3 Reasons Why British Columbia’s Tax on Foreign Housing Buyers Won’t Work

Canada’s housing market remains a hot topic, especially with prices in some regional markets such as Vancouver continuing to experience double-digit growth. In June 2016 alone, Vancouver’s average house price shot up by a startling 11% year over year to be just over $1 million, or more than double what it was a decade ago. This growth, according to some analysts and politicians, is occurring because of a sizable influx of foreign investment from China.

As a result, the government of British Columbia has implemented a 15% property transfer tax on foreign home buyers. This should reduce the volume of foreign investment, stabilize the market, and make housing affordable for local buyers. There are, however, signs that the tax will not have the desired effect and prices will continue to rise.

Now what?

Firstly, there is a lack of evidence that foreign investors are responsible for soaring housing prices.

Government of British Columbia data shows that for June 10, 2016, to July 14, 2016, 10% of all transactions by value in Metro Vancouver can be attributed to foreign purchasers. While this may appear to be a big number, it isn’t capable of driving the massive growth in prices witnessed over the last decade on its own.

Many economists believe that the real driver of excessive housing prices is a lack of supply coupled with lax lending standards and cheap credit. Earlier this year Capital Economics economist Paul Ashworth voiced these very sentiments, and ratings agency Moody’s Analytics drew similar conclusions, stating that inadequate housing supplies rather than inflated demand from foreigners is responsible for driving higher prices.

Secondly, it has been speculated by some market pundits that a housing bubble doesn’t even exist.

According to Nobel Prize–winning economist Joseph Stiglitz, a bubble exists when the price is high today only because investors believe that the selling price will be high tomorrow, despite fundamental factors not supporting those prices.

This indicates that for a bubble to exist there needs to be a degree of frenzied speculation, but this is not happening in Vancouver. It appears that it is a lack of supply that’s responsible for the inflated growth of housing prices. This becomes apparent when considering that Vancouver’s housing inventory for June 2016 was less than half of its 10-year average and inventories have been below this number since 2014.

In fact, number of economists and academics have pointed to inadequate supplies as being the key driver, while some planning authorities point to the scarcity of land that’s preventing new supplies of housing from being developed.

Finally, Vancouver is experiencing considerable population growth, placing even greater pressure on already constrained housing supplies.

According to National Bank of Canada, the working-age populations of Vancouver and Toronto are growing 70% faster than the rest of Canada. This can be attributed to those cities having the greatest concentration of jobs and highest job growth in Canada. For 2015 economists from the Bank of Montreal reported that Vancouver and Toronto were responsible for all of the nation’s job growth in that year.

This is creating considerable demand for a limited inventory of properties, causing prices to soar ever higher. 

So what?

The direction of Vancouver’s housing market is difficult to predict with a lack of hard evidence supporting claims that a housing bubble is being created by excessive foreign investment. One factor naysayers are ignoring is that the current situation could represent a rebalancing of supply and demand to establish a “new normal” for prices. Even so, with the growing alarm surrounding Vancouver’s property market, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) sensibly moved to reduce its exposure in May.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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