$2.4-MILLION BUNGALOW
The impact B.C.’s 15 per cent foreign buyers tax is having on Vancouver’s housing market shows the extent to which offshore money has inflated prices, writes Douglas Todd.
Kris Klaasen has been “gobsmacked” by Metro Vancouver’s housing turmoil.
While many worry the city’s bubble might be bursting, the 61-year-old communications designer is conflicted over how his modest Vancouver home has become worth almost 20 times what he bought it for.
“Housing has become a hypercommodity in this city. Living in Vancouver has become very tense. And intense. Every day I’m in a conversation about the price of housing and what it’s doing to the city.”
Years after Metro Vancouver became one of the world’s most unaffordable cities for housing, the provincial government stunned British Columbians on July 25, announcing it would be slapping a 15 per cent tax on foreign buyers of Metro homes, from massive detached houses to modest condominiums ( but not to pre-sale condos).
This seismic policy shift came in the wake of real estate industry leaders and B.C. politicians long denying that offshore investment had anything to do with affordability.
Klaasen, the ostensible beneficiary of runaway real-estate prices, bought his corner house in Kitsilano in 1982. With help from parents, he picked up the modest bungalow for $126,000.
Now realtors tell him it could sell for more than $2.4 million.
Although Klaasen recognizes he stands to haul in a big profit, he grieves over how “outside money” is hurting so many others in Metro Vancouver. Many who leave are young adults; others are retired. They’re moving to Maple Ridge, Prince George or Vancouver Island.
“My friends are saying, ‘I’m out of here,’ ” he says. ‘ HORDES MYTHOLOGY’
The B.C. Liberals’ decision, which took effect Aug. 2, to cool Metro’s market by levying a 15 per cent tax on foreign buyers amounted to a startling about-face.
It was announced just one year after B.C. Housing Minister Rich Coleman claimed his government “does not have any policy” on foreign buyers. Coleman had argued Metro prices “were pretty reasonable compared to other cities like London, Singapore, Tokyo.” The tax was also introduced well after Cameron Muir, chief economist for the B.C. Real Estate Association, routinely dismissed polls showing Metro residents believing there was too much foreign ownership.
“The mythology,” Muir said in 2014, “is that there are hordes of investors coming in Vancouver and driving up prices.”
In the face of resistance from the development industry, which in recent years has donated $12 million to the B.C. Liberals and frequently dismissed critics as “xenophobic,” how did Metro get to a tax on foreign buyers?
UBC geographer David Ley, author of Millionaire Migrants: Transpacific Life Lines, says the B.C. Liberals’ 15 per cent tax was “out of character” and ” totally unexpected.”
Now for the first time in decades, Ley said, the anti-red tape B.C. Liberals took a stand for “re-regulation” and “anti-globalization.”
Ley, who has long tracked house prices in Metro and other “gateway” cities, feels the B.C. government finally felt political pressure to react to the “collateral damage” it has been instrumental in creating by relentlessly wooing AsianPacific investors after Vancouver’s Expo 86 world’s fair.
The tax, which does not apply to commercial property, is proving highly popular in the city of 2.5 million, which suits a governing Liberal party just eight months out from a provincial election.
The Angus Reid Institute found nine of 10 city dwellers applaud it. After announcing the tax, Premier Christy Clark’s dismal approval rating jumped seven percentage points, to 34 per cent.
Vancouver’s tax on foreign buyers is also catching on in the Greater Toronto Area, where Angus Reid found three of four in that region of six million want it.
Is the levy working? It’s too early for firm conclusions, but the Greater Vancouver Real Estate Board’s report for September contained a chart showing the average price of a detached home had plunged about $400,000 from its peak of $1.9 million.
The total number of home sales fell by about one-third in September, compared with the same month last year.
But the GVREB claims the typical “benchmark price” has remained firm.
Many observers question the GVREB’s analysis, suggesting the industry has a vested interest in making people believe the bubble is not bursting. SOCIAL COSTS
Why did B.C. finally feel the pressure to follow Hong Kong and Singapore, which have long had regulations to soften the deluge of East Asian capital?
The short answer is that runaway house prices have caused devastation and voter outrage.
Here is Ley’s partial list of the social costs:
“Out-migration of young, difficulty in retaining key employees, overcrowding, homelessness and couch surfing, heavy debt loads, long commutes and traffic congestion, the necessary rise of illegal suites in detached homes, and young adults remaining in the family home into their late 20s. Family reproduction is also affected as the necessity of two wage earners in a family delays or prohibits childraising.”
At a recent SFU symposium, Mapping the Hedge City: Vancouver and Global Capital, Ley explained it was basically a handful of investigative journalists in Metro who forced the B.C. government, and Ottawa, to finally act.
Their articles revealed the tax necessary to rein in foreign speculation, and that more measures are needed to restrict the way fortunes made outside the country are being funnelled into Metro housing.
One of the strongest protest movements that has arisen is HALT (Housing Action for Local Taxpayers), which includes many Chinese-Canadians and is led by Justin Fung, whose parents came from East Asia.
Fung, along with activist Fenella Sung, attack the self-serving “racebaiting” of real estate developers and politicians who try to silence critics by claiming it’s xenophobic to link housing prices to foreign money.
“The vast majority of Canadians who want a fair shot at an affordable roof over their heads simply don’t have a racist bone in their bodies,” Fung said. “It’s never been about the Chinese people as a race, but the fact that money is flowing out of China and finding its way into Vancouver real estate.” FROM THE ’ 70S TO NOW
This is not the first time Metro residents have fretted about house prices.
The problems can be traced back to at least 1976, when Vancouver economic researcher Gordon Soule put together a book titled The Housing Crisis.
In the book, then-Vancouver mayor Art Phillips and future B.C. premiers Mike Harcourt and Bill Vander Zalm discuss even then how Canada’s unusually high offshore immigration rates were fuelling relative unaffordability in Metro.
But in-migration has continued apace. And an early factor behind the rising flood of money into Metro has been the way the B.C. government sold off the Expo 86 lands.
Bypassing an offer from local buyers, Ley said Social Credit politicians sold the prime waterfront property to Hong Kong’s richest man, Li Ka-shing. It was a signal for more Asian speculators to follow.
Prices would take off dramatically with the arrival of Hong Kong residents fearful of China’s gaining sovereignty over their region in 1997.
Left-wing community organizers responded by protesting the razing of houses and trees and increased prices caused by the influx of money from people from Hong Kong (and Taiwan), many of whom continued to work in Asia.
Real-estate industry officials in the ’90s responded by denouncing the protesters as “racist.”
The rapid sell-off of Metro real estate in the past three decades has been exacerbated, Ley says, by scores of taxpayer-funded trade missions that federal and provincial politicians have proudly led to Asia.
Their marketing efforts came to a head last fall, when Premier Clark included three real estate firms in what turned out to be a controversial mission to China, with Vancouver NDP MLA and housing critic David Eby describing the move as “mind-boggling.”
During all this time, however, the most crucial factor driving up Metro housing prices has arguably been Ottawa’s Business Immigration Program (BIP), which was initiated in the mid-1980s.
Ley estimates the BIP has brought more than 400,000 welloff immigrants to Metro.
BIP has helped make Metro one of the most sought-after markets in the world for the $52 billion each year that Chinese buyers now spend on overseas property, Ley said.
Josh Gordon, a Simon Fraser University assistant professor of public policy, says National Bank of Canada economists estimate “almost $13 billion was spent by Chinese investors in Vancouver in 2015 alone. This represents roughly one-third of all home sales volume in that year.”
The Conservative government eventually confessed that, as a group, those who took advantage of the BIP, many of whom own Vancouver mansions, paid the lowest amount of taxes in Canada.
The Conservatives finally killed the BIP in 2014. But the federal Liberals are considering whether to revive an immigrant investor pilot program similar to the discredited BIP.
$ 9,000 HOUSE IN 1948
The history of housing prices in Vancouver reveals the city has always been somewhat pricey compared to wages. But the gap grew wide in the 1990s and has become a chasm since 2010.
Earning a modest income running his business from his basement, Klaasen knows his family has only got by largely because he was able to buy his house for $126,000 more than three decades ago.
A land title search of Klaasen’s property and house, which was originally built in the 1940s, shows that before he bought it, it had been cheaper still.
Previous buyers had snapped up his home for $13,800 in 1965, $15,000 in 1960 and $9,000 in 1948.
What does this mean in today’s dollars? Since Klaasen’s purchase in 1982, inflation in Metro has gone up 132 per cent.
That means he bought his home for roughly the equivalent of about $300,000 today.
Many people would kill for the chance to buy a house for that price.
Statistics Canada data suggests Klaasen bought when the ratio of average Metro earnings to average house prices was about 3.5 to one, which is considered barely affordable.
But that’s a far cry from today’s catastrophic ratio of 13 to one.
Klaasen realizes he is among thousands of Metro residents who are basically like lottery winners — they’ve become wealthy for just sitting on their ass(ets).
RISE OF AN UNEQUAL CITY
In 2016, U.S.-based Demographia, which measures house prices against wages, ranked Metro Vancouver as the third-least affordable of 367 global cities. Only Hong Kong and Sydney are worse.
SFU’s Gordon is among those who say unaffordability is the leading social-justice issue in “unequal” Metro Vancouver.
Compared to the rest of Canada, Gordon found Metro’s unaffordability rate this year is 2.5 times worse than the national average.
It’s also almost twice as unaffordable as the Greater Toronto Area, which also faces a housing crunch. And it’s roughly five times worse than Edmonton and Ottawa, the latter being where (out-of-touch?) federal politicians are responsible for a national housing strategy.
Even though the 15 per cent tax is “several years too late,” Gordon said it’s one necessary component to bring local housing back in line with the labour market.
In addition to combating foreign buying, the SFU professor believes the surcharge signals further policy action to come, which should discourage speculation. Similar surcharges in Hong Kong, Australia and Singapore (which has 15 related regulations) have been effective.
Unfortunately, Gordon said the tax will not stem the foreign-rooted buying that occurs through “local proxies,” including tax-avoiding Canadian-based shell companies, as well as offspring and spouses who may be landed residents.
Nor will it curtail purchases by “newly arrived, non-working permanent residents with substantial (offshore) wealth.”
The other thing the 15 per cent tax does not confront is perennially shoddy law enforcement.
Many experts have cried out about the lax approaches of the federal immigration and tax departments. Reports reveal federal officials have looked the other way as money laundering and tax evasion spins out of control in Vancouver and Toronto real estate.
At least governments are starting to face reality, though, Gordon says. No one should be led astray, he says, by development industry arguments that housing price jumps are caused mostly by low interest rates, the “desirability of Vancouver,” its allegedly “strong” economy, geographic constraints, bad zoning or lack of social housing. The main problem, his research shows, is foreign demand.
‘ XENOPHOBIC’ CLAIMS
Still, dramatic things have happened in the 10 weeks since the 15 per cent tax was announced.
Some industry lobbyists have been apoplectic. Reviving their silencing technique of the 1990s, they have claimed the tax is “xenophobic.”
They also say it contravenes globalization agreements like NAFTA. Metro Chinese student Jing Li, 29, is the lead plaintiff in a Canadian class-action suit that claims the tax contravenes 30 freetrade treaties. A group of Chinese billionaires, members of the China Entrepreneur Club, was in Chelsea, Que., on Tuesday to complain about the tax to Prime Minister Justin Trudeau. It was the group’s second meeting with Trudeau in less than two months.
The handful of Metro journalists covering the housing crisis two or three years ago has also now turned into a small army.
Housing has exploded into the province’s biggest story, with Eby, the NDP housing critic, receiving lots of coverage.
In the past six months, especially since August, a dizzying upsurge of news stories has exposed the many legally dubious and criminal ways that realtors, lawyers, immigration “consultants” and major banks have helped foreign or dual-passport clients speculate in Canadian real estate.
News stories have uncovered the scams and loopholes that have helped thousands triple-flip properties, fake Canadian tax residency requirements, launder untold amounts of offshore money, obtain mortgages more easily than Canadian citizens, avoid capital gains on mansions and pretend to occupy large houses that are actually empty.
The federal Liberals also seem to be waking up to the situation.
In early October, Ottawa moved to tighten lending rules, making it harder for people without ade- quate equity to get a mortgage. The federal government has also suggested it will close a loophole that allows Canadian lawyers to launder foreign money. And it’s hinted it may end the honour-system reporting that some foreign buyers have been abusing to avoid taxes on capital gains.
Many, however, remain skeptical. The federal government’s enforcement of tax and immigration laws has long been underfunded and weak, say specialists. Ottawa’s promises, they worry, may be mostly a public-relations exercise.
FUTURE FORECASTS
As for prices, it’s hard to get people to agree on what’s happened.
Much of the speculation since Aug. 2 has focused on whether Metro’s housing market bubble is bursting, as predicted in July by SFU economist emeritus Herb Grubel.
Even while the GVREB has claimed prices were about onequarter higher in September than a year earlier, real estate journalists argue it’s underestimating the drop.
Postmedia has also reported that, since early August, prices have suddenly been rising in Victoria, Toronto and Seattle, which don’t tax foreign buyers.
With all the political manoeuvring and volatile economies in Asia, few want to guess the future.
But Central 1 Credit Union chief economist Helmut Pastrick has estimated Metro prices could fall five to 10 per cent this year.
He also predicts prices will double over the next 25 years. Pastrick says demand will slowly rise again because one million more people, predominantly from offshore, are expected to move here by 2041.
Whatever politicians are thinking, the pressure on them to act on behalf of citizens, not foreign interests, has grown more intense in the past six months.
Fung, of HALT, has made it clear he will not stop challenging developers. He wants more done “for the vast majority of us struggling to make ends meet ... or trying to get into the housing market.”
$13 billion was spent by Chinese investors in Vancouver in 2015 alone. This represents roughly onethird of all home sales volume in that year.