B.C. Finance Minister Carole James made a candid admission this week after introducing a budget that targets foreign home buyers and speculators.
Yes, Ms. James told reporters, she'd like to see real estate prices fall in the province.
"We need to see a moderation," Ms. James acknowledged. "My hope is by addressing both supply and demand, you will see more supply in the market and that will ease some of the cost pressures."
A soft landing is one thing. But B.C. is using public policy to orchestrate a housing correction.
The motivation is laudable. Rising prices are putting the dream of home ownership out of reach for a generation of young people in the province. The average price of a home in the Greater Vancouver area – condo or house – now tops $1-million, up 26 per cent in the past three years alone.
The danger for B.C.'s NDP government is that its bold experiment in market manipulation causes collateral damage. The tax could chase away lucrative tourism and investment business. And if Ms. James gets her hoped-for real estate correction, it could push many stretched home owners into default, depress others' retirement savings and even trigger a recession.
The most controversial measure in the budget is a tax of 2 per cent a year on the assessed value of homes left vacant by out-of-province owners – what the government is calling a "speculation tax." B.C. estimates the tax will hit roughly 15,000 properties and bring in $200-million a year in revenue.
B.C. is also increasing the tax on residential resale transactions by foreigners to 20 per cent from 15 per cent, and extending its reach from Vancouver to the Fraser Valley, Central Okanagan and parts of Vancouver Island. And it's raising the property transfer tax on homes worth more than $3-million.
The B.C. government isn't saying exactly how it expects all these measures to affect house prices or resale activity. But it's projecting that housing starts in the province will tumble 27 per cent this year.
Residential construction activity has been a key driver of the B.C. economy in recent years. The sharp drop in starts will slow economic growth, and exacerbate the housing supply shortage in the years ahead.
The tax on vacant properties will undoubtedly hurt tourism. Many foreigners and Canadians from other provinces own vacation properties in British Columbia, which may be unoccupied much of the year. The tax – $40,000 a year on a $2-million property – could cause many of them to invest elsewhere. That would damage the province's tourism industry.
Meanwhile, the clear message B.C. is sending to the world is that non-residents are not welcome in the province because they're disrupting its real estate market. And yet, the real culprits may be low interest rates, inadequate housing supply and strong economic growth.
Turning away foreign buyers could have effects far beyond the housing market. Fewer buyers means less business investment and consumer spending. Some investors may choose to buy in Toronto or elsewhere instead.
A correction in housing prices would trigger a host of other unintended consequences. While lower prices are great for prospective buyers, they are unequivocally bad for current owners, many of whom borrowed heavily to get into the frothy market. The Bank of Canada, for example, has estimated that a 25-per-cent price drop would put nearly one in four mortgages in Greater Vancouver underwater – a precarious situation where a property is worth less than the mortgage.
A correction of that magnitude could push the province into recession.
Even homeowners with more manageable debts, or no mortgage at all, would see their expected retirement nest egg shrink if prices fall. For some, that would mean less money to pass on to their children to buy homes of their own.
On the other hand, there is no guarantee that the measures will send prices lower, particularly if economic fundamentals, not foreign buyers, are the main cause of skyrocketing B.C. real estate prices. Toronto-Dominion Bank, for example, is forecasting a relatively modest 5-per-cent price correction.
Other provinces experiencing housing affordability challenges, such as Ontario, would be wise to take a long hard look before following B.C. any further down the path of home-price engineering.
The downside risks are many and the potential gains are uncertain.