Failing to exclude existing deals injects uncertainty into investment climate

Josef Filipowicz, Kenneth Green and Steve Lafleur
The Vancouver Sun

Mike de Jong, B.C.’s finance minister, recently and unexpectedly announced an additional property transfer tax of 15 per cent on foreign nationals purchasing residential property in Metro Vancouver. Whatever the merits of this policy, many have overlooked a troubling element of its implementation that it will be effectively imposed retroactively.

The tax applies to property sales agreed to before the Aug. 2 deadline but not yet registered with the Land Title Office. This means that some contracts forged under one set of rules are now affected by a new set of rules (the new tax) even though these transactions occurred before the tax was announced. This tax will add roughly $140,000 to a typical Greater Vancouver real estate transaction, closed before the imposition of the tax. This is after de Jong had previously stated strong opposition to such a policy.

The retroactive nature of the tax is especially problematic when it comes to pre-sale homes, which often involve the signature of contracts well before these units can become occupied. The Urban Development Institute estimates that the tax could jeopardize as many as 3,000 pre-sale deals involving foreign nationals, hurting local sellers as much as foreign buyers. Every transaction has two parties, and both sides will be harmed by this measure. For instance, a family that has sold their home, having already bought a new home, might find themselves scrambling to resell, and possibly at a lower price than originally budgeted for. Indeed, there are already early signs of sellers discounting home prices to blunt the tax’s effect.

Moreover, imposing a tax on already signed agreements demonstrates a worrisome indifference to the rule of law. The rule of law, which includes respecting contracts, is a central tenet of liberal democracies such as Canada and a key contributor to prosperous societies. Retroactively changing the terms of a legally binding contract is a breach of that tradition.

Beyond these important ramifications for the rule of law, failing to grandfather in existing transactions injects uncertainty into B.C.’s investment climate. After all, if the provincial government has retroactively interfered with existing contracts once, how can foreign investors and their local counterparts — be they homebuyers or investors in B.C.’s other industries — trust that the provincial government will follow due process in the future? Accepting this kind of retroactive action in principle sets a dangerous precedent.

Concern over investment uncertainty isn‘t just an abstraction. Research shows that investors react to uncertainty by pushing prospective new investments elsewhere. Limiting uncertainty should be a priority for government, and if this surprise tax causes a sudden shift it could have unpredictable consequences domestically and with our trading partners.

While there are reasons to oppose the new tax on foreign transactions in general, it’s particularly worrying that the province plans to retroactively interfere with existing contracts. At the very least, existing transactions should be grandfathered in. Doing so is not only a matter of upholding the rule of law, but is crucial to avoid sending the wrong signal about doing business in B.C.

© 2016 Postmedia Network Inc.

Canada’s national housing agency rang more alarm bells about Vancouver’s real estate sector after it released a report of problematic conditions in the city

SUSAN LAZARUK
The Vancouver Sun

Vancouver’s surge in house prices of 36 per cent over the past year was by far the highest in the world, but the new 15 per cent tax on foreign buyers is expected to slow the growth, according to a group that tracks housing prices in 37 cities.

Vancouver topped the ranking for the fifth consecutive quarter of the Prime Global Cities Index released by Knight Frank on Friday.

The 36.4 per cent hike was far and away the biggest hike among all cities, far outpacing the average gain of 4.4 per cent from June 2015 to June 2016.

The city with the second-highest price growth was Singapore, at 22.5 per cent. The only other Canadian city listed was Toronto, with a 12.6 per cent increase over the same time period, the fourth highest overall.

The authors predicted price inflation in Vancouver “is expected to slow in light of a new tax for foreign buyers.”

B.C.’s new 15 per cent property transfer tax assessed for non-Canadian buyers came into effect on Aug. 2.

“Vancouver joins an expanding club of cities (which includes Hong Kong, Singapore, Sydney and Melbourne) where policy-makers are taking steps to control the flow of foreign capital into their housing markets in order to stem demand and improve affordability for local residents,” Kate Everett-Allen, head of international residential research at Knight Frank, said in an emailed statement.

“Other top performers this quarter include Shanghai, Cape Town, Toronto, Melbourne and Sydney; all saw annual price growth reach double figures in the year to June.”

Housing markets in most of the top 10 ranking cities have cooled over the past year, thanks to interest rate hikes, fees for foreign buyers, higher land taxes or new limits on second home purchases, added Everett-Allen.

Hong Kong’s luxury residential market performed the worst, with prime prices falling 8.4 per cent over the past 12 months. Prices in Taipei dropped 7.7 per cent, Moscow 5.2 per cent, Delhi 4.9 per cent and Paris 2.7 per cent.

© 2016 Postmedia Network Inc.

Incomplete government study on foreign buyers now a waste of money: Opposition

ROB SHAW
The Vancouver Sun

The B.C. government says it can still find a use for an unfinished study into the effect of foreign buyers on local real estate, even if it has already leapt ahead with a foreign buyer property tax.

Housing Minister Rich Coleman said Thursday that the foreign buyer research, which was started by B.C. Housing in February, will cost $68,000 and be completed by the end of the year.

“This is a complex issue and certainly the province finds value in any credible data or analysis which may help inform further consideration, discussion, and future decision-making,” Coleman said in a statement.

“We look forward to the findings. The study is intended (to) go far beyond the scope of recent policy changes, which government decided to act upon more quickly to address immediate challenges in (relation) to housing affordability.”

The Opposition NDP maintains the study is a waste of money because the government charged forward with the 15 per cent foreign buyer tax last week, without waiting for any data or conclusions from the research. Any work would be of dubious value because government dramatically changed the marketplace with the new tax halfway through the study period, said NDP critic David Eby.

“This is evidence of the sudden panic and rush to get something, anything on the table for the public that showed some kind of action other than just studying the problem,” said Eby.

“This study and the money spent on it is a victim of that.”

Though the province describes the research as far-reaching, internal documents show it’s focused heavily on the issue of foreign buyers in real estate.

“Currently there is not any direct way to determine the magnitude of foreign ownership,” reads a 20page proposal to government by the Conference Board of Canada, which was hired in February to conduct the research.

“Any current data sources are subject to many caveats and not very reliable … given these data gaps, determining the magnitude of foreign ownership of residential real estate in B.C. will be the study’s biggest challenge.”

The Conference Board described a detailed plan to define foreign ownership, review existing data and canvass other countries like Australia, Switzerland and the United Kingdom.

It proposes to examine existing statistics from B.C. Housing, the Canadian Real Estate Association and the Canadian Mortgage and Housing Corporation to “build an economic model of the B.C. housing market and the markets for Vancouver and Victoria” using quantitative analysis.

“For instance, one hypothesis that will be tested is whether foreign influence on Vancouver’s residential market is confined to higher-priced, single-detached homes in certain neighbourhoods,” reads the proposal, obtained by the NDP under Freedom to Information.

The government said the study will also look at land availability, zoning, time frames for approvals, fees and charges for community amenity contributions, interest rates, construction costs and availability of trades and labour.

The Conference Board initially proposed a six-month timeline, to be completed June 30. But the government now says “a final study is expected to be completed by the end of the year.”

© 2016 Postmedia Network Inc

Despite record high prices and big risks, gen Y chasing hot homes

Garry Marr
The Vancouver Sun

Millennials are not giving up on the dream of owning a detached home, despite national prices soaring to record levels, buoyed by average prices that routinely reach seven figures in hot markets.

Even in the face of what the Toronto Real Estate Board says is a “troubling trend” in its market, generation Y will not be deterred from their dream home, with 51 per cent of the cohort planning to purchase a detached home in the next two years, according to a survey by the Ontario Real Estate Association.

But planning and purchasing must be two different things, because the barriers to entry to the detached home market in Ontario have never been greater, at least in the city of Toronto where the average detached home sold for just over $1.2 million in July, according to the Toronto Real Estate Board.

Even accounting for the larger geographic region of the Greater Toronto Area — meaning, a trip to suburbia — the average existing detached home sold for an average of $952,983 in July, according to the TREB numbers, released Thursday.

The real estate industry says provincial regulations encouraging density and choking off developable land has created the imbalance between supply and demand in the low-rise market, including detached homes.

“Housing policy is now top of mind for all levels of government. Policy-makers need to be focusing on solutions to the sustained lack of low-rise inventory throughout the GTA,” said Larry Cerqua, president of TREB, in a statement. He refused a request for an interview.

Given the state of the market, what exactly makes this generation — defined in the OREA study as the group born between 1981 and 1992 — think they will actually be able to afford anything but a condo?

“I think what we are seeing in the research, there are a few factors. It’s obviously stage of life, as needs change, your requirement for a home changes,” said Fahed Malik, the director of marketing communications at OREA. “There is a need for a larger home and a detached home can give you that practicality.”

Part of what also drives them is this idea that real estate’s return makes it worth the risk. The survey, which was conducted online by Ipsos between May 31 and June 2 and is considered accurate to within 3.5 percentage points 95 per cent of the time, finds 77 per cent of generation Y thinks real estate is a good investment. A year ago only 70 per cent felt that way.

Why wouldn’t they think real estate always pays off? Property prices have had only one real dip in the GTA over the past 20 years, which is most of their adult lifetime. Even the Great Recession barely impacted prices between 2008-09.

Ontario millennials are hardly alone in their desire for a large, detached home. The demand is just as strong in British Columbia, which has seen the benchmark price for detached homes climb to almost $1.6 million in its largest city.

The provincial government in Victoria won’t let the dream die easily, and last month announced a 15 per cent tax on foreign purchasers in Vancouver in an effort to control prices in a market where the supply of detached housing is finite. Prices are destined to go higher in a market where supply is outstripped by demand, even if you do more to limit that demand.

There are options for that detached home, but they ultimately mean sacrificing something along the way. Elton Ash, regional executive of Re/Max of Western Canada, says that means a resurgence of interest in suburbia.

“The desire to have the dog, the garage and 2.4 kids is strong no matter what generation you are talking about,” he said, pointing out that detached home affordability question is not a panCanadian issue. “I just did a road trip in Manitoba and visited a community 35 kilometres north of Winnipeg and the lot cost was $45,000. But it’s the same result as you move out of city cores, prices to get cheaper and that’s why bedroom communities are getting more popular.”

Living near the city’s downtown means downsizing your expectations. The OREA study didn’t ask people specifically where they would be willing to live to afford a detached home, but it’s now realistic for a person working in Toronto to live more than 100 kilometres away from her job.

The prices continue to drive that message home. Results from the Real Estate Board of Greater Vancouver for July do show detached homes are pretty much unattainable for local residents, but the average attached home, which could include a rowhouse or townhouse, sold for $669,000 last month. That’s clearly a more attainable goal.

The OREA study found the second choice of generation Y buyers, after detached homes, was condo apartments at 28 per cent, followed by semi-detached at 18 per cent and row houses at 13 per cent. Detached homes may be the first choice of that generation, but the reality of the marketplace means the percentages of those other options are going to rise — at least in Toronto and Vancouver.

© 2016 Postmedia Network Inc

Levy on foreign buyers could hurt Canadians with U.S. property

Adam Leamy
The Vancouver Sun

A single clause was all that was required. One that exempted citizens of countries with trade and investment agreements with Canada from the 15-per-cent tax on purchases of Metro Vancouver residential real estate. The North American Free Trade Agreement (NAFTA) is just one such trade agreement.

For want of a clause like that, B.C. legislators this past week passed into law a tax bill that deprives Americans of their NAFTA opportunities and protections. B.C. MLAs have thus put British Columbians and all Canadians with U.S. residential real estate at risk of U.S. retaliation and, in the case of one state — Hawaii — have legitimized their ongoing efforts to deprive Canadians of their NAFTA protections and opportunities.

Since 2012, Hawaii has been introducing legislation to nationalize the property of off-islanders who own legal vacation-rental properties there. The Hawaii bills are barriers to trade and investment and, whether by accident or design, capture Canadian cross-border investors by violating NAFTA at Chapter 11.

These Hawaii bills were the typical anti-NAFTA effort: Canadians with cross-border investments in residential vacation-rental properties must use local banks. Canadians must forfeit management of the property and any handling of money to local realtors or property managers. Canadians must be licensed, like doctors, to operate the investment. And this year, eight bills to re-designate vacation-rental zoning as non-tourism zoning.

In 2012 and 2015, The Vancouver Sun carried op-eds on Hawaii’s assault on Canadians’ NAFTA opportunities and protections. Those pieces were picked up in Hawaii, and so The Vancouver Sun helped save British Columbians from nationalization of their properties by anti-NAFTA Hawaii.

But there’s a critical difference to the Hawaii bills targeting vacation-rental properties: They’d force existing off-island owners, i.e., Canadians, to transfer management to locals, who are exempted from the laws, or to sell the diminished investment to locals and abandon the Hawaii market. Long before B.C. acted to “put British Columbians first,” Hawaii was asserting the need for such off-island-owned housing to be in Hawaii residents’ hands.

The Harper and Trudeau governments were asked to step in to encourage Washington to ‘have a word’ with Hawaii to remind it of its NAFTA obligations. And this year, as in each year since 2012, these NAFTA-violating Hawaii bills disappeared at crossover or conference. Canadians’ properties in Hawaii have not been nationalized and nor has control been forfeited to third parties selected by Hawaii legislators. And, critically for Canadians, the effort has not spread to other U.S. states.

Irrespective of one’s views on Canadian federal governments, their quiet efforts likely helped save individual Canadians from U.S. efforts to violate NAFTA. Good on them, and good on The Vancouver Sun for giving space to the matter as it gave credence to the need for provincial calls for federal action to preserve Canadians’ NAFTA opportunities and protections.

It’s expensive for Canadian companies to launch a NAFTA challenge. It’s all but impossible for individual Canadian or U.S. citizens to launch one. Were these Hawaii bills to become law, and were other states — like those home to residential real estate in which Ontario and Quebec residents have invested — to follow Hawaii’s lead, perhaps egged on by B.C.’s unilateral action to deprive Americans of their NAFTA opportunities, Canadians would fast come out on the losing end.

For decades, until we were surpassed by China, Canadians were the largest foreign purchasers of U.S. residential real estate. The value of our cross-border holdings in U.S. residential real estate must be in the hundreds of billions.

Perhaps in the aftermath of this made-in-B.C. trade mess, Hawaii’s efforts to nationalize Canadian citizens’ cross-border investments in U.S. residential real estate will spread to other Canadian-rich locations of U.S. residential real estate investment. After all, Canadians do tend to buy the cheaper U.S. properties — properties right in the bullseye of the U.S. middle-class property preference. And ‘Putting our people first’ is as powerful a rationalization for anti-NAFTA laws in Florida and California as it is in B.C.

It’s unlikely B.C.’s ‘analysis’ of the NAFTA implications of its residential tax on foreigners considered Hawaii’s assaults on Canadians’ NAFTA protections and opportunities, and the risk to British Columbians with cross-border investments there.

Nor was B.C. likely to have considered the ‘green light’ it’s anti-NAFTA law provides to Hawaii and its determination to ignore NAFTA in the drive to separate off-islanders, i.e., Canadians, from control of their Hawaii residential real estate investments. Hawaii is no innocent when it comes to anti-NAFTA bills, and going forward, it will require remarkable temerity for individual B.C. residents to ask Hawaii legislators to uphold NAFTA, when B.C. has just terminated protections and opportunities Americans have under it. British Columbians have been fighting Hawaii’s NAFTA-violating bills for five years. Last week, B.C. legislators cut the legs out from under us.

Some powerful folks in the U.S. have said that they’d renegotiate NAFTA. In passing this law, B.C. legislators have done it. It is simply too risky for Canadians to hope that a B.C. welsh on a trade agreement, at perhaps the most dangerous time given stated U.S. disdain for NAFTA, will go unreciprocated in the U.S.

B.C. legislators should move fast to correct this trade misstep — before U.S. states decide to take the B.C. anti-NAFTA route to put their residents first, too, on any number of trade and investment fronts.
And for good measure, Canada’s federal government should quietly, but quickly, ‘have a word’ with B.C. to remind it of its responsibilities in honouring NAFTA obligations.

© 2016 Postmedia Network Inc.

The Real Estate Council of B.C. is making changes to crack down on agents trying to game their procedures

Michael Mui
The Vancouver Sun

The Real Estate Council of B.C. is requiring government photo ID checks during licence applications for the first time after discovering an agent who scored 90 per cent on his licensing exam had someone else write the test.

The change will be effective on Sept. 1 this year. The real estate council said in a statement that previously, applicants were required to submit ID — but only to police for a criminal record check and during their licensing exam.

“That requirement is still in place, and the council is adding the requirement that a copy of the photo identification be included with all licence applications, to allow the council to match the photo identification against the identification required … at the time the students write the real estate licensing examination,” said spokeswoman Marilee Peters, in a statement.

“The only (misrepresentation) case we are aware of was at the University of British Columbia, involving Mr. Ryan Rana, whose licence was suspended indefinitely as soon as the council became aware of the misrepresentation.”

In Rana’s case, according to a disciplinary order, the agent’s photo on his website didn’t look like the person who showed up to write the exam at the Sauder Real Estate Division in November 2015. A compliance officer later identified a name and face on Rana’s Instagram and Facebook accounts and matched it to the person who actually wrote the exam.

Peters said in the statement that all licence applicants are required to present a recent criminal record check, employment history, bankruptcy or insolvency history, among other requirements.

“Licensees who are found to have provided false information on a licence application will be subject to discipline, which can include licence cancellation,” she said.

© 2016 Postmedia Network Inc.

The 15 per cent tax might instead only induce a home price increase

Ephraim Vecina
Canadian Real Estate Wealth

The new tax on foreign buyers of residential properties in British Columbia was ostensibly meant to cool down the overburdened Vancouver market, but a long-time market observer noted that the levy will precisely have the opposite effect—at least in the near future.

In an analysis published by the Financial Post, James West of the Midas Letter noted that the 15 per cent tax might instead only induce a home price increase of similar magnitude.

“That’s because, for the driving force behind the supercharged environment for home in Vancouver — wealthy Chinese billionaires — the 15 per cent tax barely qualifies as a rounding error. And with the status-obsessed Chinese, that new tax has just made Vancouver one of the most exclusive addresses in the world,” West wrote.

And while the ultimate effects of the tax have of course yet to manifest, Vancouver might serve as a test case for other Canadian markets, which for the most part have played host to wealthy foreign nationals over the past decade due to less stringent immigration regulations.

“If the housing market were to demonstrate any weakness, the Canadian government is in the enviable position of being able to tighten or ease policy to regulate the flow of, and more importantly, the net worth of immigrants into Canada,” the analyst said.

“All eyes in Toronto will be on Vancouver in the weeks ahead to see exactly what effect the new tax ultimately exerts,” West added. “Vancouver is also planning a tax on any empty real estate to curb the practice of buying condos in order to qualify for permanent resident status.”

The new tax, which took effect last Tuesday (August 2), engendered much controversy, and Toronto industry professionals have voiced fears that the city’s homes—especially those in the luxury segment—would become increasingly out of reach of domestic buyers as a result.

“Where are those foreign investors going to go? They’re not going to want to pay that 15 per cent, so they’re going to now dump it into the Toronto real estate market, which is already hot,” Toronto-based real estate agent Derek Ladouceur said earlier this week.

Copyright © 2016 Key Media Pty Ltd

Foreign property tax will have no effect on affordability

Ephraim Vecina
Mortgage Broker News

Vancouver’s real estate boom has attracted a profusion of wealthy buyers eager to get their share of the market’s enormous gains, but by all accounts, the past decade has seen the focus shift to rich foreigners as the prime movers in the red-hot Canadian city.

With a front-row seat to this market transformation, broker Clarence Debelle certainly has no shortage of tales of moneyed Chinese who have gravitated to Canada’s high-volume, high-demand housing segment.

“I show homes every day to Chinese families from Shanghai, Beijing, cities I’ve never heard of, and sometimes it’s just the mother and kids because the father is working,” the Vancouver-based professional told Bloomberg, alluding to the increasingly common phenomenon of male parents working in China and the rest of the family staying in Canada.

Many of Debelle’s clients are high-powered Chinese professionals, with some even in the muti-billion wealth bracket. Their exodus to Vancouver should come as no surprise, he stated, considering Canada’s record-low interest rates and immigrant-friendly system.

“It’s typical of any wealthy person to move money abroad to preserve their wealth. They’re concerned about the market there and they want hard assets to preserve and protect their capital,” the luxury broker said.

“The number of people I deal with who have at least $2 billion, it’s amazing. I had a client who had $2 billion, was 43, and thought it was a good start,” he added.

The city’s intense growth—which has already surpassed other global heavyweights like New York and London—is showing no signs of halting in the near future. In June alone, the average price of a single-family property rose by 39 per cent year-over-year, up to $1.6 million.

From June 10 to July 14, foreign buyers purchased over $885 million worth of real estate in the Metro Vancouver area, approximately 10 per cent of total real estate sales volume in the region over those 5 weeks.

Housing has served as the vanguard in keeping the Canadian economy afloat, Statistics Canada revealed in its latest report. Together, foreigner-fueled real estate markets and stronger bank lending now represent around 20 percent of the country’s economic output.

“It’s not just the agents. It’s the guy at the dock unloading a Sub-Zero fridge or custom sink off the boat for the house. It’s the decorators and landscapers. Chinese investment has spurred an entire economy,” Debelle said.

Copyright © 2016 Key Media Pty Ltd