B.C. government says goal of budget taxes is a housing price drop

VICTORIA — Finance Minister Carole James says the goal of her budget’s new housing taxes is a downturn in the market and a drop in home prices, potentially making the market more affordable but also potentially putting some existing homeowners under water on their mortgages.


James said Wednesday that her new taxes on speculators, foreign buyers and homes valued at more than $3 million will, she hopes, lead to a correction in a housing market that has experienced steep price increases for several years.


“We need to see a moderation,” she said. “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 and you’ll see a moderation.”


James was asked specifically if the goal was a decline in home prices. “Yes,” she said. “I hope we don’t see the kind of escalation you are seeing now in the market.”


A decline in house prices will undoubtedly be welcome by those who are priced out of the market. But it could also cause some recent buyers to suddenly see the value of their home drop below the price of the original mortgage they took out to purchase the property.


When asked about such a scenario, James said she thinks people will understand it’s necessary so that people can afford to live in the communities in which they work. She admitted her Finance Ministry has not done any modelling on how much the market could adjust because of her measures.


“We’re taking some very bold steps,” she said. “There are firsts here and we’re going to track it carefully.”


Her declaration sparked concern in the real estate and housing sectors.


“I can’t imagine a government telling homebuyers who bought a home in the last year that we are purposefully trying to put you under water,” said Cameron Muir, chief economist of the B.C. Real Estate Association.


“I’m fully in favour of having prices grow at a much lower rate. Ideally you’d want home prices to grow at our near the price of inflation and perhaps a little bit less so incomes can catch up over time. If home prices were arbitrarily driven downward by government policy there are large consequences to that in the marketplace, including builders pulling back on production so you’ll end up in another supply crunch down the road as well as you’d impact the overall economy.”


The Bank of Canada calculated in 2016 that a 15 per cent drop in housing prices would put one in eight mortgages in Greater Vancouver under water, with a 25 per cent drop meaning one in four mortgages would sink into negative territory.


Anne McMullin, president and CEO of the Urban Development Institute, said she’s not sure James means what she says, because a housing price drop could trigger a recession. It’s a politically popular line, said McMullin, even if the reality is complicated because the same homeowners who want to see cheaper prices so their kids can buy a home also want their houses to retain their higher values so they can pass on their equity or use it for retirement.


“Probably what she’s saying is we don’t want prices to keep going up, that’s fair,” said McMullin. “But she was struggling with a political statement she thinks the public wants to hear. Which I understand. I don’t envy her. I don’t think she’s trying to crash prices. They’d have to be cut in half in order for the average person to buy in the City of Vancouver.”


Josh Gordon, a Simon Fraser University assistant professor in the school of public policy, said he thinks James is making the right move by trying to trigger a market drop.


“Prices do have to come down a decent amount if we’re going to get back to affordability and that will mean some of the people who bought in recent years will be underwater on their mortgages,” he said. “That is an element of the situation that’s unavoidable if you are going to achieve affordability.”


“It can create some economic problems which is part of the reason why you should not allow a housing situation to get to this place in the first place, which is the fault of the B.C. Liberals, not the NDP,” added Gordon.


“The problem with accepting the status quo in terms of prices is it would always be an unaffordable market. So if you ever want to achieve affordability, you will have to bring prices down and that is going to lead to some people having to take a hit.”


Muir said a smaller correction could be brought onto the housing market without causing too much pain.


“The market can easily withstand a 10 per cent price correction,” he said. “That’s certainly not inconceivable over the next few years as we have headwinds in the market, as this current cycle comes to an end, and as we have a large number of units in construction come to completion in the housing stock.”


Overall, the NDP’s new housing taxes, combined with a plan to invest $6 billion to create more than 33,000 new housing units over 10 years received mixed reviews from the real estate and development sector.


“There was a huge pile-on of taxes, a total about $500 million a year in taxes, which we don’t see as having any positive impact,” said McMullin.


“We’ve had all those taxes in place already and you don’t tax your way out of a housing situation. The one positive note was there was a huge recognition that we have a supply problem and they are earmarking $6 billion over 10 years to try to address that supply problem. However there was nothing in the budget to incentivize or compel municipalities to deal with the approval process, that’s a huge add -on of cost. ”


James faced similar criticism by some at a Greater Victoria Chamber of Commerce appearance Wednesday, during which she said her budget aims to encourage municipalities to build by exempting the provincial school tax from areas zoned municipally for affordable housing projects.


McMullin said the government needs to include other incentives and penalties, such as making it law that municipalities have to follow their regional growth strategies, linking subsidies for rental buildings to expedited municipal approvals, and making transit funding contingent on nearby zoning density.


“What I said to the premier not that long ago was unless they deal with the municipalities they will not have one single unit built before the next election because it takes four to five years,” she said.


McMullin also said more construction labour is needed, noting the government plan will result in a 25 per cent increase in building units and stretch the supply of available workers.


The B.C. Real Estate Association supports the 114,000 unit housing goal over 10 years, said Muir, and praised the provisions in the budget that will set up a registry for condo pre-sale contracts as well as requiring the disclosure of beneficial ownership of companies involved in sales.


The increase in the property transfer tax on homes worth more than $3 million “makes a lot of sense,” said Muir. “You’ve got wealth individuals in a progressive tax system should pay more,” he said.


But Muir panned the increase of the foreign buyer tax from 15 to 20 per cent, and its expansion from the Lower Mainland to Greater Victoria, the Okanagan and the Fraser Valley. He said the previous Liberal government’s introduction of that tax had little affect on the market, because foreign buyers are such a small percentage of sales. “The ability of the foreign buyer tax to have any impact on affordability is negligible to none,” said Muir.


Gordon praised the speculation tax, which will levy a two per cent surcharge on properties annually but provide exemptions for those who pay taxes in B.C., as well as for principal residences and long-term rental properties.


“They have in quite a fundamental way, although the details are sketchy, reshaped the tax landscape with the speculation tax,” said Gordon. “The big (problem) in Vancouver prior to this was you could lead a wonderful life and own expensive property while only contributing minimal amounts in terms of income taxes. That favoured foreign buyers … over local citizens. The speculation tax addresses that.”


James said Wednesday that the tax will apply not only to foreign buyers, but people from other Canadian provinces who own second homes in B.C.


“If you are from outside the province and leave your home vacant you will be taxed,” she said. “If you want to ensure you don’t pay the tax, you put your house on the rental market and encourage people to rent it.”


British Columbians with multiple properties “are not subject to the speculation tax if they pay income tax in British Columbia,” said James. “That will come in their income tax forms as a refund.”


McMullin said the speculation tax is more of a vacant homes tax. “It will penalize people from Alberta and Ontario and anybody,” she said. “Even local buyers. It’s really an empty homes tax, and a B.C. income tax.”


Click here to get the latest update on BC Speculation Tax


Source: http://vancouversun.com/news/politics/government-says-goal-of-budget-taxes-is-a-housing-price-drop

Share this:
Share on facebook
Share on twitter
Share on linkedin