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July 25, 2016 | The Crash Tax?

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

 

FIRE modified

On a day when the price of oil oozed back down to $43 and the Canadian dollar slid into the 75-cent range, provincial politicians in BC told foreign investors to buzz off. It was a bold, unexpected and political move.

In fact, just about all the pols had on their mind was housing. The BC government has also taken over regulation of the real estate business from the industry itself, and paved the way for Vancouver to start taxing property owners for not living full-time in their own condos and houses.

The new levy on foreign buyers was a shocking, ground-breaking reach for a bunch of people who said a few months ago this would be a dumb move. But a spring election gets closer by the week and, ya know, it’s all about perceptions. And dumping on foreigners. In a Brexit-&-Trumpian world, it’s the new normal.

Anyway, here’s the deal. Foreign nationals (or corps) registering property in Metro Vancouver will be hit with an astonishing tax of 15% of the purchase price on deals over $2 million. Yes, that’s an extra $300,000. Welcome to Canada. Everyone else pays the same land transfer tax as now – about $38,000 to buy the $2 million digs.

The logic behind this: the tax will help dampen demand and throw water on runaway price acceleration in YVR. It comes weeks after the province started collecting data on foreign buyers, discovering they’re behind about 5% of deals. By the same token, this amounted to $1 billion worth of sold listings in a month. That would equal tax of $150 million. The province has also left room to raise the Chinese Dudes Tax to 20%, if it feels like it, or depending how the polls look for premier Christy Clark in March.

So what might this accomplish?

Beats me, since a lot will depend on how these two moves – a tax on non-resident buyers and another tax on investment properties – is perceived outside our borders. If we look like a bunch of anti-globalist, wall-building, inhospitable nimrod isolationists, then the flow of capital could end quickly. If everyone living in Vancouver is correct (as opposed to me) and offshore capital is the No.1 reason houses are insane, then this would be a Crash Tax.

Given the weakening energy sector, our no-growth economy and the latest job loss numbers – not to mention a US presidential candidate who wants to tear up our free trade deal and erect his own tariff barriers – predicting consequences looks easy. I think you should have listed your house in Kits last week.

Then again, the $2 million-plus, Chinese Dudes Crash Tax could also work to force the same flow of capital (that everyone believes is evil) into lesser-priced properties. After all, if these Chinese dudes are (as everyone believes) a bunch of corrupt money-laundering mainland criminals, why not just use six condos for the wash-and-rinse cycle instead of one fat Shaughnessy mansion?

That would topple prices at the top end of the market while fattening them in the middle. Suddenly the last sleeve of listings truly affordable on average Van incomes would no longer be that way. So it’s hard to know how Christy could stand up on Monday and say, “Today we are taking measures to ensure home ownership remains within reach of the middle class.†Actually, it’s the opposite.

So if Chinese dudes are a major market-maker, a tax of this magnitude would have the same impact as a big spike in mortgage rates. Given the fact prices have catapulted higher while sales of detacheds have collapsed up to 40% already, it could be game over. If the buyers flee, so do billions in home equity. Gone will be the force that pushed 91% of all Van house over the $1 million mark. So much for that early retirement.

But if the Chinese dudes’ influence is more urban myth than economic reality, how could these moves – taxing land registrations and empty condos – make housing more affordable for anyone? Vancouver continues on the same path of real estate obsession, over-borrowing, rampant speculation and a dangerous one-asset economy.

The governing Libs are gambling, of course. The more market intervention by government, the more unknown the outcome. Politicians anxious to be seen ‘doing something’ have opted for the lowest common denominator of blaming external forces – foreigners – for a problem which has been 95% created by house horny locals, and remains.

Either the market keeps soaring, or it turns into a smoky hole with a tail fin protruding. There is no soft landing. Not even for Ms. Clark.

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July 25th, 2016

Posted In: The Greater Fool

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