Thomas Davidoff is an associate professor in the University of British Columbia's Sauder School of Business and director of the Centre for Urban Economics and Real Estate.
It is hard to afford housing while working for a living in Metro Vancouver. Not everyone agrees why, or what should be done to improve affordability. A new data release has focused attention on the role of buyers who bring money into our housing market from elsewhere. This release provides some useful information, but its focus on nationality limits its use in providing policy guidance.
Last month, British Columbia's Finance Ministry began using property transfer forms to distinguish between home purchases by Canadian citizens or permanent residents and everyone else ("foreigners"). Between June 10 and June 29, buyers who reported themselves to be in the latter group bought $351-million of property in Metro Vancouver, representing 5 per cent of all transactions and 6.5 per cent of the value transacted.
The June data show that foreign buyers play a meaningful role in the local housing market. Getting citizens and permanent residents to buy 6.5 per cent more real estate would require a significant reduction in home prices. The back of an envelope, combined with some classic econometric studies, suggests that to get Vancouverites to purchase 6.5 per cent more housing would require roughly a 13-per-cent reduction in prices.
Of course, if buyers who are neither citizens nor permanent residents disappeared tomorrow never to return, there would be further price reductions due to a loss of recycled home equity and diminished expectations about future growth.
Finance Minister Mike de Jong has rightly argued that we should measure outside money as a driver of unaffordability before reforming taxes. But the ministry's focus on nationality is misplaced. Almost no one in government is considering a ban or tax on foreign buyers. Data the government already has on real estate transactions and income taxes would be more useful in judging the merits of policy proposals that are on the table.
A proposal I helped advance – along with more than 40 other economists at the University of British Columbia and Simon Fraser University – does not go into the controversial area of nationality. The B.C. Housing Affordability Fund (BCHAF) proposal, adapted into a private member's bill pending action, asks for increased property taxes from homeowners who are not local taxpayers, haven't lived in their homes a long time and don't rent them out. The funds would be given to local taxpayers, which would improve their ability to afford housing. Rhys Kesselman of Simon Fraser has put forward a similar proposal.
Homes that would be subject to the BCHAF tax are likely a much larger fraction than the 6.5 per cent from foreign buyers. Investor immigrants and Canadian friends, family and local businesses are all channels for money to flow from outside the local economy into homes. Work by David Ley at UBC and Josh Gordon at Simon Fraser, building on journalists' hard work, suggests these channels are important.
The ministry can broaden its study to include more salient data at little or no cost. If a given home purchase is paid for by a homeowner working locally, there should be tax returns from that address indicating enough income to cover costs. Simply merging housing transaction data from the past few years with tax returns in the two or three years following purchase would tell us how common it is for someone to buy a home without reporting enough taxable income to support the purchase.
Comparing the 5 per cent of all purchases identified as foreign to the fraction of purchases with little or no matched income tax can provide us with an idea of how much the ministry's nationality data underreports the underlying issue of outside money. A recent and welcome report by Ian Young in the South China Morning Post indicates that the Canada Revenue Agency may use such comparisons of home purchases with income tax returns to trigger audits.
The Finance Ministry's nationality data provide only a noisy signal of the underlying volume of money brought into the local housing market from outside. However, changes in the ministry's counts over time might be quite informative and are worth watching. If non-citizen purchases track the broader quantity of non-workforce purchases closely, then we may learn if increases and decreases in outside purchases are associated with increases and decreases in local prices.
If the foreign counts do not track Vancouver home prices, and if there are few homes with buyers who do not report meaningful income, then Mr. de Jong would be right to move on to supply-side solutions to our affordability problems. However, if there are many "low-income" buyers of expensive properties, and if the non-Canadian share of buyers in the new transfer data tracks local prices, then government should implement workforce-friendly tax reform along the lines of BCHAF.