Josh Gordon is an assistant professor in the Simon Fraser University School of Public Policy.
Many have been caught off guard by the B.C. government's announcement that it would start taxing foreign buyers of residential property in Metro Vancouver. For those who have been watching the polls, though, it's not quite as surprising.
The anger in Vancouver around the housing affordability crisis is palpable, in particular around the role being played by foreign capital. It was always going to be difficult for the B.C. Liberals to refuse any kind of policy action on foreign ownership before the next election.
This move gives them a bit of breathing room. And it should. While it is not sufficient in relation to foreign ownership, it's a good start, even if it's several years too late.
First, let's consider "the good." This kind of a policy is an important component of a long-term strategy to bring the local housing market back in line with the local labour market. The tax will do a few important things. For one, at 15 per cent, it will discourage foreign buying in Vancouver real estate, since foreign buyers are not completely price insensitive, contrary to popular belief. In short, it will make other destinations for foreign capital more attractive. To the extent these buyers are price insensitive, then British Columbia will get a good deal of tax revenue, and this can be put toward worthy public purposes.
Most important, the tax will affect buyer expectations, local and foreign. If buyers perceive the tax to be an effective mechanism to curtail foreign buying, and as a sign of further action to come, then expectations of price growth will moderate substantially. This will give local buyers pause, weakening the "fear of missing out" mentality that has helped drive prices sky-high. And it will also be a signal to those counting on price appreciation, including but not limited to speculators, that selling soon might be a good idea.
Combined, these reactions will likely slow price growth substantially and may even turn it around, if the experience of Hong Kong and Australia are any indication.
Second, though, there is "the bad." This policy will only address a fraction of the foreign capital entering the Vancouver real estate market. Since it only affects new purchases, earlier purchases on the basis of foreign capital will be untouched, and money will continue to arrive to fund these mortgages.
As well, it will not be able to stem foreign buying that occurs through local proxies. Not all foreign buyers will want to buy through a proxy, but given the new tax, many might opt for it now.
Lastly, it does not address the purchases that will take place by newly arrived, non-working permanent residents with substantial wealth, including those admitted through the Quebec Investor Immigration Program (QIIP).
What these weaknesses indicate is that further policy action will be required to truly re-establish affordability in Vancouver. The most promising step in that direction is something similar to the policy proposed by my colleague Rhys Kesselman. It is a progressive property surtax that can be offset by Canadian income tax paid, with seniors effectively exempted. What this structure does is target the surtax to those who have paid for housing with foreign income or wealth, and who do not plan to work and pay income taxes in Canada. At the high end, the property tax rate reaches 3 per cent annually, which is nothing to sneeze at, especially if price growth slows or reverses.
In the meantime, further action can be taken by the federal government and law enforcement bodies to tackle "the ugly." The federal government should cancel the farcical QIIP, which encourages a particularly perverse form of wealth-based migration, and which has been shown to be a net loss for Canada. In addition, law-enforcement bodies, including the Canada Revenue Agency and the Financial Transactions and Reports Analysis Centre, should begin to crack down on tax evasion and money laundering in a much more concerted way. The B.C. New Democrats' proposal for a dedicated "task force" in this area should be looked at seriously.
Ultimately, this problem is not going to be solved overnight. Nor should we want it to be. Doing so would send the market crashing and put the financial system at risk. People who are justifiably angry will call on social media for more draconian and immediate steps to address the problem. But they should temper those calls with the understanding that a soft landing is far preferable to a hard landing, for all concerned.