Government intervention in free markets might solve some problems but create others. Was this new government policy really necessary or did it forcefully the Vancouver housing bubble?
The Vancouver, B.C. (British Columbia) residential housing market was red hot the last few years pricing many locals out of the market last summer. Locals especially resented the Chinese buyers and wanted to mitigate this source of demand. Now foreign buyers who purchase residential real estate will be forced to pay a 15% foreign buyers tax thanks to a new rule imposed by the Canadian Federal Government . The new transfer tax went into effect on August 2nd of 2016 and the impact is already being felt as home sales velocity has dropped 32.6% in September compared to a year ago with similar declines expected to continue. Previously surging prices have now flat lined. But was this new government policy really necessary or the right type of market interference?
Historically, aggressive legislation similar to this foreign buyer tax have created or exploited loopholes, caused unintended consequences, and facilitated creative workarounds for those with sufficient motivation and means. Government intervention in free markets might solve some problems but create others. In some cases the remedy is a solution is search of a permanent problem that is really temporary. If the folks working in the B.C. government did any research they did not publish the findings.
Rewind to 1986 when the Japanese has descended on Honolulu in a peaceful way. Annual appreciation rates in Waikiki and Waiala-Kahala, HI were in excess of 20% per year and by 1987 crested 40% on account of increased primarily Japanese buyer activity. This was a direct reflection of the Yen/dollar exchange rate at the time making the purchase of homes in Yen feel like a bargain. As the prices surged in very limited neighborhoods and the Yen softened the home price inflation subsided. Some lucky local sellers were able to pocket exorbitant prices and buy in markets less affected by foreign demand. Later, as prices returned to normal, they were able to buy back in with cash in their pockets.
In 2012 Hong Kong experienced a similar steep run up of 25.7% in housing prices, and imposed an identical 15% tax, to little avail. Today Hong Kong’s housing market remains one of the world’s most unaffordable, and volatile. In both instances housing prices eventually returned to a lower market equilibrium pricing level, with or without direct government intervention.
In efforts to curb housing demand all B.C. homebuyers will be subjected to a more stringent mortgage rate stress test, essentially reducing those who qualifying to buy to a smaller set of financing options. Such rules are actually making it harder for the first time homebuyer to qualify, the very same Canadian buyer their government was looking to protect!
So, it stands to reason that perhaps the B.C. government might have overreacted in their near term response. Other rules applying to all owners may have been sufficient. For example, an annual fee if the home is left vacant may eliminate a source of demand resented by locals vested in their neighborhood.
Note the theme, all their new regulation is aimed squarely at the demand side. Vancouver is a really nice place to live and work. We can presume it will continue to experience net population gains going forward. A more balanced approach to this former fear of a housing price bubble could have included some immediate support for an increase in the supply of new affordable housing. If the regional and local governments don’t address inventory levels, home price appreciation faster than incomes will soon come back. One thing remains certain, government actions to target or restrict foreign demand in a local market hurts both locals and foreigners alike.