Property purchase tax boost necessary to reduce demand

The July 25 introduction of a 15 per cent property purchase tax on foreign buyers by the provincial government surprised many observers, and shocked the real estate industry.

In particular, foreign buyers with transactions in progress were caught in a dilemma. If they were able to move the completion date up, they could avoid the tax. Some did so. Others walked away from signed contracts, forfeiting deposits which in some cases were substantially lower than the tax bill would have been.

Philip Dumoulin of Sotheby’s International Realty in South Surrey said one realtor lost three buyers and a fourth asked for a referral to Toronto, planning to buy there instead of in the Greater Vancouver area.

Foreign buyers have had less direct impact in Surrey than in some other parts of Greater Vancouver, such as the City of Vancouver, Burnaby, Richmond and areas of the North Shore. However, there have been a significant number of such buyers in South Surrey and White Rock, and it is likely some also bought homes in Fraser Heights, which already has a sizable population of Asian background.

As happened in the late 1980s and early 1990s, it isn’t just foreign buyers who influence property prices in Surrey. At that time, many buyers from Hong Kong bought homes in Vancouver to hedge their bets, not knowing what the pending jurisdictional takeover of Hong Kong by the Chinese government would mean.

Many people who sold properties to Hong Kong buyers at that time bought homes and moved outside Vancouver. A significant number came to Surrey, Delta and White Rock, and that boosted prices here. This came after a prolonged slump in the real estate market, caused by 20 per cent interest rates in the early 1980s and a lengthy economic downturn.

A similar thing has happened in this boom. In recent months, real estate prices in virtually all Surrey neighbourhoods have increased sharply. Detached homes in particular have been in demand.

While prices in many parts of Surrey are substantially below prices in most areas of the Burrard Peninsula, they are still much higher than they have ever been. Even with low interest rates, this makes owning a home a challenge. Making payments can become a struggle, and if interest rates ever rise, there is a high risk of many homeowners defaulting.

The 15 per cent property purchase tax is designed to crimp demand, not just from foreign buyers, but from people who are relocating to other areas of the Lower Mainland. A chilling of demand is long overdue. Realtors have been saying for the past year that a shortage of supply was exacerbating demand, and no matter how many new homes came onto the market, it didn’t seem to affect the demand.

What is equally important in any discussion of housing supply and demand is recognition that the rental supply needs to be increased. More and more people are coping with rent increases that they cannot handle. With real estate prices so high, more people have no choice but to remain renters. This puts upward pressure on rents.

The provincial government has put $75 million into a fund to build rental housing, and also promises that revenues from the new higher property purchase tax will go into this fund. This substantial commitment to creating new rental stock is very important.

Renters and housing advocates must insist that work begin right away on building new rental housing. Local governments need to identify sites where rental housing can be built quickly and fast track approvals.

Housing market challenges were left to their own devices for too long, and the situation got out of hand. That was a key factor leading to the drastic tax increase, which definitely sends a negative message to foreign investors. Measures to increase the supply of homes for purchase and rental are welcome. A decline in demand is also a good step in the right direction.