Vancouver real estate and the HST

Before the 2009 provincial election, Peter Simpson had a hunch that B.C. politicians would want to copy their Ontario counterparts and combine the GST with the provincial sales tax. By the start of the B.C. campaign, the federal government had already promised Ontario $4.3 billion over two years to do this. So Simpson, CEO of the Greater Vancouver Home Builders’ Association, knew there would likely be a big cash incentive for B.C. to harmonize its provincial sales tax with the GST. That’s why he distributed a questionnaire to all of the politicians in the B.C. legislature in advance of the election asking if their party would “promote HST” and, if so, what would be done to preserve housing affordability.

None of the MLAs wrote back to him. “However, the [B.C.] Liberal party responded,” Simpson told the Georgia Straight in a recent phone interview. “In their response, they defended the current provincial tax system and poked holes in the HST process—and said it would reduce their flexibility to raise or lower taxes provincially if they brought the HST in.”

In its letter to Simpson, the B.C. Liberal party noted that there are no provincial sales taxes on energy-efficient appliances, club and gym membership fees, newspapers and magazines, restaurant meals, and the professional services of architects and accountants. But the provincial sales tax would be extended to these areas under the HST. “In short, a harmonized GST is not something that is contemplated in the B.C. Liberal platform, but we are committed to improving the tax system,” the party declared.

Ten weeks after the May 12 election, Premier Gordon Campbell and Finance Minister Colin Hansen announced that a 12-percent HST would be introduced effective July 1, 2010. As a result of this, the provincial tax will be extended to all the areas mentioned in the B.C. Liberal letter to Simpson. And in return, the B.C. government will receive $1.6 billion from the federal government to cover “transition” costs.

“We understand that the HST is going to help some industry sectors, but it sure as hell isn’t going to help home-building and home-renovation companies,” Simpson said, acknowledging that the HST won’t apply to resale housing.

The backlash was on display when a couple of hundred people gathered at Kitsilano secondary school on April 6. Former Social Credit premier Bill Vander Zalm was there to launch his provincewide petition drive to eliminate the HST, right in the midst of Campbell’s constituency of Vancouver–Point Grey. On the steps outside of the school and in the hallways, volunteers eagerly shoved pamphlets into the hands of anyone interested in receiving them.

The centre spread of one leaflet featured a list of 70 products and services on the “HST Hit List”, which will have a new seven-percent provincial surcharge on top of the GST. They include new homes, real-estate fees, strata fees, rents, home maintenance, and home renovations. In front of a supportive crowd in the school auditorium, Vander Zalm told a long story about how he decided to launch a provincial crusade against the HST, which he characterized as a “bad tax”.

“There’s an old saying: if you want to make something look good, you have to lie,” Vander Zalm claimed. “And you have to lie over and over. And that’s what’s been happening.”

In a phone interview with the Straight a day before the rally, Vander Zalm said that the B.C. Liberal government is creating a “horrendous mess” by extending the provincial sales tax at this time. “It’s going to impact housing—new housing—tremendously,” he predicted.

The former premier claimed that home renovators in the East Kootenays and the Peace River region will have to start collecting money under the table just so they can compete with entrepreneurs based in Alberta, which has no provincial sales tax. “If you’re a contractor in Alberta, you can move into B.C. and be very competitive,” he said. “You just work out of your Alberta office.”

In July, the B.C. government announced that home buyers will not have to pay the seven-percent provincial portion of the HST on the first $400,000 toward any new home purchase. After the home-building industry raised a ruckus, the government increased the threshold to $525,000 in November.

Simpson, however, said that this might not be sufficient to maintain demand for new housing in the current economic environment. He noted that interest rates recently rose significantly, and there may be more increases coming in the future. At the end of March, chartered banks hiked their five-year fixed-term rate by 60 basis points, reducing some borrowers’ purchasing power by tens of thousands of dollars.

In addition, Simpson pointed out that the federal government has tightened the eligibility rules for mortgages insured by the Canada Mortgage and Housing Corporation. Effective April 19, borrowers must qualify for a five-year fixed-rate mortgage even if they can obtain a less expensive loan at a floating rate. Those who are refinancing their homes can only withdraw a maximum of 90 percent of the value of their residences rather than 95 percent. And investors will have to put 20 percent down for homes they don’t occupy.

“All of these could put up a stumbling block for a potential owner,” Simpson said.

Effective July 1, a buyer of a $600,000 home will pay an additional $5,250 in provincial sale tax under the HST. A $700,000 home will cost an extra $12,250. A buyer of a million-dollar house, townhome, or condo can expect to fork over $33,250 in additional sales tax.

Some builders and marketers have started buying newspaper ads encouraging prospective buyers to close deals before the HST takes effect. Surrey agent Jim Rodha, who placed one such ad in his local community paper, told the Straight by phone that all the people visiting his open houses are aware of the looming tax. “I think it is encouraging them to do something sooner rather than later,” he said.

Simpson also said that some buyers are accelerating decisions to buy new homes to beat the tax. But he added that builders have told him about other potential purchasers who don’t know about the HST, notwithstanding all of the media coverage. “We’ve been screeching about it for ages, but for the home buyers, it didn’t affect them,” he said. “Now, they’re starting to sit up and take notice.”

Over on Vancouver’s West Side, agent Shelly Smee told the Straight that she’s not hearing a great deal about the HST from her clients, about half of whom are parents whose kids have left home. “With those empty-nester people, they’re going to bitch and whine about a tax, just as anyone would,” she said with a smile in an interview in her Kerrisdale office. “I’m calling it the horrible stupid tax. But it is what it is. Those are the same people who voted our government in. You make your bed and you lie in it.”

Smee mentioned that she always asks her clients why they’re buying a home, noting that this is a far more important consideration than short-term ups and downs in the housing market. She said she tells them: “Forget what the media is saying; forget what everybody else is telling you—what is your motivation?’’

“The investor who is looking for a cap rate of 3.2 percent is a completely different animal than somebody who is having their second or third child arrive,” she said. “I always caution all of my clients not to get caught up in the buzz of what’s going on.”

For empty nesters looking at Yaletown or Lower Lonsdale, Smee will ask about their lifestyle. Do they want to take a SeaBus every time they see a Canucks game? “After location, it comes down to price,” she said, noting that Coal Harbour property can sell as high as $2,000 per square foot whereas a condo with a view can be acquired for $700 per square foot on the North Shore.

At the start of her interview, Smee printed out a breakdown of March real-estate listings along with their prices, across different Vancouver neighbourhoods. Later when she scanned the data, she noticed a spike in the number of downtown condos coming onto the market. To her, this indicated that some investors decided to sell their units after the 2010 Games.

“It’s still not an above-average number for a spring market,” she maintained. “Vancouver is very cyclical in its seasonal market, but it also depends on which area you’re looking at.’’

On April 6, the Real Estate Board of Greater Vancouver issued a news release citing a “steady influx” of new listings last month. For the entire region up to the Whistler-Pemberton area, 7,004 detached and attached homes and apartments were put on the market. That’s a 60-percent increase over the same month a year ago, when the market was just crawling out from the recession.

The REBGV also reported that the benchmark price for all residential properties peaked last month at $584,435, which was a 20.3-percent rise over the average in March 2009. (For more on the latest real-estate statistics, see this story.) Smee said that even with the run-up in prices, there are still competing offers for detached houses on the West Side, which had a benchmark price of $1.66 million in March.

Meanwhile, one North Shore mortgage lender says he’s “buried” in work because of the recent rise in mortgage rates. John Ribalkin told the Straight in a phone interview that he’s expecting a short-term “balloon” in demand for homes from people who qualified for mortgages at a lower interest rate.

He said their pre-approvals will expire in 90 to 120 days, which will cause some to rush to close deals before they have to return to their lenders and requalify at a higher rate. At this point, he can’t predict how many of those people who prequalified will close a deal.

“I could have five clients all competing on the same property down the road—the same apartment, townhouse or house,” Ribalkin commented. “One of them is going to get it, but the other four won’t.’’

Unlike some in the housing industry, he doesn’t expect the HST to have a huge effect on the market because the majority of purchasers don’t buy new housing. “It’s not going to have the impact that everybody is worried about,” Ribalkin predicted.

Sauder School of Business professor Tsur Somerville also suggested that the HST won’t have as big an effect on housing prices as some might believe. In a phone interview with the Straight, the director of the UBC Centre for Urban Economics and Real Estate noted that builders will receive credits for sales taxes they pay on business inputs under the HST, which could lower their costs. In addition, Somerville said, there is elasticity of demand for housing, which means as prices rise, so does buyer resistance to pay more.

“If you tax new houses, it’s going to raise the cost for all housing,” he said.

Somerville noted those costs will be split between consumers and suppliers. He added that there will also be a rebalancing of prices between old and new homes. The net effect, he suggested, might be about 1.5 percent for buyers and another 1.5 percent for suppliers. “In a market where housing prices have gone up 15 percent, one or two percent additional [to the price] sure looks small,” he concluded.

However, that doesn’t mean people won’t adjust their behaviour over the short term. Somerville said that consumers alter their decision-making in advance of incoming taxes, and he predicted that the HST, in combination with rising interest rates, will have an impact on buyers who are near the margin of being able to afford a new home.

“We’re expecting to see more housing purchases right now in advance of the HST coming in,” he noted.

This means that we can expect to see a real-estate rush in B.C. in the coming weeks, but how long it lasts is anyone’s guess.

Follow Charlie Smith on Twitter at twitter.com/csmithstraight.