price of a detached house sold in greater Vancouver in June was $1.7 Million.
Graph Source: http://www.rebgv.org/sites/default/files/REBGV-Stats%20Pkg%20July%202016.pdf
I went to school in BC in the late 2000s and during that time I thought the Vancouver property market was a speculative bubble due for a sizable correction and possible crash. In 2011, I casually predicted this would happen within the next couple years. Half a decade later, I still am.
Part of the story of the price rise, or at least part of a story frequently told, is the inflation is driven largely by foreign buyers. Chinese buyers are the most common culprit, seeing Vancouver real estate as an easy way to stash their money somewhere that isn’t China. Seen in this light, the Vancouver housing bubble, is not so much the Vancouver housing bubble as it is a tendril of a larger Chinese property bubble.
This story has been present for the whole course of the price rise. Foreign ownership of property was not well tracked, and there was no real data on what percentage of Vancouver’s properties were foreign owned. Until this summer, when the BC government started collected data.
During an admittedly small sample period of June and July, about 5% of the residential property purchased in Vancouver was bought by foreigners, a rate lower than the 8% average for the United States as a whole, but somewhat higher than other Canadian cities including Toronto. Some parts of Vancouver, such as Richmond experienced much higher rates of foreign ownership. Foreign owners did spend a good deal, nearly $400,000 on average, more than domestic purchasers did. This adds up to about a billion dollars’ worth of spending on property, or around 8% of all spending on home purchases.
In order to curb rising house prices and try to make property more affordable for local residents, starting August 2, British Columbia instigated a 15% tax on foreigners who buy residential real-estate in the city.
Vancouver is not the first place to try this. Other cities that saw waves of foreign home buyers and high housing prices have attempted similar methods to try to cool rising property prices and limit foreign demand. Vancouver’s tax is very similar to one Hong Kong instituted in 2012. Singapore taxes foreign buyers more heavily and Australia is looking into something similar.
Will it work?
Christy Clark, the Premiere of BC, argues for the tax as a way to keep home ownership accessible to the middle class. I think the tax alone is unlikely to make a noticeable impact.
Economists like to think of taxes as creating a gap between the amount that the buyer pays and the seller receives. This gap means that fewer transactions occur and the pre-tax price should be somewhat reduced. Transactions go down as those who were willing to purchase a home at the pre-tax price, may not be willing to purchase the same home at a 15% price increase. The question then, becomes how many buyers will decide that a 15% price increase is not worth the trouble.
What Happened in Hong Kong?
In 2012 Hong Kong instituted a similar 15% tax on foreign home buyers. Hong Kong has elements of an attractive counterfactual, or at least a case study. It is a very expensive, land constrained city, with property buoyed by Chinese demand.
Immediately following the imposition of the tax there was a decrease in the number of transactions but not a drop in prices. A similar thing seems to have happened to Vancouver last month. In Hong Kong, prices continued to rise for several years after the tax was implemented.
Obviously, there are differences between Vancouver and Hong Kong, but taken at face value this suggests that any immediate impact the tax will have on prices in the Vancouver Area are likely to be relatively mild.
Does 15% matter?
In order for the tax to impact demand for house prices, buyers will need to be scared off by higher prices. One of the defining characteristics of the Vancouver housing market over the last few years has been the reluctance of buyers to shy away from ever higher prices. A 15% increase for certain buyers sounds is a lot, but between 2015-and 2016 the benchmark house price in Vancouver increased by 30%. If previous price increases did not deter buyers it seems unlikely that this one will.
The end of the Bubble?
Part of the goal of the tax was to help prick the housing bubble, giving speculators a chance to catch their breath and come to their senses. After the imposition of the tax, reports started to filter in of buyers walking away from deals. Home sales in August (the first month after the tax was implemented) hit a 4 year low. That said, the benchmark price, remained pretty constant, down just 0.1%. One month of data is not indicative of much, with the possible exception of uncertainty. It does seem likely that any potential impact will be seen first, in the number of transactions and only later, in the final selling price.
Vancouver real-estate remains very expensive, and overpriced by most conventional measures. It should be due for a correction. I’ve been saying that for years now. If I just keep saying it, eventually I’ll be right.
Sources, References, and Further Reading:
 All dollar figures are Canadian dollars, unless otherwise noted.
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