A day late and a dollar short. The Foreign Buyer Tax will never create affordable housing in Vancouver again. Even with wild price swings a 25-30% drop in price will only negate the increase of the past nine months. The benchmark price for a detached home in Metro Vancouver is $1,579,400, a 33.7% increase since September 2015. In Vancouver Westside where the wealthiest foreign buyers purchased properties the benchmark price is $3,624,300 in September 2016, a 32.1 increase since September 2015, a 62.1% increase since September 2011 and a 186.7% increase since September 2006.

There was a rush to close deals by July 29 before the Foreign Buyer tax increase to the existing Property Transfer Tax should be enacted on August 2 so the August and September sales stats are probably not a true reflection of the market. There was a price increase of 0.1% in September 2016. A truer picture will emerge in October and November stats. Sales for September were 9.6% below the 10-year sales average for the month.

Not actually that still by Kenny Louie

It’s been clear to longtime realtors in the Metro market place that the regulation of foreign investment should have begun by 2007 as affordability waned and the trajectory of the market became obvious. The later wave of speculators taking advantage of Canada’s lax finance and money-laundering laws used the Vancouver real estate market as an easy way to collect unreported capital gains on a false principal residence declaration while their dirty money came out sparkling clean on resale of the property. And then more dirty money was dropped into the next property to repeat the process.

It appears that the Finance Minister and the provincial and federal governments have had the scales fall from their eyes and enforcement and stricter rules are now in place. However, there is always the problem of inspecting what you expect. According to reports both levels of government are sorely lacking in experienced audit and reporting staff to be sure that these false claims are disproved and the tax funds are collected.

In a large housekeeping sweep of the mortgage rules and in an effort to offload some of the liability from the federal government to the banks granting the mortgages qualification levels have been redrawn to require more of the borrower and the bank. A mortgage insurer in the secondary insurance market stated the previous CMHC arrangement with the banks to fully insure the loans of borrowers with less than a 20% down payment turned what would be sub-prime mortgages in any other country into gilt-edged government backed securities in Canada. Our guaranteed loans are unique in the world. When borrowing amounts were not so high the liability of the Government of Canada was more manageable. It’s a system that allowed a broader based home ownership and helped to prevent financial meltdown in the 2008/2009 Great Recession.

Real Estate Market Repot September 2016

The new rules of requiring mortgage applicants to qualify at higher rates will reduce a buyer’s pre-approved price point by about $75-100k which places Metro Vancouver townhomes and condos more out of reach for many buyers, causing an even greater strain on the non-existent rental inventory.

The RBC CANADIAN HOUSING October 12, 2016 Vancouver housing market: cooling but not collapsing report was extremely clear in its analysis of the current and future conditions of the Metro Vancouver housing market . We have quoted extensively from pages 5 and 6:

While we expect purchases by foreign nationals to recover partially from the drop in August in the coming months, the new tax has introduced a thick layer of uncertainty.

Vancouver is still attractive for international investors:

We have no doubt that the new tax will put a damper on foreign buyer interest in Vancouver in the near term; however, we believe that Vancouver will continue to attract investment from wealthy individuals— especially those from China given the strong connection already established—once the initial shock from the tax has run its course. Vancouver offers a sought-after lifestyle and prestige for wealthy Chinese that only a handful of other international cities can boast. These cities include Hong Kong, Singapore, Sydney, Melbourne and London—all of which impose some form of restrictions on foreign buyers (e.g., special stamp duty or capital gain tax). The new tax, therefore, is unlikely to be a major deterrent for wealthy investors. Compared to the peer group, Vancouver high-end properties still appear to be ‘affordable’ despite looking excessively expensive from a Canadian perspective.

Strong base and flow of wealthy immigrants:

An arguably even more powerful force in the Vancouver-area market is the strong base and inflow of wealthy immigrants that keeps fueling homebuyer demand, especially at the higher end of the scale. Over the years, Vancouver has attracted a disproportionate share of investor-immigrants under the former Canadian Investor Immigrant Program (cancelled in 2014), which channeled substantial wealth into the city. A similar, and still operating program in Quebec reportedly maintains a strong flow of wealthy Chinese immigrant-investors in the Vancouver area to this day, as immigrants are not legally bound to settle in the province of application. High net worth immigrants are drawn to Vancouver for the same reasons as foreign investors (desirable lifestyle, political and economic stability, and prestige), as well as other factors such as good schools, clean environment and the ‘global passport’ that Canadian citizenship offers. We expect that Vancouver’s ‘brand’ will remain strong among wealthy immigrants, as will housing demand from them.

Speculation:

A grey area that could potentially tip the market over. By our reckoning, much of the market frenzy between early 2015 and early 2016 was due to factors other than local fundamentals, and we suspect that buyers motivated by expectations of capital gains have played a prominent role. Admittedly, speculative activity is much of a grey area with limited hard data to track. Statistics released earlier this year by the provincial government would indicate only a small uptick in property flipping (homes resold within 12 months of first purchase) recently; however, we believe that speculators have tended to hold on to their residential investment to capitalize on rapid price appreciation at a time when returns on other types of investment have been significantly lower. Importantly, a downgrade of capital gain expectations have the potential to alter housing investment dynamics considerably, even turning speculators from buyers to sellers. It is important to note that a sharp change in sentiment would not be out of character for the Vancouver market. Home prices in the area historically have been notoriously volatile, recording some of the larger cyclical swings (both up and down) among major Canadian cities."... RBC CANADIAN HOUSING October 12, 2016

At this time prices have come down a little on higher priced properties, sales volumes are lower which was occurring before the Foreign Buyer Tax and is also a characteristic of the late Fall market in most years. The major adjustment appears to be the lack of urgency displayed by buyers. Everyone is waiting for the other shoe to drop.

JB00DT