Foreign buyer taxes and the mortgage stress test

By Michelle Hopkins
February 13, 2019

Recently, Vancouver was named the second most expensive housing market in the world, second only to Hong Kong, according to the 15th Annual Demographia International Housing Affordability Study. This doesn’t come as a huge surprise to Vancouverites who have long watched the housing situation worsen.

If you listen to the news, you know that much of the blame has been placed on foreign ownership. According to Statistics Canada, non-residents own 4.8 per cent of residential property in metropolitan Vancouver, accounting for 5.1 per cent of total residential value.

For years, buyers have mainly been coming from mainland China, but that is changing, says Robert Cheung, an independent mortgage broker who works with foreign buyers. Contrary to popular belief, by and large, Chinese buyers have been avoiding Vancouver as of late.

“Because of the new rules, foreign [buyer] taxes, and the Central Bank’s rigorous mortgage qualifications, they are staying away,” says Cheung. “We also see foreign buyers coming from the United States, Southeast Asia and Europe.”

The federal mortgage regulation policies, announced in January 2018, are making it harder for people to get into the home market – especially the young and middle class who find it difficult to afford a home due to the mortgage stress test.

“The stress test means people have to qualify at a two per cent higher interest rate than the bank is offering,” says Cheung. “This really hasn’t been much of a problem for most foreign buyers because it is relatively easy for them to come up with a 35 per cent down payment.”

Over the last few years, however, British Columbia has also introduced measures aimed at slowing down the number of non-residents looking to invest in Vancouver real estate.

The foreign buyers’ 15 per cent tax rate was initiated in Greater Vancouver in 2016; in 2018, it was increased to 20 per cent, and expanded to apply to the Nanaimo, Victoria, Fraser Valley and Kelowna regions.

Vancouver’s further attempt to address the city’s housing crisis in 2016 was the introduction of a one per cent empty-homes tax on the assessed value of a home for homeowners who leave their residential properties vacant for more than 180 days a year.

“The goal of this tax is to have people either live in their homes or open them up to the rental market,” says Esther Lee, director of financial services in the City of Vancouver. “This does not affect principal residences, or if you rent out your home for at least six months.”

To further discourage foreign possession, the foreign tax also applies to “satellite families.”

“Satellites families are Canadian residents, however, if the major income earner in the family is working overseas, say in China, and not reporting or paying Canadian taxes, they will also be subject to the 20 per cent speculation tax,” says Raymond Lu, CA/partner, Manning Elliott.

Perhaps one of the most contentious issues facing foreign buyers, adds Lu, is the speculation tax the NDP government announced in February 2018. This is a two per cent property tax targeting out-of-province owners. To put that into perspective, a $5-million home not used as a primary residence will be subject to an additional $100,000 levy.

“The speculation tax will be levied on residential properties in certain urban areas, if they are not being used as primary residences,” explains Lu.

Additionally, non-permanently occupied second or vacation homes in Metro Vancouver, the Fraser Valley, Nanaimo and the southern tip of Vancouver Island, including Kelowna and West Kelowna, will be subject to this tax.

“These policies and regulations claim to solve market prices, but they aren’t … they aren’t fixing the affordability issue,” says Lu.

“Most Vancouverites can’t afford to rent these large, expensive houses most foreign buyers own nor can they afford to buy them.”

Related reading

The new mortgage stress test

Stress test survival guide: What can you afford now?

About Michelle Hopkins

Michelle Hopkins is a freelance journalist and corporate writer with extensive experience in development projects, home and business writing.

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