Foreign-buyer tax puts the ball in Ottawa?s court
The Vancouver Sun
In Vancouver, there’s plenty of worry the 15 percent tax on foreign home buyers could be too successful, chasing away legitimate investors. In Ottawa, the big worry is the tax won’t be enough.
Federal government officials studying the move have doubts about its effectiveness to slow the market, according to two people familiar with discussions on the matter who spoke on condition they not be identified. Offsetting factors include Vancouver’s lack of supply and Canada’s record-low interest rates. The federal government wasn’t involved in the decision, the people said.
It could, however, be a problem for Prime Minister Justin Trudeau. He has promised to act on the affordability issue but is worried any full-blown attack to contain Vancouver and Toronto — the country’s two most expensive markets — would trigger declines in the rest of the economy, or even produce a major correction.
“Fifteen percent, when prices have been escalating at more than 10 percent a year, won’t do very much,” former Bank of Canada Governor David Dodge said in an interview. “It will have some initial disruption but it really won’t do very much.”
After tighter mortgage rules Finance Minister Bill Morneau introduced in December failed to cool the market, he sought to devolve some of the responsibility to the provinces and cities, with British Columbia’s move the first salvo in those efforts. A failure in B.C. could make it more difficult for the federal government to resist pressure to become more active.
Sousa said Ontario won’t create any “unnecessary walls” for “newcomers.” Still, there are some good reasons for the central Canadian province to follow with its own measure. One of the biggest is that British Columbia’s move will drive foreign flows to other cities, particularly Toronto. Ontario Premier Kathleen Wynne isn’t facing an election until 2018, but some sort of tax on real estate would also help her meet a pledge to balance the budget before going to the polls.
While vowing in last year’s federal election to “consider all policy tools” to make homes in Vancouver and Toronto more affordable, Trudeau’s options are limited outside of leading collaboration with cities and provinces.
The Canadian government’s role as a regulator rests on its ability to manage flows of mortgage insurance. There is still room for Morneau to tinker with mortgage qualification rules but that risks making it more expensive for people to qualify at the lower end of the market.
Morneau sought to get around that problem in December by tightening insurance rules only for homes above C$500,000 ($382,877), yet there was no let up. The cost of a detached home in Vancouver has soared 26 percent over 12 months to C$1.76 million in July, while in Toronto the cost of such homes is up 21 percent to C$952,983.
With the economy struggling through one of its weakest periods of growth, interest-rate hikes from the Bank of Canada are off the table. A federal tax of some sort on property — a provincial and municipal jurisdiction — is also out of the question. “The provinces would go nuts,” Dodge said.
One potential option would be a transaction-based tax implemented at the local or provincial level that tries to target speculators, said Jean-Francois Perrault, chief economist at Bank of Nova Scotia who has worked at both the finance department and Bank of Canada. The sooner you turn over the house, the higher the tax, he said.
The added benefit is it allows you to avoid the discriminatory aspect that makes British Columbia’s measure a blunt instrument. “To the extent you want to deal with speculators, putting a tax on speculation of some kind, whether it’s to foreigners, to Canadians, or everybody is one way to go,” Perrault said.
© 2016 Postmedia Network Inc.
