`DECOUPLING' OF WAGES, HOME PRICES LAID BARE
Foreign capital often excluded from official stats, SFU prof's study shows
This study provides evidence of widespread tax avoidance in certain urban areas. ... The evidence suggests that considerable tax avoidance is occurring in satellite family situations.
Joshua Gordon, SFU public policy specialist
The lack of connection between soaring housing prices and tepid local wages in Metro Vancouver is caused in large part by hidden foreign ownership, says a peer-reviewed study from Simon Fraser University that is being welcomed by the B.C. minister responsible for housing.
Based on data Statistics Canada has been collecting only recently, SFU public policy specialist Joshua Gordon's paper shows the “decoupling” of housing prices from incomes in Metro Vancouver has been caused by “significant sums of foreign capital that have been excluded from official statistics.”
Gordon's research set out to solve a puzzle in Greater Vancouver and, to a lesser extent, Toronto. How can tens of thousands of owners who tell Revenue Canada they are low-income (earning less than $44,000 a year) consistently afford homes valued in the $2-million to $10-million range?
The new data revealed Richmond, West Vancouver, the city of Vancouver and Burnaby were epicentres of the foreign-ownership phenomenon: They have the highest housing prices, low average declared incomes and the largest proportions of non-resident owners.
“This is a powerful corroboration of the idea that substantial amounts of income are not being declared in satellite family situations,” said Gordon, whose paper defines foreign ownership as “housing purchased primarily with income or wealth earned abroad and not taxed as income in Canada.”
The strange decoupling of housing prices from local wages is peculiar to Metro Vancouver and Greater Toronto. It does not show up in most Canadian cities or in the U.S., Gordon says, where high housing prices invariably correspond with high wages.
Gordon's study is the first to be based on crucial new data from the Canadian Housing Statistics Program, which for the first time began two years ago to track the extent to which non-residents were buying housing.
“This study provides evidence of widespread tax avoidance in certain urban areas,” Gordon says in his paper, titled Solving puzzles in the Canadian housing market: Foreign ownership and decoupling in Toronto and Vancouver, published last month in Housing Studies.
“The evidence suggests that considerable tax avoidance is occurring in satellite family situations,” says Gordon, who appreciates B.C.'S unique speculation and vacancy tax for monitoring such satellite ownership.
Attorney General David Eby, the minister responsible for housing, welcomed Gordon's research. “It's helpful to have work like this, using independent data sets, that positively correlates some of the activity we know is happening in the market.”
The B.C. NDP government “didn't wait for the smoking gun” before it brought in its 2019 speculation tax, the first of its kind anywhere, Eby said. Even while many denied the property market was being distorted, Eby said, “we saw enough to realize foreign capital was a factor. So we took action.”
B.C.'S speculation tax applies a two per cent annual surcharge on homes owned by either foreign citizens or satellite families, which it defines as households where more than 50 per cent of income is earned abroad.
While Gordon generally endorsed B.C.'S speculation and vacancy tax, he stressed it must be rigorously enforced — and also suggested it could be strengthened. Gordon questioned whether it's wise to exempt homeowners from the speculation tax if they rent out even part of their dwelling. “This rental exemption for single-detached properties might be eliminated entirely … pressuring foreign-sourced owners to either sell into the local market or to pay an annual property surtax.”
Eby, calling the speculation tax “an experiment,” acknowledged it needs ongoing evaluation. “This phenomenon of Vancouver being an international city and people being resident here but not earning their income here is one that our tax system is still working to come to terms with.”
The cohort of more than 200,000 people who were approved entry to Metro Vancouver through Canada's business immigrant programs, Gordon said, provide one of the most striking illustrations of satellite families who declare almost no income in Canada yet own costly houses.
“Migrants arriving with substantial wealth can have a pronounced effect on housing prices” by creating “powerful downstream effects,” Gordon's paper says, citing the research of Markus Moos and Andrejs Skaburskis, who found almost two out of three investor immigrants to Canada, mostly from Asia, choose to buy property in Metro Vancouver.
An earlier Statistics Canada study found the median value of a detached Vancouver home bought by immigrants who arrived via the investor program was $2.55 million, but the same group “declared an average of only around $20,000 in income in the first 10 years after landing.”
Gordon's paper captures how Vancouver condo marketer Bob Rennie, former chief fundraiser for the B.C. Liberal Party, acknowledged the decoupling when he joked in a 2012 speech to the Urban Development Institute that “the Vancouver market never went up on fundamentals, so why would we go down on fundamentals.”
Two of the first public figures to try to flag Metro's decoupling situation were former Richmond mayor Greg Halsey-brandt and the one-time head of the Canadian Race Relations Foundation, Albert Lo. They expressed concern in 2015 that the homeowners in Richmond most likely to declare poverty-level incomes (and thus pay low taxes) resided in expensive neighbourhoods. The late housing analyst Richard Wozny also tried to bring attention to how housing “fundamentals” were askew in Metro, with no meaningful link between prices and wages.
In the debate over the cause of high housing prices in Canada, Gordon says the conventional explanation, promoted by developers, is that not enough housing supply is being built. But, as Gordon emphasizes, in Canada “there has not been a single peer-reviewed article” exploring the supply theory.
In contrast, Gordon's paper makes clear “the relationship between foreign ownership and decoupling is very strong and stark: The areas (of Metro Vancouver) with the highest rates of foreign ownership are the areas with the greatest decoupling of prices from homeowner incomes.”
Analysts generally consider housing “affordable” if the ratio of property prices to household income is about four or five to one. But this ratio jumps to a startling 13 to one in Burnaby, 16 to one in Richmond, 22 to one in the city of Vancouver and 23 to one in West Vancouver, which are the municipalities with the highest proportion of non-resident owners.
In Greater Toronto, the suburbs of Markham and Richmond Hill are most affected.
Eby welcomes how significant new data is now available to shape Canadian tax collectors' priorities. “I've been endlessly frustrated by the proclivity of Revenue Canada to chase small businesses and servers and their tips … instead of being concerned about this phenomenon of people who are very wealthy but who have very low incomes. It undermines public confidence in the tax system of Canada.”