The extraordinarily high cost of housing in Vancouver and the GTA, including new rentals, is inflicting real hardship on all but the wealthiest local buyers. This is having serious long-term effects on businesses’ ability to attract and retain talent. Failure to reduce housing prices will lead inevitably to a dramatic market crash — and severe economic pain.
Many factors contribute to our housing price bubbles. Some reflect attractive features no one wants to change: a high quality of life, protected parks, security of investment, high immigration rates and relatively strong local job markets. Other key long-term drivers of the speculative housing bubbles in Vancouver and Toronto can be changed and controlled:
Ultra-low interest rates: Medium- to long-term mortgage rates of 2.5 to 3 per cent are inflating the bubble, allowing locals and foreigners alike to carry much higher mortgages and pay far more for houses than a normal rate of 5 per cent would permit.
Wealthy foreign buyers: There is ample evidence that Vancouver is unique in North America as a mid-sized urban area with a very large number of foreign buyers who use substantial wealth acquired elsewhere (and generally only taxed elsewhere, if at all) to buy homes. Toronto is attracting many non-resident buyers as well.
Two further factors apply mainly to Vancouver: a lack of land for detached housing and high construction costs.
These long-term factors have been aggravated in both markets by:
‘Renovate-to-sell’ entrepreneurs who purchase older homes and then, while nominally living there, either rebuild or renovate them, before reselling for a quick tax-free profit; and
Pre-Closing ‘Shadow Flipping’ (aka ‘Assignments’). When prices rise so fast, profits can be made “flipping” a contract to buy a house or condo before closing.
There are some simple, fair and timely steps governments at all three levels could take to talk the market down to more reasonable levels.
Taxation:
Let’s start with foreign buyers. We could impose a special — temporary — tax on all purchases of housing in these hyper-inflated markets by non-tax residents, to be paid upon closing. Using tax resident status to trigger the tax is both logical and fair; those paying their fair share of income and other taxes in Canada would not be penalized, whatever their origins.
Enforcement would require a purchasers to prove they’re Canadian taxpayers in good standing. That would evade abuse — for example, the wealthy foreign businessman whose wife, children or parents nominally “buy” a house in Richmond but have no material declared Canadian taxable income. To avoid the tax, a buyer would have to demonstrate a minimum declared historic income or minimum tax paid — and if the income shown does not support the cost of the house, no exemption. Corporate buyers would have to prove that beneficial ownership of the property is enjoyed by taxpaying residents.
The renovate-to-sell flippers should be subject to full taxation on their gains as is required by existing law. And provincial governments should look at bringing in a steep ‘flip surtax’ for any property which is either:
resold in less than say 2 years; or
sold in circumstances where the original contract of sale was “assigned” from the original buyer. (aka ‘shadow flipping’).
For resales within the time limit, owners who are forced to sell for non-speculative reasons — such as an unexpected transfer — could apply for an exemption.
Making immigrant investment work for residents:
Taxes alone won’t be enough. Rather than just deterring overseas buyers from buying in Vancouver and GTA, governments should accompany tax policy with a program to channel the money now chasing overpriced homes into a long-term immigrant investment fund dedicated to building affordable rental housing in return for a visa.
Expanding the rental pool
Condos should be the main source of new rental housing — but we need to ensure more of them reach the long-term rental market, rather than being held empty or underused as short-term investments, or rented as short-term accommodation for visitors. Provincial governments could consider selectively limiting outright bans on rentals in strata bylaws, at least in new condo complexes.
Municipal governments must also enforce existing bylaws to stop owners from renting out condos and other rental housing in the Airbnb-type short-term rental market.
None of these proposed reforms is extraordinary. More than half could be implemented without passing new legislation. All could be geographically targeted at Vancouver and the GTA. Some, like a flip tax, would require consultation and careful drafting before being legislated — but even committing to pass them should have a moderating effect on markets. Any additional tax revenue earned by provincial governments from the taxes should be invested in subsidizing affordable housing.
A small number of non-speculator owners who recently bought at the top of the market might suffer from lower prices. But that risk was always there — and arguably was obvious to any informed buyer for the past two years or so.
Introducing these measures strategically would actually protect buyers, by staving off another catastrophic market crash of the kind that occurred in Vancouver in 1981 and the GTA in 1991. The potential costs to the entire Canadian economy, to middle and lower-income families, of both spiraling housing costs and a market crash are too high to risk.
Original Article
Source: ipolitics.ca/
Author: J. Geoffrey Howard
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