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Housing Affordability a Key Topic During Trudeau's Visit to Vancouver

Housing Affordability a Key Topic During Trudeau's Visit to Vancouver

I was in Vancouver last week during Justin Trudeau's visit; his car actually pulled up in front of my cab as I was hopping out.

While the hottest topic was the $460 million in federal funding for British Columbia transit (provincial and municipal contributions top that figure up to over $900 million), the housing affordability crisis and listings shortages in over-heated markets like Vancouver and Toronto was a key topic in Trudeau's interview with CBC Radio Vancouver . Even the prices of Vancouver condos and Toronto condos are rising well above traditional inflation levels, although they're still an affordable alternative for buyers priced out of the freehold market in Canada's two hottest real estate zones.

Trudeau's comments come as no surprise as housing affordability was a key campaign message; one that was further underscored in the release of the 2016 Federal Budget that we took you through back in March.

Canadians now want to know what specific measures the Federal Government will be taking to bring balance back to the country's hottest real estate markets. While we don't have specifics yet, we do have confidence that an action plan is in the works.

Here's what the Prime Minister had to say on his visit to Canada's hottest real estate market, Vancouver.

Trudeau Says Housing Affordability a Priority for the Feds but Prudent Planning is Key

Local real estate markets are typically the concern of municipal and provincial governments but with the extreme conditions we've seen in Toronto and Vancouver in recent years, the federal government is stepping in.

The challenge, of course, lies not in recognizing that an intervention is needed but in crafting a plan that a) is grand enough in scale to have a significant impact but b) doesn't swing the pendulum so far the other way that it causes a freezing, rather than a cooling, in any of Canada's real estate markets.

In addition, because any Federal measures need to be applied across the country, the Feds have a challenge on their hands to develop a plan that doesn't hurt the rest of Canada at the expense of cooling off Vancouver and Toronto.

Trudeau told CBC Radio Vancouver last Friday that he is talking to their municipality and province, but not yet in a position to announce an action plan or release any specifics. He did tell CBC though that "obviously overseas money coming in is playing a role" in Vancouver's housing crisis.

He went on to say that stabilizing these two key markets is a priority but implied that they aren't going to implement plans in a knee-jerk fashion.

"We need to make sure that any action we take is not going to make the situation worse. The law of unintended consequences is very, very present in housing markets," he said.

"As a federal government, levers we use here in Vancouver and perhaps Toronto could have extremely negative impacts on housing markets in Calgary or Montreal or Halifax... We need to make sure that we are reining things back a little bit in a way that doesn't completely devalue those people whose equity is still in their homes... Getting that balance right is going to be really important."

Finance Minister Announces Working Group to Study Canadian Housing Market

After Monday's meeting by officials in Vancouver, Finance Minister Bill Morneau announced this past Thursday that a working group is being established to research and analyze what's really happening in Canada's housing market, with a focus on Toronto and Vancouver. The working group will include representatives from the federal government as well as the Ontario and B.C. provincial governments.

As quoted in the Globe and Mail , Morneau stated: "The working group that we're setting up will review the broad range of policy levers that affect both supply and demand for housing, will look at the issue of affordability and will look at the stability of the housing market."

This comes after the latest data from the Canadian Real Estate Association shows that last month's resale price for Vancouver homes was up a staggering 30% year-over-year.

Can Taxation Cool Toronto and Vancouver Markets?

Not too hot. Not too cold. Just right. That's the key to success. So, what actions might this new working group consider in their intervention of the nation's two, hottest real estate markets?

Some of the more popular strategies with Trudeau's constituents revolve around taxation. Specifically, some sort of hefty taxing of foreign buyers (e.g. occupancy tax) and foreign sellers (e.g. capital gains). Others believe a luxury tax on the nation's most expensive properties is warranted.

With the first strategy, you won't find many Canadian citizens arguing with the need to cool foreign investment in Toronto and Vancouver and taxation seems the most logical course of action to do so. An outright ban of foreign-owned property is too drastic and could have catastrophic effects on our local market.

Currently, non-residents don't pay anything more to buy a property in Canada than a Canadian citizen does but there are tax implications to sell (although many would argue that they're not strict enough compared to other countries).

Occupancy tax is something we hear tossed around in conversations in the industry but I can't see Canada going this route. A steep capital gains tax on real estate sales by foreigners, on the other hand, may just be the ticket. That should be viable in terms of implementation and it's something that's been imposed in many other countries including the US, the UK and Australia. So, while every market is different, we have case studies to follow.

It may not decrease the level of foreign-owned property to the extent some would hope but it would certainly add to the nation's coffers and perhaps help fund some of the social housing projects in Trudeau's master plan (albeit probably not in a direct way).

Regardless of the actions taken, understanding who owns property in Canada and to what extent is the obvious first step. The truth is, we simply don't know just how much of Toronto's and Vancouver's properties are foreign-owned.

Making it mandatory to state your citizenship in real estate contracts across the country is a natural, first step along with ensuring that this information is released from local real estate boards to the government, likely through StatsCan. Currently, you do have to state if you're a non-resident in your mortgage application but a lot of wealthy foreign buyers don't need a mortgage to buy.

The Feds have dedicated $500,000 to StatsCan for research so hopefully we'll have a clearer picture of foreign-ownership in 2017. Whatever the measures taken to cool the market, it's clear that the right approach will need to be evidence-based and not fear-based. We simply don't know right now how big of an issue foreign ownership is.

A luxury tax is more controversial but it's not without precedent. As an example, New York has had a "mansion tax" for decades.

It started in 1989 during tough times as an economy boost when only high earners could afford properties over $1M but now, a huge percentage of properties in New York City fall into that "luxury" category of $1M+. This is in addition to transfer tax on any property purchase. Mayor Bill de Blasio proposed reforms to the mansion tax that would see a luxury tax of 1% on real estate purchases over $1.75M of 1% and of 1.5% on purchases over $5M.

But Torontonians already pay the steepest land transfer taxes in the country. Should we be hit again? And is the luxury market even the problem?

I can speak to Toronto's luxury condo market and say that there's a lot of stock right now. Sales have been slow this year in a lot of the city's luxury condo buildings like the Four Seasons. It's the family housing market where we're seeing the most stress, particularly with family-sized freehold houses under $1M.

The other issue with the luxury tax "solution" is that some people proposing it seem to want it for the wrong reasons. A lot of the comments on related new articles we've been reading are pro-luxury tax not as a measure to help strengthen the overall economy but rather as a way to reign in "dirty money" property purchases. In other words, let's make multi-million dollar home purchases less attractive to buyers trying to avoid the eyes of the tax man, whether it be citizens or foreigners making the purchase. However, the vast majority of luxury home purchases are by honest, tax-paying citizens and so taking a blanket approach to address a much more niche and the specific issue doesn't make sense to me.

If we look at our local picture, land transfer tax is already through the roof; purchasers of luxury Toronto properties are hit hard given the double whammy of Provincial and Municipal taxes. Land transfer tax is not a set fee and there's no maximum (it's calculated on a percentage basis); luxury Toronto condos and houses are already taxed very high. Plus, all of our property taxes are on the rise. Why should the wealthy have to pay more on real estate purchases when they already do under our current system?

Should the wealthiest citizens be taxed at a higher rate? Maybe. Then focus on income tax change. Should real estate fraud, money laundering and tax evasion be cracked down on? Absolutely. Then focus on more frequent and fulsome CRA audits. But adding a luxury property tax to our nation's already steep real estate prices just doesn't make sense to me. But you may disagree.

Tell us what you think the Feds should do, below.

Lead image: Photo of Vancouver by Harshil Shah from flickr. Vancouver's False Creek area by Kenny Louie from flickr. Photo of home in Toronto's affluent Bridle Path neighbourhood courtesy of Property.ca .