Vancouver has been a super hot market for real estate. Anecdotal evidence points to foreign buyers who consider Canada a safe haven for investment, and who find Canadian real estate prices cheap by comparison with say, Hong Kong. The extent to which foreign buyers have driven up prices, however, is not known because that’s all we have: anecdotes and no hard evidence.
What is indisputable, however, is that house prices had gone crazy. And so the BC government decided to introduce a 15% surtax on purchases by foreign buyers to cool things down a little.
Now I don’t have a problem with that as a matter of policy. Foreign citizens have no constitutionally protected right to own land in Canada. There are precedents. There was a time when Prince Edward Island banned not just foreigners, but everyone who wasn’t an islander from owning land on PEI.
But the way the BC government introduced this tax has caused real hardship and unintended consequences: they made it retroactive to deals that were already underway. The rationale provided was that if they had hinted that a tax was coming, there would have been a surge in house sales.
A new tax that reaches backwards in time to affect deals that were concluded before the law was enacted strikes me as extremely unfair.
It’s unfair to both the buyers and sellers who contracted on the basis of a certain understood set of facts and now find themselves in the midst of uncertainty. It’s unfair to buyers who budgeted to buy a house of a certain value, and now must pony up an extra 15% or lose their deposit and potentially be sued for the shortfall between what they had offered and what the sellers may eventually sell for in a rapidly depressing market.
It’s unfair to sellers, whose firm deals are no longer secure. (The focus has been on foreign buyers. Imagine being a seller who discovers that your buyer can no longer afford to buy because of a tax no one contemplated, while prices plummet? And imagine the litigation involved in recovering damages from someone in another country. Crikey.)
What about the argument that if the government had let on a tax was coming, there would have been a surge in sales? I find it specious; it misses the point entirely.
There didn’t have to be any forewarning. The same legislation could have been enacted with one small change — that it would take effect with respect to all real estate contracts with foreign buyers into from then on. That would have given fair notice to prospective buyers and sellers of what was coming, but with no effect on contracts already in the queue.
Instead, this makes BC look like some kind of a banana republic where contracts aren’t worth the paper they’re printed on because of arbitrary government action.
Markets don’t like uncertainty. Investors will take their money somewhere else. And those foreign workers and students who planned to call Vancouver home find themselves facing significant and unexpected financial losses for no good reason.
The difference between good legislation and bad legislation is that good policy considers all the consequences before laws are implemented. Instead, this law comes off as a political move, entered into quickly without adequate information about the problem it was trying to fix. A rapid drop in house prices may placate locals until the other shoe drops and the economy goes into a tail spin. Instead of slowing down the housing market, this legislation may have killed it altogether.