Vancouver’s housing market has been the destination of choice for foreign capital investment for some time. The end result has been an arguably overheated market, one in which domestic buyers have been largely priced out of housing opportunities.
The province responded in early August, in an attempt to curb further price increases, with the introduction of a significant foreign buyers housing tax. Prior to the introduction of the tax, residents paid a 1 percent tax on the first $200,000 worth of their real estate purchase, 2 percent on the remainder of the purchase price between $200,000 and $2-million and 3 percent above $2-million. With the introduction of new legislation, foreign buyers will be subject to a 15 percent transfer tax on their investment.
With such a dramatic increase in the cost of investment, we should expect international residential real estate investors to re-evaluate how they are allocating capital across different markets. As they do so, we can expect several possible changes to the real estate investment landscape in Vancouver, but also in other high-value investment property markets such as the Greater Toronto Area.
The Outlook for Vancouver
The outlook for Vancouver will depend largely on foreign investors’ view of the continued relative desirability of its residential investment property market at the now considerably higher price point. The possible economic outcomes are straightforward. Foreign investors may prove insensitive to the transfer tax, and thus we would expect investment levels to remain relatively high. This would represent a large tax revenue increase that the B.C. government could use to expand the housing supply, alleviating pricing pressures on resident buyers. It is also a possibility that in the medium to long term, foreign investors will move to play in lower value but still attractive segments of the Vancouver real estate investment property market, where the absolute burden of the transfer tax is relatively lower. This kind of response will weaken the intended impact of the transfer tax, as there will be higher demand at lower price points, serving to drive what may currently be considered affordable housing prices upward.
Finally, we may also see residential real estate investment dollars flow out of B.C. toward now relatively more attractive opportunities in other provinces.
The transfer tax has only been in effect since August 2nd, but early indications suggest that its introduction into an already declining market has coincided with an accelerated decrease in housing sales in the month of August, where sales fell a whopping 65.7 percent year over year. Anecdotal evidence has also pointed to a number of cancelled deals both on the part of foreign buyers who were not expecting to be subject to the 15 percent tax and by domestic buyers who are expecting to see falling prices as the impact of the transfer tax on demand is felt. Moving into 2017, TD Bank analysts are forecasting a drop in sales activity by 10 to 15 percent over the next six months, at least in part due to the corrective influence of the transfer tax.
Toronto Residential Investment
A reallocation of foreign investment away from Vancouver seems very likely to mean an increased presence of international real estate investors in the GTA. Financial markets move very quickly, and thus if the transfer tax has indeed incentivized a reallocation of funds, we should expect this to happen sooner than later. Since publishing our article in Gulf News a couple of weeks ago – Vancouver’s new realty tax is a deal-breaker – we have seen a surge in Asian Investors looking to buy prime real estate in the greater Toronto area and/or shopping for property management and rental services for new purchases. Surrounding areas with established single-family homes, communities such as Oakville, Richmond Hill, Markham, and North York are among those seeing the fiercest bidding to secure a purchase.
The average cost of a home in the city of Toronto in June was $746,546, up nearly 17 percent from the same month last year, according to the Canadian Real Estate Association. By contrast, the average cost of a home in Vancouver in June was $1,026,207, up only 11 percent. With the average additional cost savings of $111,981 created by the Vancouver transfer tax and the higher average rate of growth, Toronto real estate is now a very attractive, stable alternative for finding investment property opportunities.
Toronto has also been experiencing what many would describe as an overheated real estate market, and new investment flowing into the market may fuel further unsustainable price increases. The Ontario Government will need to keep an eye on how the real estate market develops to gauge whether and when a similar tax response may be required.
We will be keeping a close eye on the Toronto real estate market as well as other high-value markets such as Victoria and Montreal; International investors will want to do the same as they make decisions about where to best place their property investment dollars.