August 25, 2016 | foreign investment
August 2nd has come and gone. So, it’s official. The Metro Vancouver area will now add 15% to all foreign buyers who purchase in the Metro Vancouver area after this date. The fallout of this has yet to be determined. There has been a rush for many foreign buyers to complete their transactions before the August 2nd deadline. Who could blame them? I would do the same thing. But the question now becomes: where will the foreign investors go after Vancouver?
Some real estate enthusiasts and trackers have already mentioned that this added tax has had an impact on the Vancouver market, even weeks after its inception. Understandably, many foreign buyers may not see value in an already expensive market like Vancouver that now has an added 15% tax. As Canadians, we have not seen a tax on foreign real estate investors in Canada. The idea of one may seem novel and a fresh idea to combat high prices to some, but it isn’t a new idea.
Similar taxes on foreign investment existed before August 2nd of this year in different manifestations to keep foreign investment in check in Australia, London, Switzerland, Mexico and Hong Kong. Vancouver is the first place in Canada, however, to impose such a tax. Everyone will be watching it very closely to see if home prices are effected.
To give you some context. Prices in Metro Vancouver were $930,400 in July 2016, up 32.6% compared to July 2015.
And no, there are no typos in that previous sentence! 32.6%. Prices are clearly roaring ahead for many reason like limited land supply and low interest rates, but many believe home prices are higher because of foreign investment in Vancouver. I don’t think I have seen any collected stats on this, so, I am not comfortable saying just how much foreign investment ramps up price in Vancouver. I don’t work in Vancouver real estate, so I do not have an on-the-ground feel for just how foreign investment is playing out in that city. I do work in Toronto real estate though.
To provide a bit of context, Toronto's average home prices landed at $709,825 in July 2016 up 16.6% from last year.
Not as stunning/terrifying as Vancouver, but still impressive. There seems to be less concern over foreign ownership here, but we are being watched closely for two reasons:
- We’re the New Vancouver, But So Are Other Cities. Foreign investors may find Toronto more appealing since we don’t currently have the 15% tax and our prices are lower. It is believed that Toronto does not have the same level of foreign investment as Vancouver at the moment. With that said, I don’t expect we’ll see a flood of foreign buyers as much as an uptick. They will find Toronto appealing, but they will also look toward other western Canadian cities. Calgary and Edmonton may see more interest from foreign investors particularly from Asia.
- We May Be Next. I think it is a possibility that the government will use the foreign tax as a way to tame the real estate market, even if foreign ownership is not a problem in Toronto. If prices level off in Vancouver, the government may see this as a valuable tool to tame rising real estate prices. They have been somewhat helpless so far by mostly picking on first time buyers, and making it tougher for them to get a mortgage while still keeping the rates deliciously low. So, even if foreign investment does not play a big role in Toronto’s real estate market as Vancouver’s real estate market, it may be used as way to dampen the market and show the country that the government can find ways to control their real estate market here.
Back to Vancouver, I think this foreign tax will be interesting to monitor. Because we, as a country, do not keep very good records of foreign investment we don’t really know how much investment is going on, and it may be very different from one city to the next. It may have a big impact on Vancouver or it may not. There will likely be some short term change as people pull back from the uncertainty of it, but I’m not sure if it will change the Vancouver housing market in the long run. If a tax like this came to Toronto, I don’t believe it would have the same sort of impact it would have on Vancouver. When I look at cities around the world that have added such a tax on foreign real estate investors, I don’t see cheaper real estate prices in those cities. London, Sydney and Hong Kong have some version of a non-resident real estate tax, but as you probably already know, these are still some of the most expensive cities in the world.