Regulatory reform is underway in British Columbia housing markets.
As you may be aware, The New Democratic Party (NDP) has prioritized increasing overall “affordability” in the BC economy. Residential housing markets, inclusive of rent levels and overall home prices, are a key focus with this initiative. The NDP has been outspoken about their intent to curtail rapid housing price appreciation while concurrently suppressing rents. From a historical perspective, Victoria, often pegged as the “California of Canada,” has seen a tight housing supply with increasing global demand. These dynamics are simple in nature, as supply tightens and demand heightens, prices increase. As rents are often a function of housing prices and inventory levels, upward trends in rents have become the norm in the Greater Victoria region.
The NDP Plan of Action.
To date, the NDP has taken a multi-pronged approach in order to achieve their objectives: (1) Implementing a Speculation Tax starting at 0.5% of a home’s appraised value for 2018 ramping up to 2% in 2019. (2) Increasing the Foreign Buyer Tax from its current level of 15% to 20% while also expanding the tax from exclusively Metro Vancouver to Victoria, Nanaimo, the Fraser Valley, Kelowna, and West Kelowna. The realizable impact of such a policy has been a highly contentious topic.
(1) The speculation tax will generally not apply to those who occupy their home, rent their residence, or pay income taxes in BC. This is targeting investors who inject capital in the BC housing market to simply speculate on an increase in price levels.
(2) Quite simple in nature, the foreign buyer tax is purposed to stifle demand from foreign investors for domestic properties.
Whether or not these policies will be effective in distorting external demand and improving housing affordability is largely unknown. The effectiveness of this policy reform is heavily reliant on the degree of enforceability. In Metro Vancouver, the benchmark price of a home is approximately $1,056,500, an astounding 16.6% year over year climb from January of 2017 (MLS Statistics). It is important to note here that a foreign purchase tax was in place throughout this entire period.
A key takeaway from the above is that correlation does not imply causality. That is to say, it is increasingly challenging to discern whether or not foreign demand is a primary driver of housing prices in BC. Though seemingly likely, these policies remain understudied and unproven. Psychological factors are also an important consideration, if policies are motivated to throttle demand, domestic investors are more likely to delay purchase decisions resulting in counteracting forces for rent/buy dynamics. Irrespective of evolving housing policies, macroeconomic fundamentals remain strong and the Victoria real estate market is resilient. Prudent diligence and an awareness of changing market structures should continually be on your radar as you consider purchasing an existing or building a custom home.
The LIDA team is here to help, since 1998 we have been building and renovating homes in the Greater Victoria region and our wealth of experience will add immense value to, not only the home building process, but also your decision analysis between a large scale renovation or a new custom build. Get in touch with us today!