15% property transfer tax on foreign buyers – what next?

Some trends to look for in real estate in the coming months

Wow!  I honestly did not see this day coming…it must have been the last 6 years of writing about it consistently…they are listening to me!  Or not.  I simultaneously had both the reactions “They finally did something about this” and “This seems heavy handed.” as I heard more about these changes.

In case you have not heard, the BC government will be levying an extra 15% property transfer tax on foreign buyers purchasing property in the Metro Vancouver area.  I thought either it was a misprint or that they were going to gross up the PTT by 15%, meaning minimal increase, and having no effect on the market, just like the governments at all levels have been doing since I became a mortgage broker nine years ago.

However, I was wrong.  The amount is a gigantic punitive measure to foreign buyers buying property in the lower mainland.  It has significant teeth to cool Vancouver real estate prices, allowing those who live here an advantage to get into market, which has up to now been searing hot.

My predictions of what will happen in the next few months are as follows:

A lot of resident “straw-men” will be appearing to buy properties now

Many of these foreign buyers will have Canadian residents who are relatives.  The purchase contract will just be assigned to them and the tax will be avoided.  I also believe that there are many people with landed immigrant status who live here but do not work here or do much to contribute to the local economy other than at the BMW dealerships.  I would effectively consider those people “foreigners” also, but they are not, and will be able to continue purchasing properties under their names.

It will be interesting to learn what the “anti-avoidance rules” to prevent foreigners from avoiding the tax.  For example, if a foreigner starts a BC holding company and uses that to purchase the properties, if they will require the citizenship or residency of the directors or shareholders of that company to avoid the non-resident tax.

The market will cool down somewhat

There are going to be foreign buyers who do not have family that can accept the assignment of the contract to avoid the tax.  They will not be buying property in Vancouver now, I don’t believe.  As a result, the market will cool down.  People who might actually live in the homes will have an opportunity to possibly buy one.  The market will likely correct, and the slack in the foreigners purchasing will be taken up by residents.

Property outside of the Greater Vancouver Area is going to get HOT

Foreign buyers will now look to Abbotsford, Vancouver Island, Chilliwack, the Okanogan, Whistler, Mission, Toronto, etc.  Anywhere where the tax is not being levied will now become a target of foreign buyers who do not have straw-men here.  I think that there is potential for these areas to be subject to taxes as foreign buyers flock to these areas.

Something does not feel right

Honestly, it is so punitive in nature, my initial gut reaction to it was to think it was heavy-handed in nature.  My suggestion that foreigners just need to buy with cash would slow things down to some degree, or making the tax 5%, or both.  The banking changes would take a long time to have happen I believe.  This change is a very quick one, and feels like an “emergency measure” by the government.  A startling statistic from the government:

De Jong said recent government housing data indicate foreign nationals spent more than $1 billion on B.C. property between June 10 and July 14, with 86 per cent on purchases in the Lower Mainland area.

In just over a month, foreigners purchased $860 million dollars in real estate in the lower mainland.  If this measure is based on that data, it could be a knee-jerk reaction, and unless they happen to get right, I would expect that this will only be temporary, and will be modified by having this new tax decrease down to 5-10% within a year.

In the short-term, the very abrupt nature of this announcement and its hasty implementation could cause some deals go go offside.  I believe it is conceivable that some people will be prepared to walk away from their deposits over this change, and then other deals that were based on the sale of a property to a non-resident will then struggle to complete, with a possible chain reaction.

On the other side, if the proceeds of this tax help to build and maintain low-cost housing, it could have significant social benefit.

The demographic who would be negatively impacted the most by these changes that I would have more sympathy for are those who relocated to Vancouver for work and are here as temporary residents and have not yet gotten their permanent residency.  However, that would be a short-term hardship during which time they can rent and then buy when they obtain permanent residency status.

All things considered, I believe that the overall impact of this change is of significant benefit for local residents that were being priced out of the market artificially by foreign buyers.  The months to come are promising to be very interesting.