How Will The BC 15% Foreign Tax Effect The GVRD Real Estate Market?
This week, the BC Government has announced that an additional property transfer tax on foreign buyers (non-resident) of 15% that will be applied to all applicable transfers registered with the Land Title Office on or after August 2, 2016 regardless of when the contract of purchase and sale was entered into. Our hope is that the BC Government will take a little more time to take into consideration and think of the impacts that this week will bring should they uphold the decision to make August 2nd the deadline.
Some questions that we have about the announcement this week:
- Could this announcement create unnecessary fear in the market place? We are already hearing buyers walking away from putting pen to paper for fear that this might be the turning point in the market. We were already seeing the market cool down with fewer over the asking price offers, more subject offers and increased inventory. With the market already showing some signs of cooling having the government impose a tax at this time may create a more drastic effect on the local economy. This decision could, in its current stance, hurt the local market and the local seller.
- Will buyers just walk away? Lets use the example of a $2 million dollar unconditional offer already in place closing after August 2nd. The buyer has placed a 5% deposit on the property at the time of the accepted offer, which would be $100,000. The proposed 15% tax (in addition to the current property transfer tax) would be an additional $300,000. Buyers will be giving serious consideration as to whether that $300,000 is worth it. Lets say the Buyer does decide to walk away and the market declines. They forfeit the deposit to the seller who now has to put their property back on the market. Let’s say the property sells for $500,000 less then the original accepted offer due to a downturn in the marketplace, the sellers now would sue the buyer for the difference. In addition to the court backlogs that would ensue, if these buyers default, this will have great effect on local sellers trying to make a move and a cause serious domino effect on other transactions predicated on this deal. This is potentially a very serious concern.
- How will this impact the developments currently under construction? Numerous developments in Vancouver have been heavily marketed out of country and it will be interesting to see how many people walk away from the deals with concern about the market or not having the extra 15% of funds required to complete. It is possible many developments could be in jeopardy if Buyers are turned away because of this tax. We would imagine this scenario would cause major legal trouble for the Government, as developers would have a significant grievance against this tax and how it is being implemented.
- What happens when one party to the title is a foreign national and the other is a Canadian or permanent resident? The guideline to whom this tax applies to hasn’t been well defined at this point. If one party is resident and the other is a foreign purchaser can you have both parties on the contract without being taxed? Does one party declare a 99% interest and the foreign national 1%? What impact with this have on the financing front? This part of the equation needs further explanation and consideration.
- How will this affect other markets outside Greater Vancouver? It is very possible that other markets could see a boom in prices as foreign buyers looking to purchase in BC choose other Cities like Victoria to buy to avoid the 15% tax. This could in essence create other markets that may become just as unaffordable as Vancouver due to the increase in foreign money. The provincial government has implementing this tax with just a focus on the Greater Vancouver Regional District could have adverse effect on other areas of the province.
- How are Lawyers supposed to handle the inquiries about this decision? Some of our clients have reached out to some of the best real estate lawyer firms in the city and they can’t take on any further business. People are trying to move up there completion dates to avoid the potential tax. They are reaching out to their fellow community to help handle the contractual burden of this decision that a lot of buyers and sellers are trying to understand.
- What if buyers simply can’t afford the tax? The real estate market has lent itself to a very competitive landscape. Lending rates have been at all time lows and in order to get into the market buyers have been putting all of their life savings into their home. As an example, a foreign national from the US who works in BC is buying an $800,000 condo downtown. They have put all of their life savings towards the 20% down payment. The 15% tax would equate to an additional $120,000. They don’t have the cash to cover that tax and the lender is hesitant to role that back into the mortgage, which they have just barely qualified for. Do they walk away from the deal?
The tax isn’t perfect; the current market did require some intervention but not a tax of this nature with this type of delivery. We appreciate the BC Governments intent to start taking action but this step is way too late. For almost a decade we have seen Vancouver’s demand skyrocket along with the prices with little collaboration between the federal, provincial and municipal governments. The optics of this being within an election year, decisions predicated on 5-week data, and little consultation with industry experts, is cause for concern. They have missed the mark in the implementation of this tax. It seems like the biggest issue to be tackled was the purchasers buying properties at any cost to invest their money in a home that was eventually not being occupied. The speculative nature of these sales has had an inflating effect on the market. It is hard to say at this point if this tax will have an impact on the top end of the market but it will hurt those wanting to move here and become a resident as well as potentially really damaging the equity and investment locals have in there property values.
Vancouver is considered as one of the best cities in the world and we are priced accordingly given the demand on a global scale. Taxing demand to curb the market is only one part of the equation and more thought needs to be given into how to effectively implement the proposed changes. One idea would be to implement the 15% tax only on foreign purchasers who have no intention of residency in Canada. Perhaps a program to ensure that homeowners have the proper documentation for tax purposes in place prior to being allowed to purchase a home? Maybe property taxes on Vacant homes should be much higher than owner occupied properties?
Currently all buyers are being taxed a huge amount when buying a home in Vancouver. We have also lost the relevancy of our homeowners and first time buyer rebates, to a large contingent of the buyer pool, due to the rising costs of homes in Vancouver. The property transfer tax has been controversial and when it was implemented 25 years ago housing prices were far from what they are today. Given the escalation of housing prices, the current property transfer tax rebate needs to be revised in order to align with the current market conditions. Why not give a significant rebate to the local buyers? It’s not just about the first time homebuyer exemption anymore. If the Government is considering yet another tax perhaps we should re-evaluate how we can help local buyers with effective and sufficient tax rebates.
What we do hope in this initial week is that the BC Government does not apply the 15% tax to all applicable transfers registered with the Land Title Office on or after August 2, 2016 but rather exempt the real estate transactions that are in the process of completing. It’s important to take into consideration the overall impact this will have on the local home owner who have really done all they can to own in this wonderful city and all the parties involved in the transactions.
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