A new analysis is looking at whether B.C.'s property resale tax actually makes a difference, and the findings suggest it may not be enough.
The BC Real Estate Association (BCREA) says that “by any definition,” resale activity “makes up a small percentage” of all sales in the province. Citing the Bank of Canada, it says that only 2.5 per cent of Canadian home sales are purchased within 12 months.
In Vancouver and Victoria, the figure is closer to 3 per cent, BCREA said. Across B.C., the government says about 7 per cent of homes sold between 2020 and 2022 will be resold within two years, but other estimates say the figure is closer to 10 per cent, BCREA said.
“Flipping activity can be harmful when the market heats up, and we know that rapid price increases attract market participants who are purely short-term speculators. It is important to distinguish between sellers who are simply looking to profit from short-term market conditions and those who will invest time, effort and capital in improving the housing stock and offering additional rental units,” BCREA explains in its latest market intelligence report.
???? Check out our latest market intelligence report, analyzing the impact and consequences of state flipping taxes.
Today we look at the implications of BC's proposed resale tax and the potential impact this policy could have on BC's housing market https://t.co/bNRJSOkhkN
— BC Real Estate Association (@bcrea) March 7, 2024
BCREA noted that exemptions are provided as part of the rules, and it is still unclear how many of the “7%” of homes identified as being sold within the two-year period from 2020 to 2022 will be subject to the resale tax.
“If you buy a home and sell it a year later, there are a number of exemptions to this tax and it's very likely you'll qualify for one of them,” said Brendon Ogmundson, BCREA's chief economist.
“The impact on demand is so small that we highlight that, given the two-year deadline that they define, it's more likely that people who were considering selling but who might incur resale tax by doing so, or who want to avoid the trouble of going to the government and explaining why they're selling their house, will delay listing to avoid the tax. So it's more likely that we'll actually see a decrease in listed properties because of the tax, which could tighten the market a bit and actually drive prices up.”
Proposed home resale tax legislation, outlined in the 2024 Budget, is expected to be introduced this spring. If passed, the new rules would go into effect on Jan. 1, 2025.
The BC NDP explains that homes sold within a year of purchase are taxed at a 20 per cent profit rate, dropping to 0 per cent “between 366 and 730 days.”
“Things are going to get even more difficult for people looking to make a quick buck by flipping a home,” Finance Minister Cathleen Conroy said while announcing the budget.
BCREA estimates that the tax would reduce sales in British Columbia by 1.7 per cent, but would have little effect on lowering prices.
“This is a real problem and people will understand it as soon as they read the details of the tax, and that's what our model shows. And it doesn't take a very large impact for the supply effects of this policy to completely overwhelm the very small demand effects. Perhaps just a 5-10% reduction in new property transactions would actually cause prices to rise compared to without the tax,” Ogmundsson explained.
“In our model, we are introducing a tax that affects investors' expected rates of return and dampens overall demand. Ultimately, it's a very small amount, like 1.7%, which doesn't have enough of an impact to really have a significant effect on prices given the size of the housing market. We're only talking about a small portion of demand, so it's no surprise that the impact on prices is so small.”
BCREA noted that “flipping is a controversial practice in Canada,” pointing out that critics claim the practice “leads to inflated home prices.”
“The extent to which home flippers actually cause home price increases remains unclear, both theoretically and empirically,” they added, noting that it remains unclear whether home flippers “cause price increases” or whether these people are attracted to markets “where price increases are highest due to other factors, such as supply constraints or high population growth.”
“The problem is, we're in a market where demand is so high, we have such high population growth, and even if we didn't have such high population growth like we have now, we have a lot of people of typical household age, especially in urban areas,” Ogmundsson said.
“People between the ages of 25 and 40 tend to be really interested in finding their own home, and we have a lot of those people in our housing because millennials are the largest demographic in B.C. and they're all in that age group right now. So there's a huge demographic demand, but we just haven't been able to build enough housing to meet that demand in the last 15 years.”
The British Columbia government said in its budget that the tax, under its Housing for Homes initiative, is aimed at preventing speculators from inflating prices in the real estate market. Exemptions from the tax include circumstances such as divorce, death, illness, job relocation and other life events.