B.C. speculation tax brings 20,000 units back to rental market

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In response to a new tax, property investors freed up an estimated 20,000 rental homes for British Columbians, according to a recent report, which proves that the one-of-a-kind Canadian tax measure is having the intended impact.

The province of B.C. recently released a report it commissioned on the tax introduced in 2018 by the NDP government, the speculation and vacancy tax. The intent of the tax was to target empty homes and to address speculation and foreign money that had flowed into the market. Each year, every B.C. homeowner must complete a declaration as to whether they’ve lived in their home for at least six months, and how much income tax they’re paying in Canada.

The data helps determine the true nature of foreign wealth that flows into the housing market, from both foreign buyers and those who have citizenship but earn their incomes outside Canada, called satellite families. Industry experts say that because it collects data on income tax, it’s a treasure trove of information on those who’ve made windfalls without paying their fair share of taxes.

Andy Yan, director of the Simon Fraser University City Program, was the first researcher to address the problem of empty homes in a report he wrote back in 2009, when he worked as a planner and data analyst for Bing Thom Architects.

“This is how supply and demand measures can lead to 20,000 units of housing – not just with the swing of a hammer and new construction, but with the stroke of a pen and new legislation,” he says.

The report, prepared by University of B.C. real estate finance professor Tsur Somerville and analyst Jake Wetzel, estimates that the 20,000 homes were added to the secondary rental market between 2018 and 2020, after the tax was introduced.

But because of the disruption caused by COVID-19 that began in 2020, the question as to whether the SVT has so far led to greater affordability remains unanswered.

“I would say the data give a consistent message of improved conditions for first time buyers, and improved conditions for renters,” said Prof. Somerville. “But there is nothing that suggests that this is a major movement in the needle on affordability.”

Still, the report underscores the market impact of global wealth when competing with local incomes, particularly its impact on renters, says Prof. Somerville. A non-resident owner is a person who is not a full-time resident of Canada, regardless of citizenship. Non-residents purchased an estimated 16 per cent of condos built from 2016 to 2017 in the Vancouver census metropolitan area, the highest by far in all CMA study areas, according to the report. Nanaimo, Victoria and Kelowna also had a “striking” amount of non-resident ownership.

“This problem is undoubtedly graver as these data do not include Canadian citizens who own property but for whom a majority of their income is untaxed world-wide income,” says the report.

“Here there is a clear consensus that foreign demand or demand for second houses raises local house prices. This makes ownership more difficult for prospective first-time buyers. This effect is larger if the wealth used to acquire these properties is from outside the local market,” says the report.

There is a multiplier effect. Owners who receive windfalls go on to pay higher prices in other neighbourhoods – or pass along the gains to children. Prof. Somerville cautions that we still don’t really know how those windfalls have been spent.

He believes the SVT should stay, especially because it addresses empty units; however, he wouldn’t raise it.

“It is important, but as many of us said in advance, this is not going to solve the problem.”

Unfortunately, it took years to establish that there even was a problem. When Mr. Yan was working to determine the possible number of condos that sat vacant, government was not collecting data on foreign money. He had to get resourceful. His 2009 report looked at an indicative sample of downtown condominiums using BC Hydro and land titles data that showed 5 to 8 per cent were empty. In addition to the empty condos, he found that 50 per cent of the study condos were non-owner occupied. That number has not changed.

Many in the housing industry, and politicians and some academics, treated the assertion that foreign money was having an impact, or that so many homes were sitting empty, with skepticism.

Finally, the Liberal government tracked real estate purchases one summer and discovered that, in a four-week period, foreign buyers had picked up more than $1-billion worth of property in B.C. They introduced the foreign buyer tax in 2016.

In 2017, the newly elected NDP government introduced tax measures that included the all-new SVT, which went beyond the foreign buyer tax and applied a 2 per cent tax on those who might have citizenship, but were earning most of their incomes elsewhere. Citizens and permanent residents who aren’t using the homes at least six months of the year pay 0.5 per cent on the assessed value. Owners are exempt from the tax if they rent out the property.

According to the new report, government has collected $231-million in revenue from the SVT since it was introduced in 2018.

Simon Fraser University political science professor Stewart Prest says the question of whether the SVT is boosting affordability will take a few more years to determine.

“I think ultimately if supply met demand you wouldn’t have speculation, so you wouldn’t need to control speculation,” says Prof. Prest. “Part of the reason why [real estate] attracts speculation is it is seen as a scarce resource. If not scarce there would be less speculation.”

He adds that the tax is “a good stop-gap measure.”

However, it’s unclear if any amount of supply would satisfy the demand when buyers are global. New York faces demand from foreign buyers from everywhere, as well as domestic investors.

Suzanne Miller founded Empire State Properties in 1991. The New York company specializes in sales and rentals of investor properties. The foreign buyer comprises more than half of Ms. Miller’s buyers. She manages more than 500 short-term properties for her clients, and they are all full, rented to corporate workers for an average of two or three months. Her foreign owners are from countries around the world, including Canada. They typically purchase a $1-million unit that’s about 600 square feet and her company rents it out for around $6,000 a month to a corporate renter, she says. Her average investor client owns about two or three units. Ms. Miller says business is better than ever.

“I’ve never seen rents or sales like I’m having this year. It’s on fire,” says Ms. Miller.

“They love the model. [Real estate] is like a triple-A bond. We do direct deposit, and take care of move outs, the security, and the utilities. They do nothing other than get a direct deposit to their account.”

But constrained supply will eventually drive up prices, she says.

“I think there will be a small dip between now and the end of the year, and in January it will be gangbusters again because there’s not a lot of supply and a lot of developers are not building.”

Marketer Jacky Chan, CEO of BakerWest Real Estate, concedes that there is the possibility that supply may never meet the demand for housing – particularly with offshore and domestic investor demand so high. He’s in favour of accepting foreign capital that operates separately from the domestic buyer. For example, only allow non-residents to buy new homes or vacant land, which is the Australian approach.

“Then you can really segregate the two markets. It would be very silly to reject all foreign investments in real estate as a country but if we allow them, the foreigners, to buy and invest in a particular type of product, and in development, then we can take control of that supply and demand.

“If they want to come to Canada, they should pay a premium on this type of product where the locals would not have to compete with them. I think that already solves 50 per cent of the question.”