A member of Premier Christy Clark’s cabinet has expressed confidence that British Columbia’s economy and real-estate market will endure after the provincial government’s imposition of a 15 percent tax on foreign buyers of Metro Vancouver homes, which took effect August 2.

In an interview July 29, Minister of International Trade and Asia Pacific Strategy Teresa Wat predicted demand from non-Canadian home buyers is unlikely to let up given the province’s high quality of life and the experience of other global cities that remain attractive to wealthy jet-setters even after they had imposed the same tax rate on foreign investors.

"I don’t think this 15 percent tax will deter developers or foreign buyers. We still encourage foreign investment as we’re not the first to come up with this tax," she said.

She cited the examples of Hong Kong and Singapore, which she said remain attractive to international capital despite their imposing the same tax rate on housing purchases by noncitizens a few years ago.

Wat sounded far more confident than her B.C. Liberal party colleague, Finance Minister Mike de Jong, whose nerves showed in a Vancouver Sun quote that "we don’t have an absolutely ironclad notion or forecast or prediction of what the impact of this is going to be."

The province’s new tax was contained in Bill 28 Miscellaneous Statutes (Housing Priority Initiatives) Amendment Act 2016 that was passed into law on July 28.

"I don’t think the economy will collapse," Wat said because "so many people still want to come to live and work in B.C. We have the best quality of life in the world."

Her claim is hard to dispute amid Europe’s increasing economic problems, terror attacks, and refugee crisis, and Asia’s worsening environmental, health, safety, and security challenges. China, the main source of foreign funds for Metro Vancouver’s real estate, is experiencing capital flight due to worries over the country’s political stability.

Bolstering Wat’s optimism is Ottawa’s plan to boost Canada’s immigration level to as many as 305,000 this year, its highest in over 103 years when more than 400,800 arrived in 1913. If history is any guide, most immigrants will settle down in the major cities like Vancouver and Toronto, which offer the most business and employment opportunities along with the best amenities and services.

For the housing market, the increased immigration into Vancouver could help cushion the short-term loss of foreign buying from B.C.’s new tax policy.

Wat said the government’s tax move, which caught the public, many in the real-estate industry and the opposition NDP by surprise, was aimed at providing immediate stability to the city’s red-hot housing market.

"We don’t want (housing prices) to continue increasing by leaps and bounds. Otherwise, many British Columbians won’t be able to own their own homes," said the province’s most senior politician of Chinese descent.

"We had statistics show that…foreigners have been buying up our properties to the extent that it has pushed up prices beyond the grasp of locals."

She also called for greater collaboration between the federal, provincial, and municipal governments to provide affordable housing.

"It’s not just the provincial government’s responsibility as this 15 percent tax is only one measure. It takes the federal, provincial and municipal governments to do this together. We need the other levels of government to play their part."

Wat took a swipe at Metro Vancouver’s municipal governments for what she said was their failure to speed up development permits.

"They must provide more land. They must also reduce their licensing fees because development licensing fees are too high," she said.

According to her, many developers are complaining that municipal governments are taking between one and seven years to approve development permits. As a result, Metro Vancouver faces a huge backlog of proposed units that are stuck in the planning or processing stages.

Wat has the support of the Urban Development Institute which, according to the Vancouver Sun, said processing delays at six Metro Vancouver cities are holding up permits of 69,500 housing units, a significant number that could well end the region’s homes shortage.

She suggested the public stop blaming the provincial government and start pressuring their municipal representatives to speed up the housing supply line.

Will the market—and the economy—play along?

Despite Wat’s confidence, there is no guarantee Premier Clark’s bold gamble will pay off. The tax decisions, made under populist pressure, represented a complete surrender of the government’s laissez-faire philosophy. The Clark government is now part of the angry crowd blaming Chinese buying for causing Vancouver’s housing price surge while ignoring the much bigger role played by quantitative easing and rampant debt generation that have created housing bubbles across the world’s major cities. A discussion of housing unaffordability in major world cities including Vancouver can be found here.

Ironically, most, including those baying to stop foreign buyers, do not think the new tax will help Metro Vancouver achieve housing affordability, and worse, some fear it could hurt the real-estate sector and drag down the province’s economy.

Politically, the widely perceived anti-foreign tax and the additional measure to allow the City of Vancouver to tax vacant homes in its jurisdiction have paid immediate dividends. Approved by 90 percent of Metro Vancouverites surveyed by Angus Reid, the moves also took the sting out of the opposition NDP’s most potent issue in the run-up to the next provincial election due next May.

But the same Angus Reid survey respondents are a hard bunch to please. Many don’t think the new tax moves will help bring down prices or help restore housing affordability. The survey’s bigger, unstated finding points to the danger of relying on public sentiments, largely influenced by media reports, to make hard policy decisions.

While savouring a victory in pressuring the Clark government’s decision to act against foreign capital, David Eby, the NDP’s housing critic, criticized the tax as "deeply flawed" in a number of ways.

"It targets a very limited portion of the international money in our market, namely, money that’s not here yet," he said in a phone interview.

"We’ve had unrestricted problematic international speculation for years, noted as early as 2011, and all of the money already here is totally unaffected by this proposal."

He said the B.C. Liberals should amend the tax to exempt people living, working, and paying taxes in Metro Vancouver.

"We put forward several amendments to try to get them to do that during the legislative session, but the government did not take those amendments seriously, nor did they adopt our proposals," Eby said.

"We proposed closing loopholes that let the most affluent commercial property buyers buy large commercial properties without paying the transfer tax, and the government refused."

Eby has campaigned tirelessly for measures to monitor and tax foreign investment in the city’s real estate in the hope of improving the housing affordability for many of its 2.5 million residents.

With Clark’s sudden defection to his cause, he knows that he is in line to share the blame if the tax is later seen to stall the region’s all-important housing market and possibly hurt the province’s economy. If it comes to that, the public may not remember Eby’s attempts to amend the tax nor its own role in pushing the provincial government to enact the anti-foreign buying legislation.

Densification delayed: will the economy take a hit?

Vancouver-born realtor Kip Smith has lived all his 56 years in the city and seen its best and worst of times. He has also watched Vancouver transform into a global city over the past two decades, attracting both domestic and international migrants and investors.

Unlike some academics and journalists, he knows there’s no going back to Vancouver’s preglobalization, pre-quantitative-easing past when anyone with a regular decent salary could afford a single-family house off Main Street with a shot at an upgrade to the fancier West Side. Apartments were mostly for poor migrants and renters.

Since 2009, new money from within and outside Canada has poured into Vancouver at an unprecedented rate to fuel the city’s real-estate boom. That’s when the U.S. Federal Reserve and the world’s central banks began a series of quantitative-easing binges pumping tens of trillions of dollars into the global economy to fight off recession. The mainstream media rarely discusses quantitative easing's role in Vancouver’s housing boom, preferring instead to blame foreigners, especially wealthy Chinese, for pricing the city’s middle class out of their single-family houses.

The media has also downplayed the role of the massive intergenerational transfer of wealth taking place between baby boomers and their millennial offspring, the rise of property funds like real-estate investment trusts (REITs), and the over-leveraging and debt-creation behaviour of domestic consumers and local home buyers with the encouragement of the financial system.

"The industry is in shock," Smith said of the new tax on foreign buyers of B.C. homes. "It was sudden and substantial. There’s also no grandfather clause for those with deals in the process."

In a step-by-step description, he explained how the tax could end up boomeranging on the city, the provincial economy, and the middle-class folks it is supposed to help.

Metro Vancouver is in urgent need of a large supply of new housing units, mostly condominiums and apartments, to meet rising demand.

To make that happen, developers must build and market in a hurry and, at the same time, plan for more large projects that require long lead times. They will have to presell a significant portion of their housing units to secure financing and ensure the viability of their undertakings worth hundreds of millions of dollars. That’s where foreign capital plays a crucial role in helping to underwrite these projects’ huge financial risks.

"Let’s see how their marketing efforts fare in the coming weeks. Foreign investors are able to pay some of the highest prices so that projects can proceed. They have the money, but will they agree to pay that 15 percent tax? Many will wait and see, or invest their money elsewhere," he said.

But doesn’t this validate the argument of those blaming foreigners for Vancouver’s rising housing cost?

Up to a point, said Smith. Without foreign capital, many of these projects will not be built, and the city will not have the supply of apartments to meet demand. Developers will have to delay, defer, or even cancel projects if they cannot sell enough units to guarantee project viability.

But won’t the absence of foreign competition enable Canadians to step in and buy up houses and condos for a lot less?

No, it may not, said Smith, as Canadians are more likely now to sit out and wait for prices to fall. The sudden disappearance of both foreign and Canadian investors will force some developers and owners of existing units to start dropping prices. In a grim scenario, the snowball effect could lead to a market crash. Already, he and other realtors have reported cases of foreign buyers forfeiting their deposits rather than pay the full 15 percent tax to complete their purchases.

Elderly Canadians looking to sell their expensive homes to downsize to apartments or help their adult children pay for their own housing are unable to proceed because foreign buying has just evaporated.

Smith predicted the collective impact of these deferments and cancellations will not only be immediate, but will be felt across the Metro Vancouver economy for years to come.

"People keep thinking it’s just realtors and developers. They forget that many Canadians want to cash out the equity in their homes to fund their retirement or help their children," he said.

He suggested the damage will spread beyond the real-estate industry which also supports employment for architects, lawyers, accountants, surveyors, building managers, engineers, and even government employees and restaurant workers.

"It will slow everything down. Housing prices were already coming off in recent weeks. This new tax will accelerate the decline. There will be a few winners but the economy will be hit."

On a broader scale, the delay could setback Metro Vancouver’s multibillion-dollar masterplan to promote urban densification and mass transit to solve the region’s housing needs. If this happens, the provincial government will be as culpable as municipalities in slowing supply growth and contributing to the region’s "housing crisis".

Smith laughed at the idea of hordes of desperate foreign investors stampeding out to the fringes of Squamish, Abbotsford and Chilliwack to satisfy their lust for Canadian real estate. He thinks the new tax and the high-handed manner in which it has been imposed will more likely drive foreigners to go to Hawaii or Seattle or even London.

The tax may also have the unintended effect of reducing the supply of much-needed rental, senior, and social housing in the Lower Mainland. In an open letter to Clark dated July 26, the Urban Development Institute (UDI) called for the tax’s exemption for foreign developers of these types of housing that are being encouraged by the government.

Hong Kong and Singapore differ from Vancouver

While Hong Kong and Singapore provided the inspiration for the B.C. government’s tax decision, there are crucial differences between the housing landscapes in Vancouver and the two Asian cities. There’s only one level of government overseeing the real-estate sectors in Hong Kong and Singapore, which have larger and more diversified, globally linked economies than B.C. In contrast, Vancouver’s smaller real-estate market and less competitive economy are subject to a bewildering array of policies from three levels of governments. The additional layers of government add significantly to the inefficiencies and cost of housing in Vancouver, a feature not mentioned by those seeking to blame rising unaffordability entirely on foreign buying.

Hong Kong announced its 15 percent tax in October 2012 and was followed by Singapore three months later. Housing prices in Singapore continued to climb through 2013 but have been in decline since while Hong Kong’s have mostly edged up but in jagged fashion from 2013 to 2015 before falling sharply this year.

The tax shock followed by a raft of cooling measures have had an impact in cooling both foreign and local demand in Singapore over the last three years, and, to a lesser extent in Hong Kong. Their recent price declines offer hope to B.C. that the new tax might perhaps have the same effect on Metro Vancouver housing prices. But despite nearly three years of decline, Singapore’s housing remains more costly and unaffordable than Vancouver’s.

Unlike B.C., Singapore has a large and successful public housing program to support the state’s ability to intervene in the domestic real-estate markets. More than 80 percent of its 5.5 million residents live in apartments operated by the state-run Housing and Development Board.

The other big worry is that Metro Vancouver’s housing-driven economy is far less diversified than Hong Kong’s and Singapore’s. The two Asian cities are global financial, trading, and travel hubs that also serve heavily populated regional hinterlands with manufacturing activities. Hong Kong serves southern China’s 250 million people, while Singapore acts as the unofficial centre of commerce for Southeast Asia’s 600 million people. Vancouver’s hinterland is Western Canada with a population of less than 12 million and a tiny manufacturing base.

Thanks to their diversified economies and strong public housing programs, Hong Kong and Singapore have been able to cope with nearly four years of volatile housing prices. How will Vancouver or the B.C. economy fare if the city’s real-estate market underwent similar volatility through 2020?

A day after the new foreign-buying tax was announced, the Office of the Superintendent of Financial Institutions ordered Canadian banks to be stress-tested for their ability to withstand a 50 percent drop in Metro Vancouver housing prices. Although this had been probably planned earlier and not motivated by the B.C. tax decision, the OFSI move underlines deep concerns that a housing collapse could threaten the country’s banking sector. And very likely the broader economy. The new tax has just added to the uncertainty.