People across Canada continue to debate whether Vancouver’s hot real estate market is messed up or just a result of high demand, low supply. For some the solution to this hot, crazy west coast market is to let the market dictate the highs and potential lows. For others, however, intervention is not only needed but essential. Here are eight possible solutions to Vancouver’s crazy real estate market.
No. 1: More data
Would you invest in a stock knowing little more than the ticker name and the asset class it belongs to? Of course not! The more informed you are, the better chance you have of making a good decision. The same applies when creating rules and regulations. If governments and provincial associations want effective regulations then they need information and accurate data. The more information they have and the better the data, the better prepared they are to create a long-lasting solution, not a temporary fix. It’s the reason why Andy Yan, an urban planner and professor at UBC, has consistently lobbied for governments and developers to focus on making data on housing and ownership trends more accessible.
As an internationally respected urban planner, Yan has worked in New York, Los Angeles, San Francisco among other places and he is surprised at the relative lack of transparency of Canadian real estate data. In a Vancouver Sun article, he challenged politicians and industry leaders to follow other world-class cities in making real estate data “a lot more open, detailed and accessible.”
Even though Yan is known for his data digs and headline-catching reports, he’s frustrated that he must find innovative ways to search out data. While his analysis is insightful, it’s also limited by complete access to accurate data. To complete a proper analysis of homeownership and investment trends in Canadian real estate, he needs full, unbiased access to that data.
Part of the problem is that many of the institutions that collect real estate data aren’t public. For instance, real estate boards collect statistics on the number of homes listed and sold. This data is made public by the boards, but the data isn’t accessible to the public without the authority of various municipal and provincial real estate boards.
Part of the problem is that the Canadian government has been slow to collect other, specific data sets—data sets that other countries have tracked and used to set regulations. For instance, Mexico created restricted zones, where foreigners aren’t allowed to buy land; Switzerland imposes quotas on the number of homes that can be bought by foreign investors; Hong Kong charges a 15% non-resident tax. Other countries that collect and use data for housing regulations include: the USA, Britain, Australia and even Thailand. (Read the excellent article in Maclean’s on how countries around the world regulate foreign land purchases.)
There are those, however, that feel that there is already enough evidence to how the “role of foreign money” in driving up the soaring property prices in Vancouver. In a recent Globe and Mail opinion piece, Josh Gordon, assistant professor at Simon Fraser University, and Anjum Mutakabbir, a master’s student at the university’s School of Public Policy argue that there are three main data sets that provide evidence of foreign investor impact on the lower mainland’s housing prices. This evidence includes: the history of the business immigrant program, recent studies of ownership of high-end homes and recent fluctuations in prices.
Yet, the federal government still does not create rules or regulations when it comes to foreign investors in Canada’s housing market. But by pledging to spend half a million to gather data on foreign ownership of Canadian real estate, the Trudeau Liberals are signalling that this issue is on their radar.
No. 2: Stiffer penalties
Another possible solution to the crazy Vancouver real estate market is to establish stiffer penalties for real estate agents who breach the laws that regulate the industry.
In February, the Real Estate Council of British Columbia (RECBC), in response to allegations made against B.C.’s real estate industry, launched an independent advisory group to examine and make recommendations on bigger penalties and a simpler, better complaint process.
In early April, RECBC published an interim progress report. As expected, the advisory group recommended: bigger penalties, a ban on “double ending” (when one realtor or brokerage represents both the buyer and the seller), and making it mandatory for agents to report all assignment sale contracts directly to RECBC.
At present, B.C.’s maximum fine is $10,000 for a breach in the regulations. In Alberta and Ontario that maximum fine reaches $25,000.
Even with these recommendations RECBC is limited. As a regulatory board, it was established to enforce the current legislation—it actually does not have the authority to make new rules. The hope, however, is that through an independent examination by an independent advisory group the weaknesses within the current regime—such as insufficient fines for misconduct—will be revealed and, eventually, solved.
No. 3: End of self-regulation
The early April interim report released by RECBC’s independent advisory board was the first step in changing outdated or insufficient regulation that dictates real estate agent conduct. Yet, the most interesting part of this report was their criticism of using self-regulation to police real estate professionals.
In a letter to the chair of RECBC, the advisory board states that the task force is considering whether or not self-regulation is adequate for the multi-billion dollar industry. The justification given was that: “Public confidence in the integrity of the real estate services sector and its regulation has been shaken. The public has rightfully questioned whether the self-regulatory powers granted to the real estate services industry continue to be appropriate and whether the industry is adequately fulfilling its obligations under this regime.”
The advisory group also questioned the power these and other trade organizations have in the overly-heated Vancouver real estate market. The concern is that these real estate trade organizations have taken on quasi-regulatory functions—regulating a membership group that they rely upon for support. This leads to blurred lines and “appears to dilute responsibilities and accountabilities.”
No. 4: Change how we tax
Last year, after speaking with the venerable economics professor Thomas Davidoff, I wrote about one option that would certainly help cool the actions of speculators and real estate investors in Vancouver’s heated real estate market. Tax housing, not income.
In Canada, we currently don’t pay tax on profit earned from the sale of our primary residence. We do, however, pay progressive tax on the income we earn—and for UBC’s Sauder School of Business professor, Davidoff, this is a problem. (For more on his own example of how “dumb luck” in real estate gave him more rewards than all his hard work earning a PhD, see my column: “Interest rates stay the same, so do hot housing prices.”)
Davidoff suggests the federal government tax capital gains made on the sale of a property. By taxing property profits, you reduce the number of speculators and real estate investors who help to inflate housing prices. Of course, “these changes are politically challenging,” says Davidoff, “Homeowners are a politician’s biggest voting block.”
Still, to appease homeowners, politicians could create a progressive home-sale tax. “The U.S. allows homeowners to shelter some gains, but taxes all profit above a certain threshold,” explains Davidoff. Or, they could continue to do nothing: putting housing affordability for the many before the political aspirations of a few. Continue down this path and middle-class Canadians will just have to accept that $1 million for an average home is the new norm in Canada.
Another controversial option is to consider implementing a tax specifically for foreign owners or non-residents who purchase property. This is what other countries have done. For instance, in Hong King foreign-owners must now pay a 15% surcharge on property purchases. In Singapore, there is a “stamp tax” on foreign buyers and Australia implemented a policy some time back that only allows foreigners to purchase new build property (and forces temporary residents to sell their property when they leave the country). In Britain, data analysts have been tracking a surge in luxury home purchases by Russians, Malaysians and other foreign investors. Now, UK politicians are proposing a levy on buyers who leave their properties sitting empty.
No. 5: Plug the property tax loopholes
Another option is for the provincial government to review and amend how it implements property transfer tax in B.C.
At present, the property transfer tax in this western province is 1% on the first $200,000, 2% charged on any portion up to $2 million, and 3% on the remainder. But here’s the thing: Most first-time homebuyers are exempt, at least for those buyers who purchase a property worth less than $475,000, as of Feb. 19, 2014.
This exemption allows some wealthy buyers to use a tax exemption that saves them from paying tens of thousands to the B.C. government. (To give you an idea of how lucrative this tax is, it’s expected to bring in $1.5-billion in revenue in 2015/2016.)
Another way wealthy foreign property buyers avoid paying property tax is to use bare trusts. According to News 1130, a property owner will set up a bare trust and then create a company as the owner of the trust. That company will purchase a property. The property can then be sold and resold within the bare trust but the company’s name remains the same on the title—meaning tax is never owed, despite multiple transactions.
This was the case with the recent sale of 1065 Nelson Street in Vancouver, purchased by a company called Nelson Street Residence from Suncom for $68-million. According to the News 1130 article:
The company’s director Shan Gao avoided paying the property transfer tax of more than $2-million because the name on the title was left the same.
This practice is common in commercial real estate–and perfectly legal. Sources have told CTV News that the strategy of avoiding the tax is being used with high-end residential sales as well.
Another reason why bare trusts are popular with wealthy non-resident homebuyers is that it shelters them from having to disclose whether or not they are Canadian citizens—a disclosure that is not yet a requirement, but may soon be if the B.C. government passes legislation.
Provincial Finance Minister Mike de Jong says the government is working on closing the loophole but it could take months.
Closing this loophole needs to be a top priority for the provincial government. But they also need to examine how to more justly apply the property tax exemption for first-time homebuyers. While any property owned anywhere in the world should exempt a person from obtaining first-time buyer status in Canada, there is no follow-up. This allows the vast majority of non-resident property buyers to skip out on paying Canadian taxes. The provincial government should also consider modifications on how this progressive land transfer tax is implemented—perhaps increasing the thresholds, or creating more expensive tax tiers on more expensive homes.
Andy Yan, an urban planner and professor at UBC, believes that updating property-transfer fees, homeowner grants and property taxes would go a long way to reduce the number of investors and non-residents who speculate and flip urban Vancouver property. (Flippers are buyers who sell their dwellings after a short time of ownership in an attempt to make quick profits.) This would go a long way in making urban Vancouver property more accessible for owner-occupier homebuyers.
No. 6: Focus on community
Every week for the last three months, I have read a different version of the same story: Upwardly mobile, hard-working, young, would-be homeowner couple who loves walking to their weekend brunch spot in urban Vancouver. Then the same couple a few family choices later, pushing a stroller and wondering how they can live in 650 square feet with one toddler and another baby on the way. They love where they currently live but don’t have a hope of buying into the neighbourhood. Now they must choose: Pay $2,500 or more on a small rental unit that may give them enough space to raise a small family, or move out of the downtown core, into a not-so-walkable, not-so-close-knit community in an inner suburban area or even further out.
Part of this problem is that Vancouver forces its residents out as soon as they want to set down deeper roots. While renting a small place in the city is good when you’re childless, many feel a need for more space and more permanency and this leads to house-hunting further and further away from the downtown core. This leads to a transient feel within all communities—both urban and suburban—as people make decisions that feel only temporary. This leads to a non-committal attitude—an attitude that permeates everything, as one Vancouverite wrote in a recent The Province piece.
“It’s hard to make friends when everyone is so noncommittal. But another factor is an oddity we discovered over the years–because space is small, and people spend so much time out in the city, no one invites people over. Having friends over to your apartment isn’t something that happens casually, which makes it really hard to play 4-6 person board games.Ask anyone about this stuff. They’ll confirm it. Socially, Vancouver sucks, and almost no one here has particularly close friends. Just a selection of good acquaintances.”
Yan believes that in order to keep communities active and alive, residents need the option to live and work in the same community. He argues that only by setting down roots in a neighbourhood, by trusting its institutions and getting intertwined with the community, will communities stop feeling like transient, zombie-like places. According to a Vancouver Sun article, Yan’s ultimate goal, as an urban planner and as a Vancouver resident, is to create a city where most owners and residents don’t feel “like rootless consumers; temporary and indifferent to each other.”
No. 7: Protect food
Real estate investors will tell you that one way to earn big money is to buy raw land and wait for its value to increase. Often that means purchasing land and waiting for urban development to catch up. But a robust local food system—such as the one in B.C.’s lower mainland—requires the protection of good, agricultural land.
Vancity, B.C.’s biggest credit union, recently released a report on the rapidly disappearing farming land in the province’s lower mainland. In an article in the Globe and Mail, Vancity urged voters press local, provincial and federal governments to enforce current policies that protect the Agricultural Land Reserve. But the Vancity report authors also suggested that new policies need to be put into place. Options for new policies included: tightening loopholes that allow land owners to receive farm-class status and lower tax rates while producing only a small amount of food, or strengthening bylaws related to the size of houses on agricultural land.
No. 8: Change how we build
One final solution that could help Vancouver’s housing affordability crisis is to dictate the type of new housing stock that can be built in the city. The idea isn’t new. In 2005, the Ontario government created a plan that put an emphasis on urban densification. Developers, motivated by profit, maximized this plan by building multi-family buildings—condos and townhomes that were predominantly one- and two-bedroom units, sometimes three-bedroom units, but typically units that are not entirely suitable for growing families. Rewind back to the 1980s, and Ontario building developers weren’t building condo-complexes. Due to rapidly appreciating rental rates, due to a scarcity of new rental units, the provincial government stepped in and offered tax incentives and exemptions from restrictive regulations to any developer who built purpose-built rental buildings. It worked—and with a greater supply of rent units in the market, rental rates dropped and stabilized.
The same type of incentives could also be implemented in Vancouver. Tax incentives, exemptions from regulations, changes in zoning, amending building laws, even development fee rebates would go a long way to incentivizing developers to build housing stock that would actually benefit middle-class Vancouverites—the very people being forced to choose between living on the outskirts of a city they work in or move away.
And if you missed it: 4 casualties of Vancouver’s real estate market, and 8 reasons Vancouver real estate prices are so crazy.