In a rush to blame foreign money, BC risks driving away much-needed capital. Part two of two.
Part two of a two-part series. Read part one here.
The law of unintended consequences
When Chinese national Jing Li bought a Burnaby townhome, she quite reasonably thought she’d be treated like anyone else. Instead, she was hit by a 15% foreign-buyer tax – and sued the provincial government.
As part of its defence, the provincial government produced an affidavit from Simon Fraser University finance professor Andrey Pavlov.
“Foreign investment directly increases the demand for real estate,” wrote Mr. Pavlov, according to the Globe and Mail.
“In addition to the direct demand, foreign investment likely induces local investors and residents to also increase, or at the minimum accelerate, their real estate investments. Since the Greater Vancouver Regional District (GVRD) is supply constrained, the increase in demand translates into higher prices.”
While acknowledging the impact of foreign capital, Mr. Pavlov is also worried about the public’s growing tendency and seemingly implacable anger to blame the bulk of the region’s housing problems on foreign buyers.
“Foreign buying has had an impact, but I don’t know if it’s the biggest,” he said in an interview.
“There are clearly a number of forces that work together. It’s very difficult to establish which forces are more powerful.”
He criticized the ‘Dirty Money’ report for being “ridiculous” in exaggerating the impact of laundered casino money.
“It’s such a small amount. This (has) nothing to do with the housing crisis.”
He described Mr. Eby’s attempts to sell a link between Metro Vancouver’s housing problems and Chinese criminal activities as a “politically easy” move that “resonates with voters.”
“You’re not offending anyone who’s involved (in the housing market). You’re only offending people who don’t vote,” he said.
If the trend of blaming foreign demand persists – and if governments keep trying to tax the problem away – Mr. Pavlov foresees negative consequences.
First, he thinks it’ll distract the various levels of government from the urgent task of boosting supply. Critics, including developers, have long maintained they are hobbled by restrictive and onerous government regulations and red tape.
Mr. Pavlov said population growth has outpaced home completions for over 10 years, creating a long-term housing deficit.
According to BC Stats, between 2008 and 2017, the region’s population grew from 2.26 million to 2.59 million – an average annual gain of slightly over 33,000. Over the same period, Canada Mortgage and Housing Corporation (CMHC) data show Metro Vancouver completing slightly over 17,500 housing units a year. When you take into account the demolition of older buildings, Mr. Pavlov calculates the region has been adding only 16,490 new units a year.
This means that every completed unit accommodated two new arrivals. On paper, this just about balanced the growth in supply and demand – but overlooks the fact that more people are living on their own and families are becoming smaller. The increase in single-person and small-family household units points to demand growth increasingly outstripping supply.
The shortfall worsens when Mr. Pavlov factors in the additional pressure on the region’s housing stock from students and temporary workers.
Given its transient nature, this group is not covered by BC Stats. But when included, Mr. Pavlov found Metro Vancouver’s population grew by 44,329 per year over the past decade – 34% higher than reported by BC Stats.
Another less-mentioned source of demand is the growing flow of tourists and short-term visitors using services such as AirBnB. Last year saw a record number of 10.3 million tourists — four times Metro Vancouver’s population. While most stayed in hotels, a not-insignificant number chose less conventional commercial accommodation that otherwise might have been occupied by local residents.
At its annual conference last month, the Union of BC Municipalities (UBCM) focused on the threat of foreign demand and speculation – while absolving its members of the responsibility for increasing housing supply.
This debate is taking place while the provincial government defends the foreign-buyer tax in court. Should the government lose, it will almost certainly trigger an expensive class action lawsuit. Foreign buyers could be in line for refunds totalling hundreds of millions – money the provincial government has already collected and likely spent.
“Why can’t BC?”
Other countries impose taxes on foreign buyers, including two of the world’s freest market economies, Singapore and Hong Kong. Why can’t BC?
The difference lies in implementation.
In 2016, Mr. Eby expressed sympathy for foreign buyers snared by the new tax. He slammed the BC Liberal government for not granting a grandfather clause. But when in government, the NDP not only turned its back on affected buyers, but raised the tax to 20%, and expanded its scope.
These decisions underline an angry message that all foreigners — not just rich criminal elements, but many who intend to stay and work in Metro Vancouver — are the main cause of the region’s rising housing costs.
Possibly, the biggest unintended consequence is the loss of confidence and trust. The government’s most potent solution for making affordable homes consists largely of imposing taxes on a small pool of foreign buyers. There is much less interest in finding ways to grow the economy and create wealth.
Instead, the public is being asked to consider “solutions” like Mr. Weaver’s call for a complete ban on foreign buyers of BC’s real estate.
The parochialism set by the NDP and Greens is leading the province further down the path of populism, and away from discussing new ways to engage the world and tap global capital – instead of fighting it – to meet BC’s housing needs.
A new generation of well-educated politicians and activists of diverse background, including new immigrants, is becoming BC’s new nativists in a strange war to keep money from coming into the province.
Jing Li’s lawsuit could have been prevented if Mr. Eby followed his own advice, and grandfathered the tax. Instead, the province now faces a possibly protracted and costly fight while stirring up resentment.
No matter how the courts decide, there will be no winners.
Ng Weng Hoong is a veteran reporter with over 30 years of experience covering the energy industry mostly in Asia. These days, Ng watches the world from his Vancouver apartment. His focus is increasingly on China, its impact on the Chinese diaspora, and the complex relationships that they have with each other and other countries.