B.C. Business Matters:
Jock Finlayson >>
Pros and Cons of the NDP's Housing Plan
In Budget 2018, the NDP government unveiled a 30-point housing plan intended to address concerns about housing affordability – including escalating rents – in Metro Vancouver and some other urban areas of the province. The Business Council recognizes the pressure on government owing to mounting public anxiety over housing affordability. And we believe that housing policy should be driven by the needs of the local population, not the preferences of non-residents or the aspirations of “investors” whose interest in housing is primarily based on the expectation of capital appreciation and/or a desire to park capital in a safe and stable asset class.
That said, there are some problems with the government’s overall approach to housing as seen in Budget 2018.
The Budget outlines a series of steps to curb housing demand, including foreign demand, and also to extract more revenue from certain groups of property owners. Arguably, raising additional revenue was more important than improving affordability in motivating the specific actions taken by government. There is also some focus on housing supply, through additional funding to build more rental, co-op and non-market units and providing universities and colleges with additional room to expand the stock of student housing.
Taken together, the housing-related tax policy changes in Budget 2018 are projected to generate more than $500 million annually in extra revenue when fully implemented.
Tabulating the Housing-Related Tax Measures in Budget 2018
|Increase/expand reach of foreign buyers' tax||$35m||$40m|
|Increase school tax on properties >$3m||$50m||$200m|
|Increase PTT to 5% from 3% on properties >$3m||$81m||$81m|
|Total housing related measures||$253m||$521m|
|Source: Budget 2018, p. 8.|
- The foreign buyer’s tax on property purchases in Metro Vancouver introduced by the former Liberal government is increased from 15% to 20%, and its geographic reach is extended to the Fraser Valley, Greater Victoria and the central Okanagan. There is no grandfathering for buyers who entered into contracts prior to the Budget – a flaw, in the Business Council’s view, one that compounds the mistake made when the foreign buyers’ tax was first enacted in 2016. Failing to grandfather existing agreements will hurt the province's reputation as a place to invest and do business.
- A higher property transfer tax rate (5%) will now apply on homes valued at more than $3 million. This is a revenue grab targeted at relatively affluent home-buyers.
- The provincial school tax rate is increased on homes assessed at $3 million and up, with the same goal (incremental revenue generation) in mind.
- Most controversially, a “speculation” tax is to be introduced on residential property, at a rate of 2% of assessed value by 2019-20. It is expected to capture both foreign and Canadian non-residents who own property in urban areas but don’t pay much if any BC income tax – and who don’t rent their properties out. Principal residences apparently will be exempt. The term “speculation tax” is a misnomer. This is a new, annual wealth tax on property, one intended to apply to non-resident owners who pay little or no provincial income tax. We are troubled that the rule is structured to exempt property owners who pay BC rather than federal income tax. The tax will impose a sizable added burden on non-BC Canadians who have second homes in urban communities across the province. It may also hit BC residents with second or vacation homes within the province – at this point we don’t really know, since the details around the tax haven’t been finalized.
How will the above four tax measures, in combination, affect housing markets? Some impact on demand is likely, especially at the higher end of the market, where foreign buyers play a disproportionate role. Urban regions beyond Metro Vancouver may see a slowing in overall transactions and a fall in prices as the expanded (and higher) foreign buyers’ tax kicks in.
The demand side measures adopted by the government are unprecedented in scale and scope. That itself creates some risk of unintended consequences. British Columbia’s large housing sector, along with associated construction activity and retail spending, has been a leading factor powering economic growth over the past several years. A material slowdown in residential investment – homebuilding but also renovation spending – along with sales activity, would weigh on future GDP and job growth. A gentle softening of demand coupled with several years of broadly stable prices would be a welcome and healthy market adjustment; sharp declines in prices, residential investment, and sales transactions would not.
Will the demand side measures in Budget 2018 do much for housing affordability? We are skeptical. The biggest price drops, if they occur, are expected to be concentrated at the top end of the market. At the lower and middle segments of the market, housing prices are largely driven by fundamental factors – local population growth, job creation, patterns of household formation, interest rates, and government policies that affect land supply and development costs —rather than by “foreign” capital or speculative activity.
Moreover, in some ways the housing-related tax policy changes adopted by the province may work against the goal of improved affordability. For example, applying the higher school property tax to residential development sites where houses don’t yet stand will raise costs for developers – leading to higher prices for homebuyers down the road, regardless of whether the developments consist of expensive homes, “average priced” homes or even purpose-built rental units. The same is true of the higher property transfer tax on properties valued at more than $3 million: it will also hit land that is assembled for development, pushing up costs for developers which ultimately flow through to homebuyers.
Supply: The Missing Piece
Finally, there is not enough in the government’s plan that will boost supply and accelerate the development of new market housing to meet future demand. Increasing the “elasticity” of housing supply requires incentivizing faster densification in urban communities, speeding up municipal permitting and approval processes, and finding ways to reduce the heavy costs that local governments often impose on new residential development. There is more the province could do to deploy a mix of “sticks and carrots” aimed at persuading municipalities to become allies rather than obstacles to advancing the goal of housing affordability.