On the Doorstep of the Greatest Single Local Loss of Wealth of All Time
We are a year out from the last provincial election, and a series of onerous provincial tax amendments on property taxes pertaining to housing as well as changes to the mortgage rules ordered by the Federal Superintendent of Financial institutions have impacted both the volume of residential transactions as well as the previous price trajectory.
It has long been observed whether in the stock or property markets, that volume precedes price. Here is a look at market metrics for single family homes in the Greater Vancouver Real Estate Market over the last year.
MLS Housing Price Index: https://statscentre.rebgv.org/infoserv/s-v1/jH5k-cjV
Sales to Active Listing Ratio (absorption rate): https://statscentre.rebgv.org/infoserv/s-v1/jHPq-WuG
Volume of Sales Transactions: https://statscentre.rebgv.org/infoserv/s-v1/jHPM-K56
The volume of Sales Transactions for single family homes has decreased by 32.3% since the end of April last year.
I believe it was Theodore Roosevelt that said words to the effect of “The Great Depression is over. Go out and spend”. These words are credited to stimulating the economy and pulling America out of its depression through consumer spending growth.
When one thinks of our local Vancouver economy over the last decade, a great deal of wealth has been created through real estate holdings, whether the principal home or otherwise. Just as utterances from the President of The United States can stimulate consumers to spend, crimp its tourism industry’s growth and cause arrested growth in the Canadian economy by threatening NAFTA, so can comments by provincial cabinet ministers such as Carole James (Finance Minister) concurrent with legislation enforcing them like: “The goal of BC Government is to see a housing price drop” [Vancouver Sun February 21, 2018].
While is might be a noble and politically beneficial goal to have lower housing prices so that everybody can in principle afford their own home, our economy does not work that way. Billions of dollars have been spent on real estate related products, from construction trades, renovations, building supply stores, labour, and transportation of related goods. Anticipating and relying on comments from a relatively new socialist government with huge spending plans will cause investors to cease investing locally, cease construction permit applications and terminate their buying plans having fueled same for the last decade from home equity lines of credit (HELOCs). New car plans, vacation homes, home furnishings and all of the big ticket items (previously purchased with real estate wealth and with confidence) will have their purchase plans grind to a relative halt.
Employees of the companies that supply these goods and services will get reduced hours, laid off and in many cases terminated as a result of the business downturn. Expect auto dealership inventories to swell, as will hard good consumer item store inventories. Residential house builders will sell-off their current inventory at a discount to eliminate carrying charges and will sit tight and await a market correction. Housing supply will constrict as opposed to grow and there will be less income qualified and employed people to purchase homes that are listed for sale.
The above would be a normal scenario. However, Vancouver’s real estate market is anything but a normal market. Remember when you were a kid, how often someone in your class at school moved? The answer as I recall is “rarely to never”. I estimate that in Richmond alone, some 15-25% of residential housing stock is owned for the purpose of gaining a profit. Unlike the olden days, those property holders will sell on a moment’s notice to avoid losing money. The investment is not usually about local schooling, or family environment. The family is often not together in the country in any event; furnishings are simple and inexpensive, and the property is seen as fungible.
Current legislation will cause the above types of residential stock to hit the market rapidly which will completely flatten house prices. This can already be seen on the above link to MLS Housing Price Index.
The Bank of Canada calculated in 2016 that a 15 per cent drop in housing prices would put one in eight mortgages in Greater Vancouver under water, with a 25 per cent drop meaning one in four mortgages would sink into negative territory.
How many mortgages did the Provincial Government of BC plan to put under water to “correct” housing prices?
It is politically appealing to restrict foreign buyers from entering our market and stripping away residential housing stock away from locals. What I am worried about is the uncalculated spillover effect of the new legislation on the rest of the economy.
Using tax policy to disincentivize an action such as a foreigners buying local property may assist in lowering prices and reducing the number of buyers in our market. But it will do little to raise taxes to replace the lost Property Transfer Taxes that are no longer being generated and which contributed some $1.5 Billion to the BC economy in years passed. Secondly, the decline in residential asset values will not be offset by anyone’s gain. It will simply be a “make the rich pay” scheme to induce house-have-nots to vote. It will not raise incomes. It will result in greater unemployment and will erode BC’s credit rating due to lost and unrecovered provincial revenues.
It remains to be seen whether the increase in annual property taxes imposed on properties in excess of $3,000,000 under the guise of "School Taxes" will offset the total of lost market value to residential stock. Even if it does, that will be little comfort to those affected property owners. As for the rest of us, do not hold your breath waiting for community benefits from any potential dividend accruing to the public purse. I expect a good deal of it will go to the provincial government’s advertising budget. Finally, the additional tax on properties in excess of $3,000,000 will do little to furnish the less affluent a home in the areas affected. If the market reacts to this increase as it does to any price increase, look forward to price declines of about 9.2% on properties valued around $6.5 mill on the assumption that an additional principal amount of money of that proportion of the asset value will have to be set aside at approximate 2% bank yield to pay for the extra $12,000 in new School Taxes. On the $6.5 Mill example, that is a price decline of $600,000. Quaerewhether banks might start to have the additional taxes included in the mortgage payments to protect themselves from recent at risk buyers who just might want to mail in the keys.