Vancouver’s empty-home tax is returning inventory to rental market

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New taxes designed to push homeowners into renting out all or part of their empty homes are achieving the goal – at least while the housing market in B.C. remains soft.

Lower Mainland property managers and realtors say they’re seeing an increase in the renting business, now that homeowners in urban areas can’t leave properties vacant without incurring the province’s speculation and vacancy tax.

Vancouver homeowners also face the City’s empty-homes tax (EHT), which was a response to the affordable housing shortage.

“The point of [the tax] was to make it so the homes weren’t being unoccupied and being used for the population that lives and works here, so in that sense, it does seem to be achieving its purpose,” says Jessica Lee, co-founder of new property management firm Bodewell, which launched a year ago in anticipation of a growing rental market.

“There is more inventory on the market and more to choose from. People who were perhaps living outside Vancouver now have opportunities to move back.”

Donald Mackenzie, company president, says that business is growing at about 50 per cent per month. They work with realtors who are advising clients to hold until the market goes back up. The expectation is that the client will then return to the realtor to sell the property, Mr. Mackenzie says.

“We enable them to hold and keep making a return until the market has picked up again and maybe in three or four years they will be selling,” he says. “And there are a lot of good tenants out there. It’s working.”

Mr. Mackenzie said that they were also motivated to launch their firm when they saw all the condo completions coming online, such as the Tate tower downtown, where they have many client investors holding units and now renting them out.

Laneway house builder Jake Fry says that for the first time in his long career he got an inquiry from someone looking to avoid the EHT.

“The first question was, ‘If we build laneway on this property will we avoid the empty homes tax if we rent it out?’ I have never had that question before,” he says.

He says an effect of the market downturn has been a return to business on the west side of the city. When extreme wealth started pouring into west side neighbourhoods such as Point Grey, Mr. Fry’s business moved eastward because west side homeowners looked down on the idea of a laneway house rental, he says. Now that the market has slowed, new owners on the west side are open to the idea of a laneway house as a mortgage helper.

“When prices jumped up and people were paying exorbitant rates, those Point Grey people wouldn’t talk to us anymore, because why would they have a rental unit? It was déclassé,” he says. “So our work was moving steadily east. And now we are going back and finding more and more projects on the west side, because these homes are now staying as family homes.

West Vancouver realtor Dez Tsourpi says the bulk of her clients are investors and she is also a property investor.

“But I’m unique in that I purchase rental properties specifically to rent out – I’m not a flipper. I buy them specifically as part of my retirement plan to get a renter in there, pay [the properties] off eventually and have income down the road, because I’m self employed and I don’t have a pension. This is all part of my wealth building plan,” Ms. Tsourpi says.

She’s been referring her clients to property managers such as Mr. Mackenzie because they aren’t flipping presale condo assignments or newly built units as they used to. Ms. Tsourpi says investors have typically bought around transit such as SkyTrain and in walkable, desirable areas.

A low vacancy rate means they can demand high rents, she says. A typical one bedroom downtown is about $2,100 a month.

Seva Roberts, property manager for Re/Max, says he had to rent out a luxury house he owns in North Vancouver, B.C., to avoid extra taxes. He says he had tried to sell, but the market crashed.

He has a number of clients who are adding small basement suites to their secondary properties in order to qualify for exemption from the taxes. Only one dwelling unit in a multiunit property has to be rented for at least six months in order to be exempt. That means the main part of a house can remain empty and available for the owners whose primary residence is elsewhere, as long as there is a rental on the property.

The City’s director of financial services, Melanie Kerr, says that the addition of any new rental units, including basement suites, is “a positive.”

Mr. Roberts says his job has become an administrative quagmire because so many of his clients are offshore investors. He oversees rentals in Vancouver, West Vancouver, North Vancouver, Burnaby and Richmond. He says he’s now dealing with time-consuming audits on properties where the owner has failed to supply the appropriate documentation by deadline.

He says he has one client from Mongolia who’s looking at a $20,000 empty homes tax bill on his luxury Coal Harbour condo.

“It’s a different ballgame,” Mr. Roberts says. “Everyone has this other job now, to deal with these taxes. … It’s very, very frustrating.”

According to the City’s latest Empty Homes Tax Report, which will be updated in the fall, 331 out of 6,231 audited homeowners were found to be non-compliant with the EHT. Those owners were invoiced for the tax. Revenue generated from the audits for the first year, 2017, was $6.2-million. Total revenue earned from the EHT was $38-million, of which $17.4-million was outstanding.

Mr. Roberts says that for clients who aren’t yet permanent residents, he believes they are shouldering an unfair amount of tax burden. The EHT is one per cent of a property’s value and the provincial tax is 1 per cent of the value. As of this year, the provincial tax is two per cent of assessed value for foreign owners and satellite families. Foreign owners do not qualify for the principal residence exemption.

Mr. Roberts says the tax is forcing foreign owners to rent out the homes they own and live in and rent a place elsewhere.

“I have a lot of clients that are working on getting their permanent resident card and they own a luxury condo. One specific client, he owns a luxury condo and he’s building a house in Jericho. He has to rent out his condo instead of living in it to avoid the speculation tax. He has to go rent another place.

“So it’s forcing people out of their homes and now they are having to go rent other homes, which is interesting.”

Mr. Roberts says he’s heard of foreign owners who rent from other foreign owners and do a house swap on paper to avoid the two per cent tax.

“They just rent to each other and pay each other’s utility bills and just stay living in their houses.”

Ms. Lee says owners in that situation will run into problems when they get audited.

As to whether the new rental inventory is having an effect on affordability is another matter. Mr. Roberts says he’s not yet seeing it.

“For the person renting downtown who has a job, it hasn’t changed. The one bedrooms and two bedrooms are still hot.”

Ms. Tsourpi isn’t so sure, either. She says the taxes are having the desired effect. But she’s concerned that once the market goes up and homeowner-investors decide to sell their properties, those rental units could be removed from the market. The ultimate solution, she says, is government incentives that encourage the development of secure, purpose-built rental.

“In the long run, it’s investors who provide a lot of liquidity to the marketplace for rentals and if they don’t feel like they’re getting enough value and they pull out en masse, I don’t know what that will mean,” she says.

“We’ve seen a lot of ‘stick,’ but we haven’t seen a lot of ‘carrot,’” she says of housing incentives. “I’d like to see some carrot.”

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