Opinion: The true cost of the new real estate tax

This week, the B.C. government introduced a new 15-per-cent tax on all non-citizen and non-permanent-resident buyers of residential real estate in Metro Vancouver. Macdonald Realty opened its first office in the Kerrisdale neighbourhood over 70 years ago. Though we now have 20-plus offices and 1,000 staff and agents, the heart of our organization is still in Vancouver.

We understand that the government felt the need to take concrete action to curb speculation and related price inflation. We understand also that the increase in real estate prices over the last few years is a topic of much concern to many Metro Vancouver residents. That said, we do take strong issue with the retroactive nature of this new tax. Specifically, that it applies to all transactions that close after Aug. 2, regardless of when those contracts were entered into. This will have profoundly negative consequences for many Canadian families, who weren’t the intended targets of the tax.

To highlight the consequences, let us give you a few real-life examples.

One of our clients is a new immigrant family in the process of moving to Canada. They have both children registered for school — their daughter will be studying English literature at the University of B.C. in the fall. They have already entered into a firm deal to buy a resale home priced at $765,000 (from a Canadian seller), but since the sale closes after Aug. 2, they are now looking at a sudden $114,750 increase in their cost — on a firm and binding contract. This is neither just nor reasonable.

Op-Ed by Jonathan Cooper

Op-Ed by Jonathan Cooper

Our second example involves a Canadian family who recently listed their home for sale in Surrey. They have a firm deal with an immigrant family for $480,000; however, that deal is now in peril, because the buyer’s cost just went up by $72,000. The sellers, as Canadian citizens, weren’t meant to be the subject of this tax, but now it has placed their financial lives in jeopardy.

The Canadian sellers in both examples point to a broader reality: the knock-on effects of this tax throughout the Vancouver real estate market that could be immensely damaging for many Canadians. Real estate is traditionally a linked economic activity. Once they have a firm deal on their property, many sellers promptly go on to buy their next home. If foreign buyers begin defaulting en masse, we could see a contagion scenario wherein a single default by a foreign buyer will result in many more defaults by Canadian buyers. In addition, the resulting flood of lawsuits from these defaults could overrun the court system. We believe that the government has not anticipated this very likely scenario.

There is a prevailing impression that all foreign buyers are big-moneyed cash buyers. But the reality is that there are many more hardworking, middle-class immigrant families who are stretching themselves in order to get a foothold in the Vancouver market and give their families a better life. It is very reasonable that some of these families will not be able to afford an additional 15-per-cent tax that was neither anticipated nor budgeted for. For many, their only option will be to default on their purchase and lose their deposits.

Furthermore, this tax damages our province’s credibility as a place to do business in the eyes of the world. If our government is willing to drastically and retroactively increase costs in one major sector of the market, a reasonable investor would have to conclude that they might be willing to do so in any sector. Do we want to be known as a place where legally binding contracts can be, without recourse, altered after the fact by the government? And in a country built by immigrants, do we want to be known as a place where we impose severe, retroactive costs on families merely because of their country of origin?

Once again, while we do not necessarily agree that the government’s move to implement a foreign-buyers’ tax is the most effective means of addressing affordability, we do understand the immense public pressure to respond to Vancouver’s escalating house prices. However, the punitive nature of the tax’s implementation will cause immense — and completely unnecessary — damage to Canadian families, with no discernible benefit.

Premier Christy Clark expressed concerns that grandfathering would create a run on the market, but this could easily be avoided by only including contracts that were agreed to before July 25, the date on which the tax was announced. Imposing a 15-per-cent tax while exempting existing contracts will achieve the government’s goals without financially imperiling blameless Canadian sellers. In the strongest possible terms, we urge the government to reconsider their position.

—————–

This op-ed by Jonathan Cooper was published in the Vancouver Sun on Friday, July 29th 2016.  Jonathan Cooper is vice-president of Macdonald Real Estate Group Inc.

What Changes to Immigrant Investor Program Means for Vancouver Real Estate | by Dan Scarrow, Macdonald Realty

112

Last month, Canada announced the cancellation of the Immigrant Investor Program along with its 65,000 applicant backlog. Some analysts have predicted that this will have a negative effect on our housing market and the media has picked up on this sensationalist narrative. We here at Macdonald Realty have been following the situation closely as there is certainly some merit to the theories that these analysts have.

To start, the immigration investor program was introduced in mid 1980s by the federal government to promote the immigration of business people and their families. Quebec subsequently negotiated with the federal government to have its own, parallel program. The investor program enables qualified investors to obtain permanent resident status in Canada and are then eligible to obtain Canadian citizenship after residing in Canada for a number of years. To be qualified for this program (prior to the cancellation), applicants needed to have at least two (2) years of business management experience, have minimum net worth of CDN$1,600,000 and make an investment of CDN$800,000 (interest free loan to the government for 5 years), and meet certain health and security requirements. The federal government admitted about 2500 families per year (with Quebec admitting a similar number) under this program. For the past 8 years the main source of investor applicants are multi-millionaires business people from China and most of these immigrants purchased properties in some of Macdonald Realty’s market areas.

But let’s put some things in perspective first:

  1. In the most recent set of data available (2012), Canada admitted 257,887 immigrants
  2. Of these 257,887 people, 2,616 families, representing 9,350 people, entered via the Immigrant Investor category (3.6%)
  3. Quebec continues to run a parallel Investor Immigrant category that (as of now) continues to process applicants at roughly the same number as the now-discontinued Federal Program (roughly 2,500 families/year)
  4. Canada now has a 10-year, multiple entry VISA that many immigrants in the queue may find even more attractive than citizenship
  5. Canada has announced that they will be replacing the discontinued program with a new one (but apparently not the Quebec one), although details have yet to be announced

So if that’s it, why all of the fuss?

  1. The vast majority of applicants in this category were from mainland China and have large fortunes
  2. The majority of these applicants were likely planning on residing in the Lower Mainland, specifically Richmond, West Vancouver, and the Westside of Vancouver
  3. Most of these applicants would have (or already have) bought a substantial house/condo in these areas
  4. If, for example, 2,000 families each buy a $1 million house, that’s $2 billion in foregone investment in a relatively small market area. Every year.

So on the face of it, it seems as though there is certainly the potential for a correction, but remember, this is foregone FUTURE investment. The money that has already entered the housing market will likely stay here. If there were rampant speculation happening in the lead up to this announcement, we would be worried, but our data shows that speculation has been at a relative low point for several years now after a flurry from 2008 – 2010.

The key question that everyone is trying to answer is how will this impact the housing market moving forward.

The reaction of our immigration consultant contacts in China has been surprisingly muted. Most have already diversified away from Canada and are now focused on the US immigration programs, although they say that, all things being equal, Canada (meaning Greater Vancouver) is still a preferred destination. Some of their clients who were in the Federal Program queue had, because of the long processing times, already given up on Canada and applied to other countries anyway. Others, whose hearts are set on Canada, may find different, admittedly constrained, methods to immigrate (the British Columbia “Provincial Nominee Program, as “international students” for children, 10-year multiple-entry visas, or the revamped federal investor program).  Surprisingly, few China-based immigration consultants express much concern about Vancouver’s housing market.

Our view therefore is that, while there will certainly be some affect from these changes, they will be only another variable in a host of factors that affect BC’s housing market.

This view is shared by others, including respected immigration lawyer, Dave Thomas:

“Will this affect the Vancouver real estate market?

I don’t believe it will.  Firstly, the Investor program has effectively been closed for almost 3 years now.  Quebec also has an Investor program but it had drastically limited its intake of new files.  So even though the immigration route has slowed, we have not seen the slowdown in the movement of capital out of China.  There are more “Chinese push reasons” than “Vancouver pull reason” for that capital to make its way here, regardless of current immigration programs.

Historically, the business immigration programs for “wealthy immigrants” only made up about 2-3% of the total number of immigrants coming to Canada each year. Admittedly, their presence in places like Vancouver was more apparent, especially when it came to high end real estate.

There are other ways to come into Canada. Younger people are coming as students, and then availing themselves of post-graduation work permits that lead to permanent residence.  Younger people with good English language skills and a job offer will have a good chance.

One negative trend, certainly, is that older immigrants with limited English skills will have more difficulty in immigrating to Canada, no matter how much money they have.”

immigration_infographic_ver2__normal