Everyone held their breath to see what impact the 15% Foreign Buyer/Non-resident tax would have on property sales and more importantly on prices. So far the answer is not much change. The sales numbers were declining in the past three months and continued to do so in August. The increase in sale prices since August 2015 for detached homes in North Vancouver is 42.2%; Richmond 43.6%; Vancouver East 35%; Vancouver Westside 34.2%; West Vancouver 38.1%. This level of annual increase is unsustainable and many speculators/foreign investors have taken their profits and are looking elsewhere for a place to park their funds. The highest end of the market and new homes are particularly affected as they were largely purchased by off-shore non-resident investors who fall under the Foreign Buyer tax.
The sales numbers were down by 26% compared to August 2015.This reflected a lack of inventory of well-priced homes. There are rumours that the cash flow from Mainland China is heading to the Toronto real estate market where the composite benchmark price for all classes of real estate is $710,410 compared with $933,100 in Metro Vancouver. So far Ontario has not imposed a second level of Property Transfer Tax that impacts foreign buyers. However,Toronto itself has a double Property Transfer Tax, just not as onerous as the one in Vancouver.
There is lots of action at the resale townhouse/condo level. Most are local buyers. Still, the sales are down due to a natural human tendency to want to buy when everyone else is buying. There is still lots of wishful thinking on the affordability issue by the public and the provincial government. Buyers are hoping for a big price drop and don’t want to make a decision in case that happens.
Much of the larger condo market focuses on pre-sales of units before the developer starts building. These sales are not yet completed so are not reported in MLS statistics. According to the Vancouver Sun projects are selling out from the plans and there are no new finished units hitting the market. These projects are sold out even before the general public can line up for them, especially the smaller units. Developers and their marketing companies appear to favour investors who don’t require too much handholding or trouble qualifying for a mortgage and who may sell their contract before completion thus paying the developer another level of profit. Banks require projects to be substantially sold out before advancing construction loans. According to the Fifth Avenue Marketing report at the end of the second quarter there were only 42 presale units listed for sale in downtown Vancouver and all were over a million dollars. The projection of pre-sales for 2016 is in the range of 18,000 units throughout Metro Vancouver. Pre-sale condo sales stats are not collected by CMHC or the MLS system.
As the sales are all in the future the Foreign Buyer Tax has not applied to them yet. The Property Transfer Tax is paid by the purchaser when the title to the unit changes hands from the developer to the buyer. There are no stats yet on how the Foreign Buyer Tax has impacted this segment of the market. There is speculation that many investor buyers will find a way to get around the tax by selling the contract before completion.
The Toronto condo building boom is attracting investors from all over the world, particularly Mainland China and as it is so much larger than the Vancouver market there is lots of room for investment at a lower price point. In Vancouver at the high end of the pre-sale downtown condo market the price per square foot is $1,500-$1,700 and they are selling out.
There are other influences in BC which may impact the desirability of the Vancouver market for Mainland Chinese immigrants/investors. The Vancouver Sun highlighted this issue. The BC Supreme Court has allowed the government of China to pursue Chinese citizens who fled China with fraudulently obtained funds. In 2015 the BC Supreme Court awarded $670 million to the Bank of China from a couple who live in West Vancouver and who laundered stolen funds through real estate purchases and Canadian bank accounts. The Chinese government is seeking the ability to have BC judges enforce monetary judgements awarded by Chinese courts. They are looking closely at BC and the US as favoured destinations for Chinese fugitives.
The Globe and Mail over the past few months has contributed to the awareness of criminal behavior in the real estate market in Vancouver. An article on a serial investor who declared each property as a principal residence of his Chinese client who was then exempted from capital gains tax by CRA who never investigated any of the claims despite having documentation delivered to them. The system of speculators make their fortune from wealthy investors in China who pay the costs and whose name is on a mortgage from a Canadian bank while the speculator with power of attorney manages the investments, sells at the right time and pays a set percentage to the Chinese investor and pockets the profits. In the meantime these wealthy Chinese speculators live in multi-million dollar homes and declare incomes of $45,000 a year to the Canadian government. Thanks to the publicity from the G&M articles the BC Finance Minister is pressing the Canadian Finance Minister to look into all the fraudulent real estate practices that go unreported. CRA found $14 million in audits of 339 foreign owners last year when they should be finding hundreds of millions in unpaid, unreported taxes.
The Harper government is largely to blame as the real estate market boomed and they closed down audit departments, relocated experienced people to other departments and then hired inexperienced auditors who knew nothing of taxation of foreign residents. CRA does not require any statement of principal residence and don’t know and don’t care if it is a fraudulent claim. It may be that the Christy Clark government getting their election ducks in a row will be able to deal with some of this fraud and criminal behavior. It is generally accepted that all levels of government have been frightened of being thought racist and politically incorrect as the larger number of fraudulent transactions are orchestrated by and invested in by some crooked Mainland Chinese immigrants and investors. The main culprit is the Government of Canada, both Liberal and Conservative who were so foolish and naïve with the Immigrant Investor Program. No wonder the 60,000 people left on the waiting list when Jason Kenney closed it down sued Canada to be allowed in.
Many local and foreign buyers are choosing to live or invest in other places in BC. Victoria and Kelowna are doing well. In Vancouver the public closely focuses on real estate. It is the main topic of conversation everywhere. It is narrow in its viewpoint. In fact the globalization of the world and the money that flows to the easiest and most lucrative place is impacting every country. Auckland NZ is the new recipient of the Vancouver treatment. Homes in Auckland are selling for over a million NZ dollars to investors, mainly from China. The government has responded by requiring a 40% cash down payment on any purchase by a non-citizen. Everyone is trying something. In Canada we could start by enforcing the rules we do have.
There will be more info coming out about the effect of the Foreign Buyer Tax over the next few months. It will impact the market but there is a balancing point where the government does not want to destroy the equity of its most reliable voters in a losing battle to make Vancouver affordable again.