Huge tax windfall highlights B.C. economy’s dangerous dependence on real estate
B.C.?S ECONOMY DANGEROUSLY ADDICTED TO REAL ESTATE
Pete McMartin
The Vancouver Sun
Is this good news or bad?
On Thursday, the provincial government announced it had raked in $2.2 billion in revenue from the property transfer tax and the new 15 per cent tax on foreign buyers of Metro Vancouver homes.
That’s a billion dollars more than the government had projected.
That enormous windfall caused Liberal MLAs to break out into a spontaneous conga line through the legislature. Finance Minister Mike de Jong was forecasting a surplus of $1.94 billion, up from an earlier projection of $264 million. He then announced that $500 million from the property tax would fund a housing affordability program and another $400 million would go into the B.C. prosperity fund “as a legacy for future generations,” he said.
And this, for the cherry on top:
The surplus allowed the government to scrap a planned four per cent increase in medical service plan premiums. It wasn’t as tasty a treat as an announcement to revamp or scrap the loathsome MSP entirely would have been. But it did make the medicine go down easier.
Overall, the windfall made B.C. the brightest light on the country’s economic horizon. And those dire predictions of house-impoverished millennials fleeing Metro Vancouver and B.C. for cheaper house prices? It hasn’t happened. Net inter-provincial immigration has increased year over year for the last three years. You go where the work is.
So, good news all around.
But: De Jong’s figures showed just how stark B.C.’s economic dependence on real estate has become. Real estate-related taxes are now the government’s single largest revenue generator. They not only outstripped the $1.2 billion gambling brings in — which is pernicious enough — but they also surpassed the tax revenue, individually, from forestry, mining, natural gas and all other resource industries. Only when you combine the tax revenue from those resource industries do they bring in more than real estate, and just by a few decimal points.
None of this takes into account the economic spin-offs that a hot real estate market generates. An angry public may chafe at the rising unaffordability of the market, and they may rightly grow livid at the influx of laundered monies, tax cheats and real estate scammers our hapless enforcement agencies have proven either too inept or too understaffed to catch.
But that hot market also employs law-abiding builders, lawyers, renovators, car salesmen, airline employees, retailers, etc. Those jobs can’t be ignored. Real estate’s reach in this province, and in this government’s bottom line, is much longer than just a matter of tax revenue. The danger is not just that real estate has become a windfall for us: The danger is we have become dependent on it.
What happens if, in the wake of the government’s 15 per cent tax on foreign buyers, that real estate market cools off or, worse, collapses?
In a Friday afternoon seminar at the Hyatt Regency sponsored by the Urban Development Institute, a panel of economists, lawyers and developers tried to answer that and other questions. Would foreign buyers go elsewhere? Would prices fall dramatically if they did? And if prices plummet, would they rebound in the long-term?
Quick answer: Their guess would be as good as yours.
For the optimists, there was Helmut Pastrick, chief economist of Central Credit Union 1, who noted that the market had begun to weaken several months before the introduction of the 15 per cent tax — but in August, sales for detached homes in some neighbourhoods had plunged by $300,000-$400,000. (At which, some audience members gasped.)
However, Pastrick believed any downturn would take three to six months to play out. Then, if the economy remains sound — and here he made note of Metro Vancouver’s six-per-cent rise in employment — the usual market fundamentals would eventually come into play. Prices, he said, should begin to rise by next year. In two or three years, he said, he expects them to surpass present prices.
His advice to prospective sellers caught in the recent downturn: “Wait it out. If the economy doesn’t go bad, where’s the pressure to sell?”
That’s a big “if” given the space real estate takes up in the B.C. economy. Economist Tom Davidoff, associate professor with the University of B.C.’s Sauder School of Business, thought there was “a significant risk of a real correction.” How much? Thirty, 40 per cent, Davidoff guessed — but that, he said, was just that, a guess. Intangible factors that can’t be measured would be at play, he said — “a combination of uncertainty and pessimism.”
His colleague at the Sauder School, Tsur Somerville, agreed.
“I think there’s a real risk there if stuff turns south enough and it affects employment levels, then things could get real rough because real estate is such a large part of our economy now.”
After the seminar, what was it that Somerville called real estate tax revenue in B.C.? The government’s heroin?
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