By Andrea Craig, JDI Student Fellow, Queen’s University

Housing prices, housing affordability, and the impact of offshore money on residential real estate in Vancouver are not new topics. However, policies to address these issues are new. Beginning last August, foreign purchases of residential real estate in Metro Vancouver are subject to an additional 15 percent property transfer tax. In addition, last month, the provincial government announced repayable down-payment assistance for first-time homebuyers in B.C.

As consumers we associate higher tax rates with higher prices. In the usual case of a tax imposed on all consumers, this is correct. However, in the case of the foreign property transfer tax, prices will decrease (or appreciate less). Here is a stylized analysis showing how the foreign property transfer tax decreases housing prices.

Down-payment assistance for first-time homebuyers will increase demand for housing by this group, which will unequivocally increase housing prices in the province. Since this policy is a loan, it encourages first-time buyers to take on more debt and the risks associated with it. As economist Rob Gillezeau succinctly summarizes this policy, “B.C. is encouraging residents to take on bigger risks, with all the benefits going to existing homeowners and developers.”

UBC economists Thomas Davidoff, Joshua Gottlieb, and Tsur Somerville propose a policy that targets residential property owners without economic ties to the region and helps local residents. Under the BC Housing Affordability Fund (BCHAF), a 1.5 percent surcharge would be imposed on all residential real estate in participating jurisdictions each year. However, most homeowners would be exempt from paying the surcharge. For owner-occupiers, this surcharge would be reduced by the amount of income tax paid by the household. For example, the owner of a $600,000 home would have a $9,000 BCHAF surcharge each year. The homeowner’s contribution to the BCHAF would be zero if the household paid at least $9,000 in income taxes. If the household paid $7,000 in income taxes, the maximum the homeowner would owe to the fund is $2,000. Also, homeowners would be exempt from the surcharge if they were veterans, disabled persons, or retired Canadian residents. For investors, the BCHAF surcharge would be offset by rental revenue reported to the Canadian Revenue Agency; this would discourage investors from keeping dwellings vacant. Distributing the BCHAF funds is much simpler than collecting: the revenue from each jurisdiction would be distributed with lump-sum payments to taxpayers in that jurisdiction.

The BCHAF policy proposal has multiple advantages:

• Most importantly, this surcharge targets residential property supported by foreign inflows. In contrast, the foreign property transfer tax is a crude policy instrument because it does not affect permanent residents or Canadian citizens without economic ties to the country, but it affects new immigrants who are living and working in Metro Vancouver.
• Many taxation structures that would be theoretically sound policies are not feasible based on the information the government currently collects or it is feasible to collect. However, the BCHAF relies on information the government already estimates or collects. This surcharge would be based on the property assessments used to calculate municipal property taxes. The critical information to determine exemptions is contained in income tax returns.
• The BCHAF would benefit both renters and property owners in participating jurisdictions. In contrast, down-payment assistance will likely exacerbate the housing affordability crisis, and does not benefit renters.
  
• Finally, the BCHAF is revenue neutral: it would not require additional tax revenue to implement. In contrast, the down-payment assistance will require about $703 million over three years according to projections.

Given the current immigration laws, tax enforcement, and administrative feasibility, the BCHAF is an excellent policy to help mitigate the housing affordability problem in Vancouver.