On Saturday February 6, the Globe and Mail
published an extensive article on the issue of home flipping in the Vancouver market. In it, the Globe investigation further casts suspicion on irregular market forces creating a bubble in the Vancouver housing market. Just as importantly, the article has caught the attention of a Vancouver MLA who is calling for an inquiry into the practice.
There are two Canadian real estate markets that consistently get the world “bubble” applied to them: Vancouver and Toronto. Critics of “bubble” theories argue that these market prices are being driven by regular market forces and that a general desire to live in urban areas plays the largest role in driving up home prices. By pointing to regular market forces and the desirability of Vancouver and Toronto housing, critics downplay the possibility of a market correction in either markets.
One suspect that is often pointed to by proponents of the “bubble” theory is foreign money. These proponents argue that foreign money (in the case of Vancouver, the money is often assumed to be that of Chinese nationals) inflate housing prices out of the price range of local buyers. A late 2015 study, also reported in the Globe and Mail pointed to the possibility that large percentages of the Vancouver real estate market are being purchased by Chinese foreign nationals. You can read the whole article and the study’s methodology here
Foreign money can create bubbles because foreign money is more fungible – it can leave faster than local money. For local house prices to collapse, people need to lose their jobs and no longer be able to afford their mortgages. Foreign money can leave more easily, with foreign landlords accepting capital losses on investment properties as the cost of doing business.
House flipping further evidence of irregular market forces:
The house flipping investigation by the Globe and Mail creates further evidence that Vancouver may be in a bubble. The study showed that a number of local Realtors “flip” homes by assigning-selling-sales contracts before closing, for higher prices than what the original seller homeowner receives in the end. This action is speculative in nature and does drive up prices. For instance, if a home sells for $1.5 million, that would normally be its market price, but if it is then assigned to the Realtor and just 60 days later sells for $1.6 million, then this drove up the value of the property by almost 7% in those 60 days. That is an annualized increase of 40%. You can see how this speculation can quickly create a bubble.
Impact on Home Prices
So, in conclusion, the evidence of a Vancouver bubble continues to increase and this could have significant effects on relocation if, indeed, that bubble does burst. Economists have predicted Vancouver correction figures as high as 30%. That is a high percentage, but for Guarantee Home Sale programs and possible loss on sale coverage out of Vancouver, you need to look at the whole numbers to understand the possible impact on relocation. 30% of a $1.5 million home is $450,000. There are few employees who could withstand such a blow and there are few corporations that would support such loss-on-sale coverage.
What about Toronto?
As the Globe and Mail article on Foreign Ownership shows, studies into foreign holding of Canadian real estate are difficult to conduct. There has, as of yet and to All Points’ knowledge, been no formal study into foreign holdings of Toronto real estate, nor of the house flipping via assigned sale practice. Could Toronto see a similar correction? Certainly, many economists are calling for a correction, but it still seems to Vancouver that garners the most attention and the most concern.
Could a possible inquiry affect relocation?
If the inquiry occurs it will all be about lost tax revenue. Assigned sales are not registered sales. There is no land transfer tax on the assigned party – it will only land on the ultimate buyer. An inquiry is likely to draw the conclusion that those that take part in assigned sales should pay land transfer tax. This would make the practice unprofitable very quickly and would likely end the practice. And for those that do continue the practice, the BC Government would receive its appropriate tax revenue.
In Guarantee Home Sale programs, properties are typically purchased via a Power of Attorney with a Deed in Blank, so that there is no land transfer tax on the transaction between the relocation company and the employee. They are not assigned sales. So, if an inquiry does result in land transfer taxes being applied to assigned sales, there should be no cause for alarm for Guarantee Home Sale programs. However, it is not a guarantee that governments will either a) not also look to other forms of transactions that do not pay land transfer tax or; b) write the legislation carefully enough to ONLY catch assigned sales, but instead catch other types of transactions such as the Power of Attorney sale. If either of these come to pass, the cost of Guarantee Home Sale procedures in British Columbia would become too expensive for most companies to continue to pursue.
This is a case that should be watched very carefully. Inquiries tend to take time, but this is a hot button issue in British Columbia and it is likely that there would be some speed behind the inquiry, because politicians will want to snuff out a practice that is threatening the stability of the Vancouver housing market.