Let Supply and Demand Determine Property Prices

In response to the theory that foreign buyers are largely responsible for driving up property prices in Vancouver, the B. C. provincial government recently imposed a 15% surcharge on all foreign buyers. Controversial to say the least, and while it is too early to say how effective it will be, there is a strong possibility that those who can least afford it, will suffer the consequences.

If foreign buyers with deep-pockets are indeed the primary reason property values have accelerated in Vancouver, it is highly unlikely they will be deterred by a 15% increase. However, the instability this direct government intervention is forcing on the market has the potential to cause considerable harm to all housing market participants.

It may also be quite unnecessary.

Vancouver Sales May Already Be Slowing

For the month of July and well before the new tax was even in effect, Vancouver home sales fell nearly 19% compared to July 2015. July’s results also marked a 25.5% decrease from the previous month and according to the President of the Real Estate Board of Greater Vancouver, July’s figures marked a return to “more historically normal levels”. If the Vancouver market has indeed reached a supply / demand equilibrium, then there remains no compelling reason for continuing this intervention.

We’ll know more about the impact this tax is having on sales in the coming months, but following B. C.’s implementation, speculation has increased that Ontario will follow suit to address price increases in Toronto. Despite the conjecture, Toronto Mayor, John Tory, seems cool to the idea.

“I am not going to, at this stage, state that I have reached a conclusion myself based on what’s going on anywhere, including Vancouver, that any particular tool or mechanism should be used to try to cool off housing prices,” the Mayor told a media outlet. “It’s a complicated matter; you’re dealing with a marketplace and governments can only macro manage things, not micro manage them.”

Ontario’s Finance Minister Charles Sousa, while “welcoming” B.C.’s  actions, also seemed to be less sure about bringing the same measures to Ontario, telling the media shortly after the B.C. announcement that “we have to be cognizant of the impacts of those decisions”.

Will Foreign Buyers Now Converge on Toronto?

The other question of course is, if the 15% tax is indeed effective in modifying the actions of foreign buyers, where will those buyers now turn? Again, Toronto is touted as the likely target but I feel any increase in buying from those looking to simply escape the new surcharge in Vancouver to be minimal at best.

The two cities are separated by half a continent and many of the features that Vancouverites delight in flaunting to their fellow Canadians – mild winters, access to the Pacific Ocean, gorgeous Mountain views – cannot so readily be found in Toronto. This is not to say that Toronto does not have its own appeal of course, but for those buyers subject to this tax, and who want to live in Vancouver and whose extended families may also be living on the West Coast, it’s hard to imagine they are prepared to instead make the trek eastwards to Ontario.

 

Pino Decina
EVP Residential Mortgage Lending
Home Trust Company

This post is intended for informational purposes only and is not to be considered financial advice.

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One Comment

  1. Arbella Dooman
    August 15, 2016
    Reply

    I also agree that the 15% tax won’t deter the Foreign buyers as the majority have an abundance of wealth and there’s more where it comes from. They may even see this as a challenge and I’m sure will find ways to justify the tax. Here’s an interesting article in the Huffington Post on Aug 11th, “Foreign Buyer Tax Will Make Government Rich, But Won’t Fix Housing ”
    http://www.huffingtonpost.ca/ike-awgu/foreign-buyer-tax_b_11446110.html

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