VANCOUVER: Home prices and sales in the Vancouver region dropped sharply in August after the new 15 percent property transfer tax levied on foreign home buyers in the Canadian city took effect on August 2. The new tax aims to tame the red hot housing market in the area and money raised from the tax will be used to boost rental housing subsidies and ensure affordable homes for the middle class.
According to government figures, Metro Vancouver accounted for 49.7 percent of all home transactions in the five weeks between June 10 and July 14 in British Columbia, the westernmost province in Canada. 73.3 percent of the transactions in Metro Vancouver were by foreign buyers, suggesting that the rapid rise in Vancouver home prices was mostly driven by speculative purchases by non-Canadian buyers, many from China.
The new tax policy has sparked controversy since its rollout. Some believe that the policy will have a limited impact on curbing speculation in the property market while others believe that the restrictions on foreign home buyers are against WTO rules and that the local government may face lawsuits. But in fact, taxes are an effective tool to curb speculation and bring down prices. Furthermore, the effect will be immediate. Data showed transactions in West Vancouver dropped 94 percent year-on-year from August 1 to 14; only three homes were sold in the area, compared with 52 in the same period last year.
Over the last decade, some Chinese investors have been getting rich instantly by speculating in the domestic property market, and, as a result, pushing up home prices. After having honed this practice here, they have moved overseas to speculate in property in foreign countries. Vancouver and Toronto are two Canadian cities where Chinese buyers have made some of the most purchases. Although the number of Chinese speculators is not great, their entry into the local property market has severely distorted market expectations and impacted home prices. This has forced the Canadian government to crack down on speculation by Chinese buyers.
Given the new tax to curb speculation, Chinese property buyers will have to be cautious if they want to invest in Canada or other markets in the future. The tax levy will not only bring down returns on their investments but also scare away potential buyers. If that happens, home sales will shrink immediately and the property market expectations will reverse. This would likely trigger a home price crash similar to what happened in Japan in the 1990s or in Hong Kong after the 1997 Asian financial crisis.
Chinese investors have gone on a home-buying spree all over the world, which not only drives up property prices but also fuels resentment among residents in the foreign countries. Canada has not been the only country that has responded to this issue of speculative purchasing by Chinese buyers. Some states of Australia has already imposed their own stringent taxes to restrict speculation by foreign buyers. If speculators still maintain their Chinese-style mindset and believe the government will not let home prices fall, they are wrong; the Canadian government will not allow them to freely push up home prices. Canadian officials have stated clearly that the government will make sure the local middle class can afford homes rather than turn property into a money machine for investors. In this regard, the time for Chinese speculators to bear the political risks in speculating in foreign property markets has begun. Other countries may also adopt similar restrictive measures and such political risks cannot be circumvented.
Most importantly, given the immediate effect of the tax policy adopted by the Canadian government, the simplest measure to restrict speculative home buying is by imposing taxes and restoring the true function of housing – homes should be a residence rather than a tool for speculation. Economic levers such as property transaction tax, property transaction income tax and property tax will all produce instant effects as they put an end to homes being used to make money. The tax policy used by the Canadian government may offer some guidance for Chinese policymakers as they work to tame their own domestic home prices and property speculation.
