In the opinion column of “The Globe and Mail” today (29th March, 2016) you will find an article titled “Sure, collect housing data – but we can’t afford to wait to act” by Josh Gordon and Anjum Mutakabbir of Simon Fraser University’s School of Public Policy. This perfectly sums up my own feeling about the situation. This situation is very acute in Vancouver where Canadian residents are being forced out of Vancouver due to affordability of housing. To an extent, the article discusses information that suggests that Toronto has also had some share of this foreign investment.
The point being made was that it does not matter that it is Chinese money. Look at it as foreign money distorting the local residential real estate market and causing significant pain to Canadians.
As with any problem, interested parties approach it from their perspective and some would consider that undue haste is dangerous because any hasty action could have undesired side effects or still worse, it could derail the only strong sector of the economy in the midst of a downturn. Yet, people who feel forced to move out of the city due to high housing costs would find that things are not happening fast enough. Imagine that you are a young Canadian launching into the work force or ready to start a family. You need to set up your own home and find that you cannot afford to buy a house closer to your parents. In fact, you probably have to look for a job else where so that you can afford a house. Your parents will follow you to help you with your young children (day care is quite expensive). Imagine what this does to the labor market?
Another interesting fact that the article points to is the concept of Gentrification. The Gentrification process in terms of normal cities happens very slowly. As the city core becomes more and more expensive, people spread outwards and some neighbourhoods that were a bit run down find favor with people moving in from more prosperous areas. They bring with them a fresh wind of change and soon the old houses are demolished and newer and better designed housing happens. this increases property values and helps the municipal tax collections too. this is good for the economy because soon the low budget groceries are replaced with mid-range to high end grocery stores and similar amenities. these in turn provide jobs. The process being gradual, there is plenty of time for people to adjust.
The kind of Super Gentrification happening in Vancouver is rapid. Overnight houses are sold, demolished as soon as possible, rebuild and sold multiple times over. New owners are typically non-resident. Existing owners are moving out and taking with them their consumer spending. This is not good for the economy. Agreed that higher property values equal higher property tax collections. However, if for some reason the foreign owners want to take out the money all at once, we can see big problems for the economy. Not so long ago when the Canadian Dollar was at par with USD, many Canadians bought American property because there was a housing down turn in USA and along with the strong Canadian Dollar it made good sense. Now with the increase in US housing prices and weakness of the Canadian Dollar, there are anecdotal reports that Canadians have been selling their American properties and getting money home.
The good thing about Josh and Anjum’s article is that they have a great solution. Tax properties above a particular threshold at a higher rate and provide refunds when tax returns are filed. This I agree will be a very targeted approach because locals will get refund and non residents who do not file tax returns will end up paying more. This will make it less attractive for them to invest and drive up prices in Vancouver. This approach is quite practical and could be introduced right away while we go about the business of collecting data and working on a long term approach.
I think the more we talk about this issue and prevent it from getting into the back burner, the better. We already have one of our major cities facing this problem and it is logical to assume that the overflow will come into our other major cities. At that time, it will no longer be a provincial problem but a national problem. It will be much more entrenched and involve more risks to the economy. We should avoid paralysis by analysis and act fast in the interim while we go about formulating a long term balanced strategy to counter this problem.