NDP’s new taxes could plunge recent mortgages underwater
Some fear those who rushed into market could rush back out after prices plummet
VICTORIA British Columbians who bought homes last year in an attempt to borrow before a federal tightening of mortgage rules could be most at risk if the NDP government’s new housing taxes lead to a drop in prices.
Finance Minister Carole James reiterated Thursday her desire to “moderate” B.C.’s housing market with a new speculation tax unveiled this week, as well as an expanded foreign buyers tax, and a tax hike on home sales and school taxes for properties worth more than $3 million.
James has said her intent is to try to lower the price of housing. If successful, it could mean some recent buyers would find themselves underwater — that is, holding mortgages for which they owe more money than they could recoup by selling their properties.
“The most worrisome is the people who bought in the last year,” University of B.C. professor and economist Tom Davidoff said.
“If you bought three years ago, it doesn’t matter because prices have gone so high it’s very unlikely you’d go underwater, but if you bought in the last year you are at risk, and that year is the most worrisome.”
Some of those buyers rushed to secure mortgages for more money than they would otherwise be allowed to borrow under stiffer interest rate stress test rules that Ottawa introduced on Jan. 1. Those owners are particularly vulnerable to both interest rate increases and a decline in housing prices, Davidoff said.
It’s unclear how many mortgages in B.C. would be underwater if housing prices drop. The most recent statistics were calculated by the Bank of Canada in 2016. That suggested a 15 per cent drop in housing prices would put one in eight mortgages in Greater Vancouver underwater, and a 25 per cent drop would put one in four mortgages underwater.
The bank said Thursday those remain its most current calculations.
The B.C. Ministry of Finance could not provide statistics.
“If there are people underwater, as long as your payments happen, it doesn’t matter,” Davidoff said. “Where it matters is when people can’t make payments … and then people start walking away. When people start walking away from their properties, that’s where you get the vicious cycle.”
B.C. is still a long way off from such a scenario, and it’s an unlikely outcome of a market correction, said Troy Resvick, president of the Mortgage Brokers Association of British Columbia.
“If there is a decrease in values, for the existing owner I don’t think it’ll make a difference,” he said. “They’re not going to run away from their home because the price dropped by 10 per cent. They still have the utility of needing a place to live.”
There also remains default insurance for mortgages that go under, Resvick said.
“Could they potentially lose something there if the market adjusted? Yeah, they could, but it would take a pretty heavy hit for most people,” Resvick said. “It would take a job loss or marital breakdown or something like that.”
Resvick said he instead is worried about people continuing to be pushed out of the market because a drop in prices could spur more activity. A potential drop in property value isn’t the only concern for homeowners.
Retired economics professor David Tha and his wife Paula Maisonville, also a retired teacher, own a home in Vancouver’s tony Point Grey neighbourhood that they bought 31 years ago for $370,000.
Now, the house is worth almost $6.5 million, and they face higher school taxes. Under measures introduced in Tuesday’s B.C. budget, properties valued at higher than $3 million will be subject to 0.2 per cent tax on the value between $3 million and $4 million, and 0.4 per cent tax on the assessed value over $4 million, beginning next year. Tha calculated that they will have to pay almost $12,000 in additional school taxes each year, which is not in their budget as pensioners.
“I’m beside myself because I’m looking at maybe another 20 years here and I don’t know how I’m going to be able to afford that tax,” the 72-year-old said. “We’re going to be taxed to death and we’ll be forced to move.
“My whole standard of living is shrivelling before my eyes and it’s all a result, in my mind, of inept political decisions.”
Tha said he may now have to defer his property taxes until he sells his house or he and his wife die and it comes out of their estate.
“It’s an option,” he said, “but it’s a very sad option as far as I’m concerned.”
Those kinds of examples are why Premier John Horgan should be clearer about his intentions for his housing reforms, Opposition critic Shirley Bond said.
“People do not understand what the intended outcomes are and has there been a really good look at what the unintended consequences might be,” the Liberal MLA said.